The MC: The Mackinac Center Blog

Michigan Supreme Court: Pension Reforms were Constitutional

Teacher unions fail challenge to 2012 law

On April 8, 2015, the Michigan Supreme Court handed down an important decision upholding reforms to healthcare benefits for Michigan’s retired public school employees. Although it was specific to just healthcare, it bodes well for any future reforms to public pensions in Michigan.

In 2010, the Legislature passed a reform that was signed into law by Gov. Jennifer Granholm. This law required all current school employees to pay 3 percent of their salaries to fund health benefits for both current and future retirees. This policy contained a fatal flaw — it required current teachers to pay into a fund to benefit other teachers. The Court of Appeals struck this law down as an unconstitutional “taking” of property from certain individuals to give to other individuals. With that in mind, another reform measure was passed in 2012 which was crafted to avoid the important shortcomings of the 2010 law.

The 2012 reform, the Supreme Court recently found, was not unconstitutional, because it did not mandate a 3 percent employee contribution. Rather, it allowed teachers to contribute, or refrain from contributing, to a choice of retirement plans. If they refrained from contributing, they would accrue future pension benefits at a lower rate. The reform has no effect on benefits that have already accrued. Nevertheless, the law was challenged by the state’s two largest teachers’ unions, the Michigan Education Association and the American Federation of Teachers-Michigan.

The unions objected to the employees having to contribute anything to their own retirement health benefits — and instead sought to make the full cost of the retirement benefits fall directly on taxpayers. They wanted to duplicate the successful challenge to the 2010 reform, but the court unanimously (with the exception of the newest justice, Justice Richard H. Bernstein, who did not participate) found that the 2012 reforms passed constitutional muster, as they did not require public school employees to contribute, and it did not require a transfer of money from one group to another.

Although the justices were not called on to decide the wisdom of the reform, they did have to examine whether the retirement reforms were reasonably related to a “legitimate government purpose.” The Court answered:

“It is entirely proper for the state to seek the continuation of an important retirement benefit for its public school employees while simultaneously balancing and limiting a strained public budget. … The state is not generally constrained from modifying its own employee benefits programs to accommodate its fiscal needs.” 

In describing the state’s need, the Court cited the accounting numbers produced by the state’s auditors:

“At the close of the 2010 fiscal year, the [state’s public school employees’ retirement system] was underfunded by an estimated $45.2 billion. Of that amount, the retiree healthcare benefits program accounted for approximately $27.6 billion in unfunded liability. … It was hardly unreasonable for the state to have concluded at the time that the [state’s public school employees’ retirement system] was in need of reform and modification.”

With public pension systems crowding out other state spending and teetering on the edge of insolvency (or even bankruptcy, as in the case of Detroit), the Michigan Supreme Court upheld a modest pension reform, which allowed the system to start becoming better funded. And the Supreme Court showed at least one way to enact future, more meaningful, reforms without falling into the unconstitutional pitfalls that befell the 2010 reform attempt.

The case is AFT Michigan and Michigan Education Association v State of Michigan, Case No. 148748.

The total value of property taxes collected in Michigan increased slightly from $12.8 billion in 2013 to $13.0 billion in 2014, a 1.7 percent increase, according to the state’s annual property tax report. This exceeded the 1.0 percent inflation growth for the Detroit metropolitan statistical area over the same period.

While property tax revenue decreased from 2007 to 2012, revenue increased in both 2013 and 2014. Average tax rates increased from 40.47 mills in 2013 to 40.79 mills in 2014 and the aggregate taxable value of all property increased a small amount, from $316.7 billion to $319.5 billion.

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April 17, 2015, MichiganVotes Weekly Roll Call

Auto insurance, double-dipping pensions, investor guarantees

Now with one click you can approve or disapprove of key votes by your legislators using the VoteSpotter smart phone app. Visit Votespotter.com and download VoteSpotter today!


Senate Bill 248, Revise mandated no-fault auto insurance personal injury coverage

To replace the Michigan Catastrophic Claims Association (MCCA) with a new state authority that would provide reinsurance to insurance companies for the unlimited personal injury coverage mandated by Michigan’s no-fault law. The bill would place some price controls on services provided to injured individuals under this coverage, and expand a state automobile theft prevention authority to include insurance fraud.


