Pension underfunding, not defined contributions, is the problem
At an event sponsored by the West Michigan Policy Forum, Nick Ciaramitaro of Michigan AFSCME Council 25 criticized defined contribution retirement plans. They are, he argued, more expensive than defined benefit plans for the same benefit, creating a “lose-lose situation.” He is wrong — letting employees control their own retirement accounts would lower costs and give them control over their own retirement.
Pension plans in governments are expensive yet are not especially generous. The risk of underfunding adds an expense to them that is not present in defined contribution plans. Most of the money going into pension funds is not to pay for the benefits being earned by employees; instead, it goes instead to pay down unfunded liabilities. The state’s largest retirement system costs 36 percent of payroll and 87 percent of that goes to pay down unfunded liabilities.
Promising benefits and paying for them later has created a hole in pension systems across the state. This is the real lose-lose situation, and it threatens retirees, current workers and taxpayers alike.
Sex! Crime! Hollywood! Uber! Oh boy!
The Legislature did not meet this week, so the Roll Call Report continues its review of key votes from the 2015-2016 session.
House Bill 4122, Repeal film producer subsidies: Passed 58 to 51 in the House on March 11, 2015
To repeal the program that gives Michigan tax dollars to film producers. Since 2008 some $500 million was distributed to producers by the state.
House Bill 4122, Repeal film producer subsidies: Passed 24 to 13 in the Senate on June 18, 2015
The Senate vote on the bill described above.
House Bill 4328, Suspend state funding for defiantly overspending school districts: Passed 61 to 47 in the House on June 18, 2015
To give the Department Treasury the authority to withhold state school aid payments from an overspending school district that fails to submit an acceptable “deficit elimination plan” as required by law, or which falls more deeply into financial trouble and must operate under an “enhanced” deficit plan. This was part of package creating an “early warning system” for school district with financial problems.
House Bill 4328, Suspend state funding for defiantly overspending school districts: Passed 25 to 12 in the Senate on June 18, 2015
The Senate vote on the bill described above.
House Bill 4637, Regulate Uber, preempt local bans: Passed 71 to 39 in the House on June 17, 2015
To establish a generally permissive regulatory framework that would enable “transportation network companies” like Uber and Lyft to operate in this state, including preemption on local government regulations or bans. The bill would require permits, specified insurance, background checks, vehicle inspections, prescribed customer disclosures and more. The Senate has not voted on this bill, and bills introduced there would be more restrictive and potentially let local governments impose their own regulations and restrictions.
House Bill 4470, Increase food business license fees: Passed 79 to 30 in the House on May 21, 2015
To increase various state license fees imposed on food establishments including grocery stores, warehouses, processors, etc. This is projected to extract some $2.5 million annually from food-related businesses.
House Bill 4470, Increase food business license fees: Passed 21 to 17 in the Senate on June 3, 2015
The Senate vote on the bill described above.
House Bill 4193, Allow electronic proof of insurance: Passed 108 to 2 in the House on March 26, 2015
To revise the state’s no-fault insurance law to allow proof of insurance documents motorists are required to have when driving to be an electronic communication from the insurance company visible on a mobile device. If asked a driver could be required to forward the information to a designated site.
House Bill 4193, Allow electronic proof of insurance: Passed 37 to 0 in the Senate on September 30, 2015
The Senate vote on the bill described above.
Who Voted “Yes” and Who Voted “No”
House Bill 4138, Authorize "presumptive parole" after serving minimum time: Passed 67 to 39 in the House on October 1, 2015
To require that parole be granted to prisoners who have served their minimum time if the person has a “high probability” under a "validated risk assessment instrument" of not being a risk to public safety, and also meets other criteria specified in the bill and current law, subject to a number of restrictions and exceptions.
