The MC: The Mackinac Center Blog

Michigan Counties on the Verge of Pension Crisis

Lansing State Journal publishes op-ed on local pension debt

Michigan’s counties are drowning in pension debt and it’s time for their leaders to act to prevent future cuts to services or major tax hikes to residents.

Josh Paladino, a Mackinac Center summer research intern, wrote about the ballooning unfunded pension liabilities municipalities are facing in a recent op-ed published by the Lansing State Journal.

When governments refuse or are unable to address unfunded pension liabilities, retirees are left vulnerable and uncertain about their futures while taxpayers are ultimately left holding the bill. In 2015, Michigan residents paid $405 million to county pension plans across the state.

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Using Ingham County’s $125 million pension funding gap as an example, Paladino made the case for shifting new hires to defined contribution plans, rather than defined benefit, as a number of counties in Michigan have already successfully done.

Ten counties have shifted from defined benefit plans to defined contribution plans for new employees and together have 94 percent of the money needed to cover their pension debt. …

Oakland County tackled its pension debt in 1994 by shifting new hires to a defined benefit plan and now has a system that’s 98 percent funded.

Deputy County Executive Robert Daddow said closing defined benefit plans and enrolling new hires in a defined contribution plan will cut down on the required payments long term, while still providing solid benefits to retirees.

Collectively, Michigan’s 83 counties have a $2.5 billion unfunded liability and owe pensions to over 63,000 members in the system.

Read the full op-ed in the Lansing State Journal here.

Read Paladino’s in-depth report on Michigan’s pension crisis in Michigan Capitol Confidential here.

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Time to End the 21st Century Jobs Fund

New Mackinac study featured in state media

Michigan’s 21st Century Jobs Fund program is fatally flawed and lawmakers ought to put it out of its misery, one Mackinac Center analyst argued in a recent op-ed published in The Detroit News.

Gov. Jennifer Granholm promised the program would blow the state away, but 10 years later, taxpayers have little to show for the hundreds of millions of dollars reallocated through the jobs fund. Aside from the fund’s lack of transparency, questionable reporting practices and possible constitutional issues, Mackinac Center’s Assistant Director of Fiscal Policy argues the entire premise of the corporate welfare program is flawed.

The state does not have great expertise in picking winners and losers and is even less likely to do so when the pool of options is limited. …

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The legislation that created the program says that it is about diversifying the economy and creating jobs. Those are measurable goals but tough to measure when the data is hidden.

But creating jobs and diversifying the economy is unlikely to happen because the program is not set up to succeed. Its scope is not large enough to make a dent in the job creation picture. The state economy creates tens of thousands of jobs every month and loses a similar number.

Hohman authored a new study evaluating the fund, which The Peninsula covered.

The originators of this program wanted a self-sustaining economic development fund that would create 72,000 jobs,” James Hohman, assistant director of fiscal policy at the Mackinac Center and the study’s author, said. “A decade later, hundreds of millions are gone and only 6,500 jobs are claimed as a result of this spending. Even then, state auditors have warned about the quality of data in the reports on this program and the administrators of it have not complied with transparency requirements.”

Hohman said any economic impact by the 21st Century Jobs Fund has been negligible and argued the money invested into it would be better spent elsewhere.

Read the full op-ed in The Detroit News here.

Read The Peninsula’s report here.

Read Hohman’s latest study, An Evaluation of Michigan’s 21st Century Jobs Fund, here.

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Obama’s Overtime Rule Would Hurt Those It’s Intended To Help

Patrick Wright joins WNEM TV5 to discuss new rule

Nearly half the states, including Michigan, are suing the U.S. Department of Labor in an effort to block the Obama Administration’s new overtime rule that would significantly increase the number of people eligible for overtime pay.

State Attorney General Bill Schuette, who signed onto the suit, said the new rule that’s set to take effect Dec. 1 will hamper job creation and increase unemployment. Patrick Wright, Mackinac Center vice president for legal affairs and director of the Mackinac Center Legal Foundation, told WNEM TV5 that the rule may be designed to increase wages, but will do the opposite.

A lot of companies, they’re not miraculously going to come up with more money. They’re going to find ways to make ends meet and that’s probably going to harm the very people that this regulation is supposed to help.

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Currently, salaried workers who make $23,660 per year or less are eligible for overtime pay, but the new rule would raise the cutoff to $47,500.

Watch the full news report at WNEM TV5 here

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Proposed Beer Tax Hike Would Hurt Brewers

LaFaive comments in MLive article

If Michigan lawmakers want to stifle the state’s craft brewers, they’ve found just the way.

