LANSING UPDATE
TO: AFT Michigan
FROM: Ellen Hoekstra and Todd Tennis
Date: October 21, 2007
RE: Legislative Report

The 2007-2008 budget got off to a rocky start, but the Legislature and the Governor finally reached an agreement that avoided a prolonged shutdown of state government. In the early morning hours of October 1, the Legislature passed bills that will raise approximately $1.4 billion in new revenues. This will be accomplished through an increase in the Michigan Income Tax from 3.9% to 4.35%, coupled with an expansion in the Michigan Sales Tax to include a broader list of services. These actions have led to potential recall efforts in ten legislative districts, five Republican and five Democratic, as well as to the replacement of House Minority Floor Leader Chris Ward (R-Brighton) with Rep. Dave Hildebrand (R-Lowell); Rep. Ward had voted "yes" on one of the tax bills.

A continuation budget was passed that will keep the government running through the end of October. Although the Legislature did not act in time to avoid a partial shutdown on October 1, it was so brief that most Michigan residents did not even notice it. The Legislature will now have until October 31 to complete action on the remainder of the 2007-2008 fiscal year budget. Even with the tax increase, they will need to trim an additional $400 million from current spending levels to completely resolve the budget shortfall, leading most observers to expect more tricks than treats this Halloween.

The revenue increase was made politically possible by the adoption of a number of what at least some legislators considered "governmental reforms". Most notable of these were Senate Bill 418, now PA 107 of 2007, which will allow public employers to create pooled health care plans; Senate Bill 546, now PA 110 of 2007, which will place future school employees into a graded scale premium system for the calculation of their retiree health care benefits; and Senate Bill 622, now PA 112 of 2007 which allows the privatization of mental health services in the Department of Corrections. Further details on these issues can be found below.

Budget Agreement Contains Changes to School and State Employees' Pensions

At the end of the long marathon set of legislative sessions to resolve the state's financial deficit, several bills negatively affecting the retirement benefits of future school employees were tie-barred to the state income tax bill (HB 5194 now PA 94 of 2007) and the state sales and use tax bill (HB 5198 now PA 93 of 2007). These changes were among the "reforms" demanded by Republican legislators before they would agree to support new revenues-or even allow the process to go forward so that Democrats could vote to support new revenues. Another bill considered one of the "reforms" was legislation affecting retired state employees who return to work in either a direct or indirect fashion.

The legislation affecting new school employees is described briefly below:

• SB 546 , now PA 110 of 2007(Sen. Wayne Kuipers, R-Holland) establishes a graded scale premium for school employees hired after June 30, 2008. This legislation, which the Governor signed into law as PA 110 of 2007, would prevent those school employees who vest with less than 10 years of service from having their school retiree health insurance premiums subsidized at all; however, they can still purchase this insurance at full cost. The graded scale premium commences with 30% of the premium being paid by the system at 10 years of service and an additional 4% per year for each year thenceforth, bringing members to 90% after 25 years of service. For example, an individual hired on July 1 2008 who accrues 15 years of service credit would receive 30% for the first 10 years of service credit and 20% of the final five years (5 years X 4%), and thus would have 50% of his or her premium paid at retirement. These new provisions are not applicable to disability retirees or to surviving spouses in duty death situations. The new law also requires members who retire earlier than they otherwise could have because of purchasing service credit on or after July 1, 2008 to pay full premiums on their retiree health benefits until they reach the age and service combination under which they could have otherwise retired.
  
  
• SB 547 now PA 111 of 2007(Sen. Wayne Kuipers, R-Holland) requires members who are hired on or after July 1, 2008 to have at least two full years of service credit before they can purchase service credit. More significantly, it also increases the amount of member contributions required by employees hired after June 30, 2008. Members whose annual compensation is $5000 or less will continue to pay 3% of their compensation ($150). Members who earn over $5000 but less than $15,000 will pay $150 on the first $5000 of pay and 3.6% of the difference on the remainder, up to a maximum of $510. The change comes in the amount paid for compensation over $15,000, which will increase from 4.3% of the excess over $15,000 to 6.4% of the excess. See chart below for a graphic explanation of these changes.
  
  

  Current MIP Payments	MIP Payments - New Hires 7/1/08
  $5,000 or less = 3% of compensation, up to $150 $5,000 to $15,000 = $150 plus 3.6% of compensation between $5,000 and $15,000, up To $510 Over $15,000 = $510, plus 4.3% of compensation over $15,000	$5,000 or less = 3% of compensation, up to $150 $5,000 to $15,000 = $150 plus 3.6% of compensation between $5,000 and $15,000, up To $510 Over $15,000 = $510, plus 6.4% of compensation over $15,000

  
  
• SB 4799 (Rep. Lorence Wenke, R-Kalamazoo) was passed by both houses but then called back by the Senate. This legislation would have further limited post-employment work by school retirees and was commonly called the "double-dipping legislation". Because it was called back, this legislation was not enacted.

