Pension Matters
State Employees Retirement Fund
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April 2011
Good News for the Pension Fund
A recent acquisition of Accuri Cytometers by Becton, Dickinson & Co (NYSE:BDX) for $205 million represents the first cash return on investment for InvestMichigan according to Thomas Lee of the Detroit Xconomy Forum. The article goes on to say that InvestMichigan generated a return “greater than 4.5 times” its investment in Accuri, according to Bob Payne, In-House State Investment Specialist with Credit Suisse Customized Investment Group. With this acquisition BDX has spent nearly half a billion on two Michigan startups in less than three years. Good for us and good for Michigan. www.xconomy.com/detroit/2011/03/30/accuri-exit-showers-michigan-with-a-lot-of-love/
More Good News from ORS
The most recent issue of Connections from the Office of Retirement Services has a great article on the value pensions bring to Michigan. It cites the National Institute on Retirement Security’s (NIRS) paper on the impact of pensions on local economies.
- Each dollar invested in pension plans provides support for about $6.49 in total economic activity in Michigan.
- Pensions supported more than 45,000 jobs paying nearly $3 billion in wages; nearly $7 billion in economic output and $970 million in tax revenues. Thanks ORS - great time to reiterate the real value of pensions.
This most recent publication also indicates that the funding level for the retirement system as of September 30, 2010 was 72.6%. (I think it’s interesting to note that new legislation just passed “would allow managers to remove pension fund trustees or become a sole trustee if a municipal or school pension fund that is less than 80% funded.” www.bondbuyer.com/issues/120_47/michigan_state_fiscal_law-1024198-1.html)
Cadillac Pensions?
The next time someone tells you about the “Cadillac pension” you are getting, refer them to the 2010 audit of the Michigan State Employees’ Retirement System. You can find it right on the main page of the Office of Retirement Services website at www.michigan.gov/ors. Then have them go to page 85 where there is a schedule that gives you monthly benefits for eligible retirees. Now at this point you have to do a little math. According to the chart there are 49,029 eligible retirees (as of the audit) and 12,896 get pension of over $2000 per month. That leaves 36,133 who get pensions of less than $24,000 a year. Where’s my Cadillac?
Of the 3138 state employees who retired in the most recent early out, 9% had pensions over $50,000; 81% will have pensions between $20-50 and 11% will have pensions of less than $20,000. That means 90% of the newest retirees don’t make enough to reach the cut off for taxes currently on private pensions. But our administration wants to tax our pensions from the first dollar. www.michigan.gov/documents/orsstatedb/SERS_Board_List_01-11_346802_7.pdf
Michigan killing its pension
For decades, public employees have had pension plans identical to those provided by most large American companies. The Pew Center for the States reported earlier this year that the gap between money set aside to pay retirement benefits and the cost of those benefits is $1 trillion at the end of FY 08.” Pew says states wound up in this predicament for a number of reasons including:
- failing to make annual payments for pension systems at the levels recommended by their own actuaries;
- expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
- providing retiree health care without adequately funding it.
Read more: The Sixteen States That are Killing Their Pensions - 24/7 Wall St.
It’s Illegal!!
According to the LSJ, “A recent poll by EPIC-MRA found only four in 10 Michigan voters favored Snyder's pension tax proposal - a number that is evenly split among voters over and under age 50.” The article goes on to quote Snyder as saying, “his plan doesn’t hurt low income retirees” because social security would still be exempt and “retired couples with $40,000 or less income wouldn’t pay income tax on their retirement income.” When did he decide this and where is it in the budget? All we have heard is that all pensions both public and private will be taxed from the first dollar and there is nothing in his budget that indicates a cutoff point. Don’t be fooled by misleading statements on this tax proposal. Go to the Executive Budget web site and read for yourself that there is no pension cut off in the Governor’s recommended budget. www.michigan.gov/documents/budget/1_345974_7.pdf
But let’s not forget - first of all, no matter how much of the pension he wants to tax there is no legal grounds to do so. A 1991 ruling by then-Attorney General Frank Kelley said that public employees' pensions “could be taxed only for those employees who take jobs after the date the income tax statute is changed to allow the tax”. (It hasn’t been changed but bills are being introduced which could change this.)