House Bill 4713, Require “culpable mental state” for criminal conviction: Passed 106 to 0 in the House on October 1, 2015
To establish that (with some significant exceptions) if a law does not indicate whether a “culpable mental state” (“mens rea”) is required to establish guilt, the presumption will be that this is required, meaning that prosecutors must show that the defendant violated the law “purposely, knowingly or recklessly.” This would not be the case if a law explicitly imposes a “strict liability” standard. Under current law, many complex “administrative” offenses authorize criminal penalties for actions that a regular person would not know are illegal.
House Resolution 141, Expel Reps. Gamrat and Courser: Passed 91 to 11 in the House on September 11, 2015
To expel freshmen Representatives Todd Courser and Cindy Gamrat from the House for using government personnel and resources to cover up an extramarital affair, and for other irregularities in the operation of their offices. Courser resigned moments before the vote, so the final version only expels Gamrat.
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.
Michigan Civilian Conservation Corps has survived multiple defundings
A number of sources attribute jokes about government programs being the closest thing to immortality to President Ronald Reagan. At least one source traces the humor back to a United States senator in 1933. That is an apt starting point because it was in that year President Franklin Roosevelt took office and worked to create — among other relief programs — the Civilian Conservation Corps.
The CCC long ago folded but its Michigan-specific derivative, the Michigan Civilian Conservation Corps, survived. And it continues today as an at-risk youth program despite having been defunded in the past. As the 2016 fiscal year ends today and 2017 begins anew, it is a good time to look back on a program that just won’t end, even though it probably should, a recommendation we began making in 2002.
The original CCC program was meant to provide work and training to unemployed people while preserving, if not improving, the environment. Michigan’s first federal CCC workers arrived near Sault Ste. Marie 83 years ago last May, according to a Michigan Historical Center article, “Roosevelt’s Tree Army: Michigan’s Civilian Conservation Corps.” The federal program ended in 1942 but that didn’t stop Michigan from creating its own version of it.
The program, inspired by FDR’s “Tree Army,” has morphed in size and scope over the years, especially during the last 25. Like the CCC, the MCCC hired people between the age of 18 and 27 to do preservation, or “ecological and restoration” work. They had been hired by the Michigan Department of Natural Resources, which oversaw the program. The MCCC has taken financial hits in the past and managed to find new life with other funding.
For example, in 1991 Gov. John Engler ended budgetary support for the MCCC, but it was to get a new financial infusion in 1994 with the sale of the state’s Accident Fund, a workers’ compensation insurer. The state set aside $20 million from proceeds of the Accident Fund sale to partially fund the program, through interest on the endowment, until 2007. In that year, lawmakers redirected the entire endowment to the state’s general fund to help balance the budget (Public Act 147 of 2007), reducing funds available to the program.
A small MCCC crew was nonetheless kept afloat within the parks division of the Michigan DNR and, according to the Detroit Free Press, had only eight recruits doing “stewardship” work at one point.
In 2012 a supplemental appropriation bill was passed to create a new version of the old MCCC. It was called “Summer Youth Initiative,” according to Sharon Schafer, the finance chief of the Michigan DNR. This program targeted “at-risk” youth from just four cities: Detroit, Pontiac, Flint and Saginaw.
The DNR provides grants to foundations in these cities. The foundations, in turn, teach young people, according to Schafer, “about natural resources and life skills they will need such as resume building, managing money, completion of college applications …” They also do work in state parks. In 2015 the program’s name was changed to “Michigan Conservation Corps” and it has enjoyed $1 million appropriations in fiscal years 2015 and 2016, respectively. The Corps now also accepts some veterans up to age 27. And so, under a different name and funding, Roosevelt’s Tree Army lives on.
Lawmakers almost eliminated the program this year. The state House budget did not fund the program. But funding was ultimately restored. Programs such as this one are typically run with money that is drained away from other programs and from family budgets, too, in the form of taxation.
There would be nothing stopping people from using their own resources to teach useful skills and lessons about environmental or financial resource management, if only the state would let them keep more of it.