The original graded scale premium legislation was 3% a year starting at 30% with 10 years of service, requiring 30 full years of service to arrive at a premium that would be 90% funded. Moving this figure to 4% once members had more than ten years of service was one of the changes we fought for, once it was evident that some form of graded scale premium would be enacted. We have the efforts of the Governor's staff as well as both the House and Senate Democrats to thank for this improvement. However, they were not able to salvage the proposed amendment we sought to protect part-time staff by permitting a half-year of service credit to count as a full year's services.

Despite the problems future school retirees will face with these reductions in their benefits, at the very least we were able to prevent the school retirement system from being changed into a defined contribution system such as state employees have. In the process of lobbying against this provision, we had direct conversations with the Governor, Lieutenant Governor, the Speaker of the House, and Senate Minority Leader Mark Schauer. The cost of conversion was a very helpful argument against this change. We were also particularly heartened by the direct promise from Senator Schauer that he would not agree to a revenue bill if it were tied to a shift to defined contribution. Finally, the issue of how the graded scale premium bill affects part-time employees is one that RCC can consider raising again through separate legislation aimed specifically at that problem.

State Employees' Postretirement Options Affected

State retirees saw legislation enacted that will affect some of them more rapidly. The Governor has signed HB 4800 (Rep. Lorence Wenke, R-Kalamazoo) into law as PA 95 of 2007

Under this legislation, state retirees who return to work for the State of Michigan in either a direct or indirect fashion would have their pensions suspended during their period of re-employment. While this provision will not affect retirees currently re-employed by the state, it will certainly limit the number of retirees in the future who wish to do so. Ironically, this provision was referred to as the "double dipping" bill, as though the state employees returning to work were receiving two pensions rather than just compensation for their additional work. We continue to seek clarification regarding the meaning of "indirect employment" so that state employees and retirees can have a good understanding of the impact of this law.

Although there was some discussion, particularly by Senate Republicans, of an early out program for state employees, it was based on the assumption that vacated positions would not be filled. Governor Granholm responded very firmly to these proposals, indicating that she was unwilling to see further diminution in the number of employees who can perform services for the state's citizens.

Committee on Retiree Health Care Continues to Meet

The House Committee on Retiree Health Care Reform has held a series of hearings over the past few months to take testimony on the issue of public retiree health care. The committee has heard from a broad variety of organizations, ranging from state universities and insurance plans to investment bankers and retirement systems. They have gotten a thorough education in the requirements of the General Accounting Standard Board's new requirements for reporting the unfunded accrued liability of public employee retirement health benefits, which typically are not prefunded.

Committee Chair Mark Meadows (D-East Lansing) has stated that he would like the committee to begin reviewing legislation in November. However, the committee's progress was slowed somewhat by the budget crisis, which caused a number of meetings to either be cancelled or postponed. In September, TIAA-CREF and Aetna both testified that the current system for funding retiree health care is unsustainable. They focused on the differences between retiree pension funding and retiree health care funding, pointing out that health care funding is a much less predictable target. TIAA-CREF opined that full funding of retiree health care is not realistic, but partial solutions, such as Health Care Savings Accounts, provide a workable system. Aetna proposed a substantial reduction in the cost of retiree health care by shifting more costs onto the plan participants.

Other presenters in the last month have been Oakland County, Ferris State University and the Michigan Employees Retirement System. Oakland County renewed its call for the Legislature to enact legislation to allow municipalities to use bonds to pay for the unfunded accrued liabilities in retiree health care, and legislation which would accomplish that goal has been transferred to this committee. Ferris State presented an overview of the Michigan Public School Employees Retirement System and its relation to Michigan universities. MERS testimony focused on its pooled health care plan, as well as its desire that the collective bargaining process be restricted in terms of its ability to increase retiree benefits for employees at the local level.

The RCC will itself be addressing the committee on November 2. Our goal is to ensure the committee is aware of the fact that school and state retirees have already seen increases in their cost-sharing for retiree health care costs and to suggest that the real goal should be cost reduction, not cost sharing. The Lansing State Journal on October 18, for example, ran an editorial that stated that Medicare Advantage plans "are no 'advantage' to the taxpayers who subsidize them"---probably without any knowledge that it is this very plan that has helped keep the MPSERS health care costs down to the same percentage of payroll they have been for the past three years. We would be interested in any input from RCC members to use in this testimony.

Full copies of the written testimony from all previous presenters are available online at http://house.michigan.gov/committees.asp (scroll down to the drop-down list and select Retiree Health Care Reforms).