Rep. Tom Hooker, R-Byron Center, introduced House Bill 5873 this month to increase Michigan’s beer tax from $6.30 to $21.70 per barrel, a nearly 250 percent hike. Michael LaFaive, director of the Morey Fiscal Policy Initiative at the Mackinac Center, weighed in on the debate in a recent Mlive article.

It will harm businesses including the many craft brewers in Michigan that have opened in recent years. Michigan is one of the leaders in craft breweries, and here we are hamstringing organizations that might actually be destinations of travel.

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He added that the tax could decrease consumption or drive people to consume other types of alcoholic beverages.

Read the full article from Mlive here.

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September 23, 2016 MichiganVotes Weekly Roll Call Report

Out with old in with new licensure mandate; increase legislature transparency; more

House Bill 4282, Exempt small-project home repair contractors from licensure mandates: Passed 66 to 40 in the House

To exempt individuals who do residential repair and rehab jobs worth less than $4,000 from licensure mandates imposed on contractors.

Who Voted “Yes” and Who Voted “No”

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House Bill 5469, Extend open records law to legislature: Passed 100 to 6 in the House

To extend the Freedom of Information Act to legislators, whose offices are currently exempt, subject to a broad range of exceptions and exemptions. The House also passed House Bill 5477, which extends the disclosure requirements to certain kinds of documents held by the governor's office.

Who Voted “Yes” and Who Voted “No”


House Bill 5475, Exceptions to applying open records law to legislature: Passed 100 to 6 in the House

To define the records that would be exempt from Freedom of Information Act requests to the state legislature under House Bill 5469. These include standard provisions on records dealing with security matters, active contract bidding, information of a personal nature or business proprietary records, records that violate attorney-client privilege or involve ongoing litigation, etc. The bill would also exempt records of exchanges between a lawmaker and a constituent. Notably, records held by the Republican and Democratic caucus staffs would also be exempt, including their communications and public relations operations.

Who Voted “Yes” and Who Voted “No”


House Bill 4822, Ban social promotions for third graders who can’t read: Passed 60 to 47 in the House

To prohibit “social promotions” of third graders who have not reached minimum reading benchmarks starting in the 2019-2020 school year, subject to many conditions and exceptions, and with requirements that additional interventions and tutoring be tried before a student is actually held back. This final version of the bill allows a school district superintendent make an exception but not teachers or principals, and only if the student is proficient in other subjects.

Who Voted “Yes” and Who Voted “No”


House Bill 5826, Ban government suing person who submits open records law request: Passed 102 to 5 in the House

To prohibit public bodies from suing a person or entity making document requests authorized by the state Freedom of Information Act.

Who Voted “Yes” and Who Voted “No”


House Bill 5651, Let new port authorities give private company partnership status

To permit a government port authority to grant partnership status to a private business or developer, which would permit them to operate and collect revenue from the facility. New port authorities would not get half their expenses paid by the state like existing ones, but would be able to keep any annual profits rather than turning them over to the local and state government.

Who Voted “Yes” and Who Voted “No”


House Bill 4580, Require "claw back" provisions in some selective tax break deals: Passed 35 to 0 in the Senate on September 21, 2016

To require that starting in 2017 local governments and a state "Next Michigan Development Corporation" must include "claw back" provisions in new tax break deals they selectively grant to particular corporations or developers, allowing foregone taxes to be demanded if the beneficiary does not abide by the terms of the tax break agreement. This applies to property taxes levied on business tools and equipment ("personal property tax").

Who Voted “Yes” and Who Voted “No”


Senate Bill 570, Exempt certain sportsmen club property from property tax: Passed 24 to 10 in the Senate

To exempt property owned by sportsmen or gun clubs from property tax if they let governments use their facilities, provide gun safety classes to the public, and have other pro-social practices specified in the bill.

Who Voted “Yes” and Who Voted “No”


Senate Bill 1022, Create process for disclosing police firing to other agencies: Passed 35 to 0 in the Senate

To establish a process and give a liability exemption that lets one police agency disclose information to another about a formerly-employed officer who may have been fired. A “separating” officer would be allowed to review the record and add a written explanation to it. Police job applicants would have to sign a waiver allowing these records to be shared with a prospective employer.

Who Voted “Yes” and Who Voted “No”


Senate Bill 1015, Impose licensure on applied behavioral analysis: Passed 34 to 1 in the Senate

To impose licensure on practitioners of “applied behavioral analysis," with $90 annual license fees and other fees, regulations, scope of practice restrictions, education and experience requirements, and more.