The only real solution is to close public pensions to new employees
Pension costs are forcing tough choices on Michigan’s school districts. Their problems are caused almost entirely by state policies, so the solution must come from the state.
In Michigan, school districts have little to say about the retirement benefits offered to their employees; all the key decisions are set by state policy. The state requires districts to use its retirement system, sets its benefits, and decides what the funding assumptions and policies will be. To pay for pension benefits, the state assesses districts a percentage of their payroll. A district sends 36.31 percent of its payroll to the school pension system, while the employees, as a group, must put 4.69 percent of their paychecks in the system.
State officials made some basic reforms in 2012 as more and more school districts began to grapple with the budget implications of retirement benefits. That year, the state said it would cap school districts’ annual responsibility for pensions. It also announced that it would begin sending an extra payment to the districts to cover a portion of pension benefits. Currently, that’s 10.53 percent of payroll, for a total of $1.082 billion for the 2016-17 fiscal year. This additional funding to districts accounts for $1 out of every $11 the state spends on K-12 education.
If the state weren’t making these payments, it could use that same amount of money to increase the foundation allowance by $727 per pupil. Conversely, if the state didn’t make those payments, districts would have to dip further into their foundation allowance to meet pension commitments.
Public attention often focuses on the size of the foundation allowance. But public school districts would rather see extra money from the state go to cover pension costs than increase the foundation allowance, an unrestricted grant. The reason is that charter schools do not participate in the public school pension system and therefore do not receive the state pension assistance; they would, however, receive their share of an increased foundation allowance, and districts would receive less.
Charter school employees generally work for a charter management company and are not part of the school retirement system that is mandatory for public school employees. Few charters would want to join the public pension plan, since private sector retirement plans tend to cost much less than the burden currently shouldered by school districts — typically 5 percent to 7 percent of payroll compared to 20.96 percent.
While the difference in retirement costs is often pointed to as a structural advantage for charter public schools, districts have advantages of their own. For instance, districts can put additional millages in front of voters to cover construction costs for new or upgraded school buildings, while charters do not have access to that funding source.
The massive scope of the pension problem has led a variety of stakeholders to propose solutions. Some of those are worthwhile, while others create new problems.
One concept regularly floated by some public school proponents is to force charter schools to contribute toward paying down the pension underfunding that plagues the statewide school retirement system. The idea is based on the belief that pension shortfalls were caused in part by decreased payrolls in public school districts brought on by the growth of charter schools. But the issue is not the size of the payroll in the statewide retirement system. Instead, it’s the size of the unfunded liabilities. Spreading the cost of catching up on underfunding to a larger base does not dilute the cost.
Moreover, Michigan’s teacher pension system would be in even worse shape if it had covered employees at public charter schools. It would also be unfair since charters would be cleaning up a mess they had no hand in creating.
Another questionable model for dealing with the pension system’s underfunding also involves spreading burden over a larger base, in this case, by levying an assessment on services purchased by both districts and charter schools. Each year, schools increasingly contract out for support services. Contractors have a competitive advantage over in-house employees since districts don’t have to pay into the state retirement system for contract employees. Some officials think the growth of contracting harms the retirement system, so they propose an assessment. But that is no solution. While an assessment would encourage districts to bring services back in house, doing so would expose both districts and the retirement system to even more unfunded liabilities.
All the discussions of what to do about pension underfunding are overshadowed by a major issue: Lawmakers cannot be counted upon to keep their spending promises. It is difficult to bind lawmakers to giving money in the future, outside of a constitutional requirement. The cap language is just a statute that lawmakers can change at will, and specific funding amounts still have to be agreed upon through the appropriations process. So far, Michigan’s policymakers have been reasonably effective at fully funding to the cap. In fact, they have often given more money than is required, which frees up district spending on other areas.
But school district officials have no guarantee that this pattern will continue. Future legislators could change the statute that places a cap on what districts must send to the pension system. They could do it with no more votes than would be required to pass annual budget appropriations bills.