The constitutional provision ("accrued financial benefits of each pension plan ... shall not be diminished or impaired") was put there for a reason “to prevent governors and lawmakers from punishing employees by downsizing their promised pensions or balancing the budget by raiding the pension fund”. But the tax exemption is also in other statutes on public employees' retirement, not just in the income tax law strengthening the implication that “not paying state income tax in retirement was an intended piece of retirement provisions”. Any attempt to change the law would in all likelihood initiate a court challenge. www.freep.com/article/20110306/OPINION01/103060443/Editorial-Legal-obstacles-public-employees
Tax Proposals Burden the Poorest
As the Institute on Taxation and Economic Policy found, the practical upshot of Snyder’s tax increases is to place even more of a burden on Michigan’s poorest residents, who will see a bigger hike than those at the upper end of the income scale.
Michigan already has a regressive tax system, which the administration’s proposal will only make worse. Currently, someone in the poorest 20 percent of Michigan taxpayers pays a tax rate of 8.9 percent, while someone in the richest one percent pays 5.3 percent. wwwthinkprogress.org/2011/03/14/rick-snyder-corporate-taxes/
Under the Governor’s plan, Michigan's main business tax would generate 4.3 percent of the state's general fund and School Aid Fund revenue -- a major shift from the nearly 11 percent that the current Michigan Business Tax supplies. The net business-tax revenue in fiscal 2013 is even lower -- 1.6 percent of general fund and school aid revenue -- if tax-credit payouts are factored in, according to a recent analysis by Gary Olson, a senior fellow at Public Sector Consultants Inc. The amount of state revenue generated from individual income taxes would increase from 31% to 41%. www.crainsdetroit.com/article/20110313/SUB01/303139970/snyder-tax-break-for-business-60
According to the paper by Olson, “The policy debate on the governor’s tax reform proposal is likely to center on the very significant shift of the tax burden in Michigan from business to individuals. Under current law, during FY 2012 13, individual income taxes will account for 31 percent of total GF/GP and SAF revenues. Under the governor’s tax reform proposal, individual income taxes will account for 41 percent of total GF/GP and SAF revenues. This is a 32 percent increase in individual income taxes under the tax reform proposal. On the other hand, during FY 2012 13, revenue from the Michigan Business Tax will account for 11 percent of GF/GP and SAF revenue under current law. If the governor’s tax reform proposal is enacted, the net revenue from the proposed corporate income tax and the continuation of previously granted tax breaks under the Michigan Business Tax will equal only 1.6 percent of GF/GP and SAF revenue. This equates to an overall 86 percent drop in business taxes under the tax reform proposal.” www.publicsectorconsultants.com/LinkClick.aspx?fileticket=K8E55xf2psk%3d&tabid=65
Do Corporations really need our Help?
- In 2009 the State of Michigan collected the $6,560,001 in income taxes. Of that $5,856,751 was in individual income tax and $703,250 was from taxes on corporation net income. www.census.gov/govs/statetax/0923mistax.html
- According to an editorial in the LSJ, the Small Business Association’s poll of its members shows only 48% would use the tax breaks to hire more workers, while 50% would use the breaks to realize profits. Since much of the job growth is touted to come from small business, this doesn’t say much for the administrations tax and grow jobs theory.
- GE pays no taxes thanks to tax breaks. The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion. www.nytimes.com/2011/03/25/business/economy/25tax.html?_r=1&hp
- Robert S. McIntyre, Director of Citizens for Tax Justice recently testified before the Senate Budget Committee in Washington. You can read his full testimony at www.ctj.org/pdf/mcintyretestimony03092011.pdf but I want to quote one small piece of his testimony here to reiterate the fallacy of overtaxed corporations.