Who Voted “Yes” and Who Voted “No”


SOURCE: MichiganVotes.org, a free, non-partisan website created by the Mackinac Center for Public Policy, providing concise, non-partisan, plain-English descriptions of every bill and vote in the Michigan House and Senate. Please visit http://www.MichiganVotes.org.

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Lawsuit Filed to Fight Michigan’s Ban on Tesla Sales

Skorup weighs in with USA Today and the Detroit Free Press

Tesla is taking its fight to sell vehicles directly to consumers in Michigan to the courtroom.

According to an article published by USA Today and the Detroit Free Press, the electric automaker is suing Michigan Secretary of State Ruth Johnson, Michigan Attorney General Bill Schuette and Gov. Rick Snyder over a 2014 state law requiring manufacturers to sell vehicles through dealerships. Tesla, much like Apple, wants to sell directly to consumers.

A bill introduced this year by Rep. Aaron Miller, R-Sturgis, would allow Tesla to sell vehicles in Michigan by allowing direct-to-consumer sales.

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Jarrett Skorup, a policy analyst with the free-market think tank Mackinac Center for Public Policy that supports changing the law, said that people should be able to freely sell goods, and supports Tesla’s position that it should be able to sell vehicles in Michigan without interference from dealerships.

Tesla argues in the lawsuit that Michigan’s law violates the Fourteenth Amendment’s due process and equal protection clauses.

Michiganders wishing to purchase a Tesla may only do so by going to another state. Illinois, Indiana and Ohio all have galleries where consumers may buy a vehicle directly from the company.

Read the full article in USA Today here.

Read the full article in the Detroit Free Press here.

Read more about the ban on Tesla’s sales in Michigan here.

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The Nov. 8 North Dakota ballot initiative to raise cigarette excise taxes by 400 percent will — if adopted — increase cigarette smuggling and cause other unintended consequences.

We have studied cigarette evasion and avoidance (what we call “smuggling”) around the United States for a decade and have developed a statistical tool for measuring the degree to which cigarettes are smuggled across state and international borders.

Our model of smuggling — which uses data through 2014 — tells us that for every 100 cigarettes consumed in North Dakota, another 11.6 are smuggled out to other states, mostly neighboring ones such as Minnesota. There is no illicit inbound traffic.

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We can run “what if” scenarios with our statistical model to estimate future smuggling rates based on proposed excise tax increases. We find that, after raising excise taxes to $2.20 per pack, North Dakota will stop being a cigarette “exporting” state. Instead, cigarettes smuggled into the state will become 16.6 percent of the total market. That is, of all the cigarettes consumed in North Dakota, more than 16 percent will have been smuggled in through one of two means: casual or commercial trafficking.

Casual smuggling typically involves people buying less expensive cigarettes for personal consumption. They do this through online purchases or going to a different taxing jurisdiction, such as an Indian reservation or another state. Commercial operations, by contrast, involve long haul, large shipments from distant states such as Virginia or North Carolina.

With the current excise tax at 44 cents per pack, almost 100 percent of the North Dakota-related smuggling is casual. People in neighboring states drive across the border to buy smokes and return home. But under the higher tax scenario, most smuggling will be inbound, and commercial.

Our model compares legal tax-paid sales with reported smoking rates by state. The difference between the two must be explained, and we — and other scholars — attribute it to smuggling. The model also controls for important factors that may influence measurements, such as border county populations and the presence of Indian reservations.

The reservation variable is important because there are four tribes in North Dakota which may be a convenient source of lower-priced smokes. A 2014 National Bureau of Economic Research paper titled, “Reservation Prices: An Economic analysis of Cigarette Purchases on Indian Reservations” looked at this problem. It conducted a survey of 6,539 smokers that roughly 19 percent of them “always” buy their smokes on one of New York’s reservations.

Some states — such as Washington — try to minimize reservations as a source of cheaper smokes by negotiating tax compacts with their tribes. Such compacts typically require tribes to collect state-level excise taxes on sales to nontribal members. North Dakota has one such compact. We’re not yet sold on their efficacy. Taking away the incentive for consumers to shop on reservations just creates an incentive for individual tribal members to become a source of cheap cigarettes themselves.

The state of Washington’s tax compacts have still not prevented it from having high smuggling rates. We estimate its 2012 smuggling rate at 48 percent of the total market. Only three other states had higher rates that year. Would the absence of tax compacts have changed that fact? We’re not the only scholars to estimate smuggling rates. In 2015, a team of researchers hired by the United States Congress (and using data through 2012) published their own analysis and estimated Washington’s smuggling rate at 45.5 percent.