Some people argue that the money going to these benefits does not make its way into the classroom, but that does not reflect the reality of how school funding works. Teachers’ retirement costs are part of employee compensation, and if there’s anything that should be considered as spending “in the classroom,” it’s the compensation of the teachers in those rooms. It is true that 87 percent of pension costs are going to benefits that employees have already earned, rather than compensating teachers for the work they do today. But that simply means we’re still spending for yesterday’s classrooms today because we didn’t spend what we should have at the time.
The pension underfunding problem is the largest long-term issue facing Michigan. State policymakers made overly optimistic assumptions about what pensions cost and have not set aside enough money to pay what they promised. Until this problem gets fixed, any additional money being generated by sales taxes, income taxes and property taxes for schools may wind up in the pension system.
The underfunding albatross has been getting larger every year. The state’s payments to districts do help them out and limit their exposure to the pension burden. But they do not absolve lawmakers of their responsibility to properly fund a pension system that meets the commitments the state has made to current and former employees. Nor do they fix the system’s funding problem. To stop the underfunding, lawmakers ought to develop a defined contribution system that will put teachers’ future retirements in their own hands rather than at the mercies of the annual appropriations process.
Adding to the dialogue
Recent debates about whether persistently underperforming Detroit schools should be exempted from state closure laws prompted the Excellent Schools Detroit coalition to share some observations behind their gloomy outlook. People of good will want much better opportunities and outcomes for Detroit students, even as the path to that destination appears steep and foreboding.
Most of Excellent Schools’ broad points about the state of education in the Motor City and its future prospects (restated below in bold lettering) hold a great deal of truth and offer good starting points for conversation. The following additional key facts and insights need to be included in the policy discussion.
1. For Detroit families, the education system remains in crisis. The staggering share of poorly performing schools in the city is undeniable. The question is what truly promising “comprehensive” solution ought to be pursued, when the recently rechristened school district has seemed impervious to making needed changes. Given the dire situation, no quality educational option should be left off the table.
2. The new Detroit Community School District Board (DCSD, formerly DPS) will have to move aggressively. Streamlining an oversized bureaucracy and rooting out the stench of corruption should be at the forefront of a new board’s agenda, as it seeks to regain public trust and redirect dollars to serve students directly in classrooms. Rethinking the role of the board and the central office to foster more local control ought to be a top priority.
3. Is the charter sector really ready to lead? The best available research shows Detroit charters on average add three months of learning each year in key subjects, but the bar does need to be raised higher. Excellent Schools is correct that too many Detroit area charters remain among the bottom 5 percent of the state’s Top-to-Bottom Rankings, though the number is far lower than the number of district schools.
But Michigan would be better off with a system that grades all schools — charter and district — not simply on raw achievement scores that tend to reflect the facts of student poverty. Excellent Schools Detroit’s local scorecard, which gives equal weight to academic proficiency and students’ progress compared to their peers, gives most schools serving the city’s students below-average marks. The result is most pronounced among DPS schools.
Excellent Schools specifically mentions two charter operators with “track records of low performance.” But directly taking into account student poverty rates, as our Context and Performance Report Cards do, tells a somewhat different story. The schools specifically cited earned twice as many A’s and B’s as D’s and F’s on the most recent editions of our report card. In other words, taking poverty into account provides for a fairer measurement of teachers and schools.
4A. The legal battle around closing schools is the predictable result of divisive, shortsighted legislating. The new Detroit reform legislation includes tougher provisions for automatically closing charter schools. It also closes the loophole on “authorizer shopping” by poor-performing charters seeking to escape sanction. But even before these changes, 21 struggling charters have been closed since 2010. No district school in Michigan has been shut down for chronic underperformance.
The new Detroit district published a legal brief arguing the law exempts its schools from closure for three years, but the attorney general since has issued a binding opinion that no such exemption exists. Wherever one wishes to assign blame for the public disagreement, everyone should agree on the need to create a level playing field for implementing high-stakes academic sanctions.