“By the early 2000s, corporate subsidies had risen so much that the average effective U.S. federal corporate tax rate paid by America’s largest and most profitable corporations on their U.S. profits had fallen to only 18.4 percent barely over half the 35 percent statutory rate. Those tax subsidies have grown even larger since then. Our complaints about business tax subsidies fall into three categories. (1) They are hugely expensive. (2) They are often economically harmful. And (3) they conflict with fundamental tax fairness.” - Back in 2004, then President Bush signed a sweeping $136 billion in tax break for businesses. The measure was the most sweeping overhaul of corporate tax law since 1986. www.msnbc.msn.com/id/6307293/ns/business-stocks_and_economy/
- The current corporate tax system “technically” taxes all profits of a US Corporation, but the corporation can “defer” US taxes on offshore profits. Deferral provides incentives for US corporations to shift jobs and profits offshore. Some corporate leaders want Congress to adopt a system that would exempt the offshore profits entirely. www.ctj.org/pdf/internationalcorptax2011.pdf
Early Retiree Reinsurance Program
I received a post card from a member who asked me to talk about this program that I had mentioned briefly in an earlier pension report. This program is part of the Affordable Care Act and provides $5 billion in financial assistance to employers (including state and local governments) to help them maintain coverage for early retirees age 55 and older who are not yet eligible for Medicare. Employers can use these savings to reduce their own health care costs, provide premium relief to their employees or both. To see a fact sheet on this program go to www.errp.gov/download/TheAffordableCareAct.pdf
According to a report from HHS, 5000 employers had been accepted into this program, with more than $535 million in health benefit costs reimbursed. The report goes on to say that 229 applications were approved in Michigan with the State of Michigan as a plan provider receiving $3,948,233 in reimbursement already. You can read the full report at www.healthcare.gov/center/reports/states02252011a.pdf
Best and Worst States for Retirees?
Michigan appears to be vying for first place in the worst place contest. Over and over we hear that Michigan is one of only 3 states not taxing pensions. Not true. There are 18 states that do not tax pensions or tax much less than Michigan is pushing, including many states that don’t have a sales or income tax either. Check out Kiplinger’s “Tax Heavens and Hells” at www.kiplinger.com/tools/retiree_map/index.html?map=5#anchor
Even Forbes Magazine gives advice to retirees to consider the taxes where they retire based on the concept that the lower your taxes the father your retirement funds will go. “In addition to the nine states without income taxes and three that don't tax any pension income, another seven (Alabama, Hawaii, Kansas, Louisiana, Massachusetts, Michigan and New York) exempt all federal, state and local pensions from tax. In fact, only five states (California, Indiana, Nebraska, Rhode Island and Vermont) don't provide public pensioners with any special breaks”. www.forbes.com/forbes/2007/0813/072.html
Michigan would apparently like to see its retirees take their $21 billion plus in federal dollars (In 2004, per capita spending for Medicare in Michigan was higher than the national average $7,860 compared to $7,439 for the U.S. overall making Michigan the 10th highest state in Medicare spending. In 2004, per capita spending for Medicare among all states ranged from $5,640 to $9,154. www.statehealthfacts.org/profileind.jsp?ind=624&cat=6&rgn=24) along with all their other income, property, and investment funds and spend it in another state. But Michigan would rather gain $900 million by taxing seniors than maintaining their $21 billion plus in federal dollars to spend in Michigan.
A View of the Future?
The following statement is taken from Gov. Snyder’s comments about local government reform for revenue sharing. Could we be looking at his vision for state pensions and benefits as well?
“For any new, modified or extended contract, all new public employee hires would have to be placed in a defined contribution plan or a hybrid retirement plan that caps annual employer contributions at 10 percent of base salary. Additionally, there should be a 1.5 percent multiplier when determining employee pensions, 2 percent for those not eligible for Social Security. Controls to prevent pension spiking, like a three-year salary average, would be required. And all new hires must pay at least 20 percent of the cost of their health insurance”. .www.mitechnews.com/articles.asp?id=12909
Pension, Pension, we all got a pension
With all the news around the country you would think that only public employees in this country have pensions. Well first of all you should know that American Express, once a railroad freight company, established the first formal U.S. pension plan in 1875. Dozens of other counties have either voluntary or mandated private employer provided pensions and another dozen counties have what we call defined contribution plans. Only the poorest in the poorest counties don’t have some type of a pension system. www.medicine.jrank.org/pages/1310/Pensions-History.html
Editor’s note: June Morse is the Lansing SERA Chapter President. She may be contacted at jmorse10@comcast.net or 517-886-9323.
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