To give the reader an idea of how profitable the trade in illicit cigarettes is, consider one example. In 2013 a California man pleaded guilty for his work in trying to smuggle millions of cigarettes shipped from China to the Port of Newark in New Jersey. They were then shipped to California for distribution. If smuggling is profitable at those distances, imagine what profits await organized crime syndicates that send loads of cigarettes from Nebraska or Missouri to North Dakota.

The massive profits that await smugglers have inspired every other sort of mischief. In the highest profile (but not only) case of its kind, North Carolina men ran vanloads of cigarettes to Michigan and used part of their profits to support the Hezbollah, a known terrorist organization. At other times, cigarettes have been brazenly stolen by thieves who cut through the roofs or break through the walls of legal, cigarette wholesalers and retailers. Other thieves hijack trucks for their cargo of cigarettes. The list goes on.

Supporters of this initiative may mean well, but the costs associated with the tax increase may outweigh the benefits.

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Union Survey: Michigan Teachers Want Pension Reform

Only 12.2 percent of MEA members feel they will have a comfortable retirement

The Michigan Education Association recently released a survey of some of its membership. Much of it isn’t surprising — like other workers, teachers want to make more money and don’t like how they are evaluated.

But one key question is about retirement and shows that school employees don’t feel secure with the current teacher pension system.

The survey asks: “Do you feel that you’ll be able to comfortably retire?” Only 12.2 percent answered “yes,” while 52.2 percent said “no,” and 35.6 percent were unsure.

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There is reason to be concerned. The teacher pension system, MPSERS, has nearly $27 billion in unfunded liabilities. Government pension systems across the state are underfunded and causing real cuts of government services.

The way to protect the retirements of teachers is to stop enrolling new employees into this underfunded system and give them 401(k)-type plans instead. This would allow workers more flexibility and control over their retirement, cap the current plan’s liabilities, force the state to start paying down the debt and prevent future underfunding.

Learn more at www.InOurHandsMI.com.

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Pugsley Correctional Facility to Close

Michigan's prison population on the decline

Pugsley Correctional Facility in Kingsley, Michigan, is slated to close later this month, on Sept. 24.

The state’s FY 2016-17 budget calls for the Department of Corrections to close the Pugsley Correctional Facility to save money, a compromise struck by a conference committee between the Senate proposal to close two prisons, and the House plan to close none. Lawmakers expect that closing the 1342-bed facility will save $22 million.

Declining prisoner population made the move possible: the department reports that the population has declined to under 42,000 from an all-time high of over 51,500 in March 2007. It has closed and consolidated more than 25 facilities since 2005.

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The Department of Corrections attributes the prisoner population decline to decreases in felony court sentences and, therefore, fewer prison admissions. It reports that 2015 was the third year in a row in which prison intake declined, especially among prisoners incarcerated for new crimes.

These findings are consistent with research showing a dramatic decline in violent crime both statewide (where current crime rates are nearly half of what they were at their 1986 peak) and nationally.

The Michigan State Police credits a policing program called the Secure Cities Partnership with improving public safety in Michigan. The MSP 3rd District Commander Capt. Gene Kapp told a Senate subcommittee that violent crime fell 40% in Saginaw and more than 45% in Flint since 2012, when the Secure Cities program began. Property crimes also dropped by 34% and 40%, respectively.

Secure Cities relies on an effort known as “community policing,” which operates by putting more law enforcement officers on the streets to build ties with members of the local community. A recent report by the Police Foundation and the Charles Koch Foundation underscores the importance of trust between communities and law enforcement agencies.

The report examines the experiences of foot patrol officers in five cities: Cambridge, CT, Evanston, IL, Kalamazoo, MI, New Haven, CT and Portland, OR. It found that, in addition to increasing a sense of safety among community members and job satisfaction among officers, foot patrols encouraged more people to tell the police about crimes and other concerns. The additional information made it easier for the department to solve problems and prevent crimes.

Preventing crime may be the single most important cost-savings measure available. The University of Michigan estimates that a murder costs society over $1.5 million in medical care and the loss of property, public service, and future earnings – not to mention the $35,000 annual cost of imprisoning the murderer.

Law and policymakers should keep those considerations in mind when addressing the tremendous cost of corrections in this state. As the Pugsley Correctional Facility closure demonstrates, safely and successfully reducing the prison population depends heavily on our ability to continue preventing and reducing crime. This occasion is an ideal time to review the outcomes of our law enforcement practices and to focus on the ones that are proven to be effective.