4B. Some schools should close, BUT closing schools alone won’t solve the problems. Yes, the evidence shows New York’s approach to school closures had measurably small benefits on the performance of local high schools. But there is no valid reason to put faith in this strategy alone. Any potential reforms for Detroit should be evaluated on the evidence of their costs and benefits. One reform that has not been enacted is to remake the city schools’ governance after Washington, D.C.
5. With or without closures, time to rethink special education. Following this undeniable point, Excellent Schools has recommended creating a task force “to consider citywide coordination and consolidation of special education and bilingual services.” The intermediate school district is a good place to start looking for reform opportunities. Wayne RESA oversees and funds a unique mandatory center-based program for more severely disabled students. The county’s conventional districts end up serving an unusually higher share of special-needs kids than charters do, when compared with the rest of the state.
6. Going beyond performance, Detroit increasingly has an equity problem. Excellent Schools accurately points out dramatic regional gaps in school quality. Schools in and around downtown tend to significantly outperform those in outlying neighborhoods. Easy solutions are not forthcoming. However, one short-term step to help reduce inequity for impoverished families would be to give families transportation vouchers they could use to get to better schools.
7. Which brings us to the last observation, poverty matters. While poverty ought not provide an excuse to abandon hope for the current generation of Detroit kids, it is quite reasonable to acknowledge the effects poverty tends to have on incoming students. Excellent Schools notes the Mackinac Center’s longstanding critique of Michigan’s school accountability rankings. Since many schools may be closed at the end of the current school year, that critique takes on more urgency.
As we seek to identify the worst schools, we should not discard achievement standards that fail to take student poverty into account. These raw measures must be balanced with measures of academic growth or comparisons based on student poverty. Detroit students, who already have few options for quality schools, cannot afford to see the wrong schools shut down.
Tax reform proposals and state pension underfunding
This morning the Washington D.C.-based Tax Foundation released its 2017 State Business Tax Climate Index. The index ranks the structure of a state’s tax system, not the actual financial burden it imposes.
Michigan’s position is unchanged from last year at No. 12. This is up from 2010 when the state was ranked 17th, according to Joseph Henchman, an economist with the foundation. Michigan’s ranking improved after it eliminated the hated Michigan Business Tax and related surcharge in favor of a more transparent Corporate Income Tax.
The index is constructed from six subindexes including such items as the state’s property, sales and corporate income taxes. The outlier is Michigan’s Unemployment Insurance Tax, which came in at 47th worst among 50 states.
Henchman, a vice president with the foundation, argued that Michigan’s ranking for the unemployment-insurance tax was a function of “a relatively high minimum tax rate, a high maximum rate, charging benefits to the most recent employer only and charging employers even if the former employee’s benefit awards are reversed or the employee refuses suitable work.”
The West Michigan Policy Forum met Monday and more than 400 of its members — comprised of business leaders — voted on its top policy priorities.
The top vote-getter was pension reform. Moving government employees to a defined contribution program (similar to a 401k program in the private sector) from a defined benefit one could save billions of dollars going forward. Today’s system is underfunded and unaffordable.
In second place: Eliminate the state’s personal income tax. This bold idea — if adopted — would place the Great Lake State in some rarefied air among states. Only seven sister states function without a personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
The Mackinac Center has long called for rolling back the state’s personal income tax burden. In 2007 the Legislature imposed a “temporary” personal income tax hike, increasing rates from 3.9 percent to 4.35 percent. A change in 2011 reduced the rate, but only to 4.25 percent, and made the new rate permanent.
Ten tax-related bills were introduced in the House and Senate over the last week. The complete list is available at MichiganVotes.org.
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.
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 Paladino’s in-depth report on Michigan’s pension crisis in Michigan Capitol Confidential here.
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. …
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 Hohman’s latest study, An Evaluation of Michigan’s 21st Century Jobs Fund, here.
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.
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.
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.
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.