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More to Charter Special Ed Gap than Meets the Eye

Disability types, local conditions drive disparity

Charter schools, like all other public schools, cannot legally turn away children with physical, intellectual and emotional challenges. Nevertheless, the numbers reported to state officials bear out that Michigan charters — as in many other states — serve lower rates of special-needs students. A closer look reveals that blame for this apparent discrepancy cannot be placed at the feet of charter school operators.

In a November 2015 MLive story, Tim Wood, the head of the Grand Valley State University’s Charter Schools Office, attributed charters’ smaller enrollments of more severely disabled students to greater parental satisfaction with existing arrangements.

Last month, Bridge Magazine reporter Chastity Pratt Dawson told WDET Radio host Stephen Henderson that some Detroit charters subtly turn away children with costly learning challenges by suggesting other nearby schools could better serve their needs. She raised the shortage of qualified special education instructors as a real part of the challenge.

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The observations from both sources likely contain elements of truth. But without further study, they remain interesting anecdotes and thoughtful speculation that don’t advance the policy conversation in productive ways. The analysis that follows raises questions about the broad applicability of these observations, and suggests other dimensions that need to be explored.

The state of Michigan’s Center for Educational Performance and Information collects and reports a fair amount of data on special-needs student characteristics and educational services at the individual district or charter level. The most recent data cited here is from the 2015-16 school year.

(The number of students a district or charter enrolls in a specific special-needs category is not reported if fewer than five. Most students are accounted for though in the group totals. However, those with rarer diagnosis classifications may be slightly undercounted, especially in smaller charter populations. But it’s unlikely that these disparities affect the general findings.)

Michigan’s intermediate school districts directly serve only about 23,000 students, but 70 percent of them have special learning needs that qualify them for an Individualized Education Program. Combined with conventional school districts, special education students represent 13.2 percent of the population of district and intermediate school district enrollments. Charter schools serve about 149,000 students, 10.1 percent of whom have an IEP. That’s 3 percentage points lower than the district and ISD rate, a real gap but smaller than the 3.9 percentage point difference reported by the National Center for Special Education in Charter Schools from 2011-12 data.

Taking ISDs and their specialized services out of the mix, however, reduces the gap between conventional and charter schools. Not including ISD enrollments, 12.1 percent of students enrolled in district schools have IEPs, only a 2 percentage point difference with charters. Further, the gap disappears altogether with a look only at the most common and treatable conditions. Cases of learning disability, speech impairment and a category that includes attention deficit/hyperactivity disorder and conditions like asthma, epilepsy and diabetes combine for 70 percent of Michigan IEPs. These cases cover about 8.8 percent of conventional district students and 8.6 percent of charter students.

The greatest disparity can be found among students with autism, emotional disturbance, vision or hearing impairment, or other severe physical and mental handicaps. Michigan charter schools would have to double the current estimated 2,200 students served in these categories to match the rate of conventional districts.

Another enrollment disparity can be found in Wayne County, Michigan’s most populous county. There, special education students make up 13.8 percent of conventional districts, compared to only 9.1 percent for charters. In Michigan’s other 82 counties the difference shrinks to less than one percentage point: 11.9 percent for districts and just under 11 percent for charters. Outside of Wayne County, the average charter school actually enrolls a higher rate of less severe special needs students than the average district school.

Local funding and operations can explain some of the discrepancy as well. The Wayne County Regional Educational Service Agency, the ISD that covers Detroit Public Schools and 32 other districts, operates center-based programs for students with “more severe impairments.” These programs, housed only in conventional districts, receive access to millions in Act 18 local millage funding, and likely contribute to the districts enrolling more special needs students than charter schools in the county. If these programs were also operated by charter schools, their special education enrollments would be higher.

Other large ISDs — covering Kent, Oakland, Macomb and Ingham counties — do not dedicate all their local special education tax dollars to center-based programs run by local districts. And in each of these counties, the special education enrollment gap for charters is much smaller than in Wayne.

More in-depth investigation could follow along the lines of research Boston University professor Marcus Winters has done in both Denver and New York City. Winters found “remarkably similar” explanations for both cities’ special education enrollment gaps. Traditional districts tend to identify more students with learning disabilities, and fewer students with disabilities apply to enter a charter — corroborating Dr. Wood’s assessment. Winters’ research left very little room for potential charter discrimination as an explanation, and it could be the case that similar trends explain the special education enrollment gap between conventional districts and charter schools in Michigan.

Similar research in Michigan would be welcomed and may help settle this debate. Nonetheless, based on the information available on special education enrollment in this state, it appears unlikely that charter schools are systematically turning away students with special needs.

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