Senate Bill 191, Expand government power to extract more costs from violators: Passed 36 to 1 in the Senate

To add retail fraud and failing to appear in court to the crimes for which a court may order a violator to reimburse the government for expenses related to the incident (such as police wages). Also, to add “transportation costs” to the list of reimbursable costs.

Who Voted “Yes” and Who Voted “No”


Senate Bill 170, Authorize high school “STEM” diploma: Passed 38 to 0 in the Senate

To authorize granting a high school diploma “endorsement” to a student who completes a specified number of science, technology, engineering and math courses (STEM).

Who Voted “Yes” and Who Voted “No”


House Bill 4195, Cap government “venture capital investment” program: Passed 107 to 3 in the House on

To prohibit the state from pledging any more future tax revenue to guarantee investor returns under an “early stage venture capital investment” scheme authorized by a 2003 law.

Who Voted “Yes” and Who Voted “No”


House Bill 4273, Eliminate February election date: Passed 93 to 17 in the House

To eliminate the February election date authorized by a 2003 election consolidation law which required all regular elections in the state to be held on either the last Tuesday in February, or the Tuesday after the first Monday in either May, August, or November.

Who Voted “Yes” and Who Voted “No”


Senate Bill 12, Allow pension double-dipping by “retired” Attorney General employees: Passed 37 to 0 in the Senate

To allow a retired state employee to simultaneously collect pension benefits and a paycheck for work performed as an Attorney General consultant or expert witness.

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.

Open Letter to Steve Inskeep of National Public Radio

National Public Radio wrong about Mackinac Center study

Editor’s Note: The author made several attempts to contact Steve Inskeep and to request a follow-up story that might provide a fairer treatment of the Mackinac Center’s right-to-work study. We received no response.

April 6, 2015

Mr. Steve Inskeep

In a March 27 on-air exchange with David Wessel of the Brookings Institution on the impact of right-to-work laws, you focused on a “single phrase that was mentioned in a news story earlier this week” (transcript here). This phrase was sourced in the NPR story to a 2013 study coauthored by Dr. Michael Hicks and myself.

Unfortunately, your conversation proceeded to completely mischaracterize this study.

The “single phrase” was this: “Actually, since World War II, income and job growth have increased faster in right-to-work states.”

Wessel initially confirmed this observation with his own look at the data over the last two years. But he then falsely insinuated that our study simplistically asserted causal relationships between RTW and economic outcomes with no effort to control for other factors that may drive economic growth.

David Wessel: “But those correlations do not prove that right-to-work laws are the reason or even a reason that some states added more jobs than others.”

No kidding!

Wessel inferred that several bulleted observations in our opening discussion (see page four) amounted to us claiming conclusive evidence of causation. But even a casual look at our study would reveal these observations as part of the narrative introducing the RTW impact questions the study’s statistical model sought to test.

To be explicit, we sought to test these questions while controlling for “the other things going on,” in Wessel’s words.

Yet the idea that other factors may explain all or part of these economic phenomena was presented by Wessel as if this is a new concept and criticism. Perhaps he skimmed past the section of our study called “The Research Challenges of Right-to-Work,” where among other things we wrote:

A study which examines the role of right-to-work absent such issues as tax policy, weather and other variables that may impact a state’s aggregate economic performance will be unable to tease out the influence of right-to-work laws specifically.

Nevertheless, neither Mr. Wessel nor yourself bothered to mention any of this, much less the carefully constructed model we designed specifically to control for those other variables.

Adding insult to injury you asked Mr. Wessel if there is any “impartial scholarship” on right-to-work laws, as if Dr. Hicks and I had failed to produce as much. This offense was compounded by his throwing the misleading “conservative” label at us.

In answering that question Wessel pointed to two other studies — but neglected to mention both were highlighted in our study’s literature review.

In addition, our empirical research was peer reviewed twice. The second review was done by economists for an academic journal in which our model and its findings are soon to be published.

One would hope that an NPR interview of a Brookings scholar about (alleged) omitted variables would not actually omit important variables itself.

I am disappointed in your coverage and treatment of our right-to-work study. It deserved better and so did your listeners.

Sincerely,

Michael LaFaive
Director
Morey Fiscal Policy Initiative

Editor’s note: This article originally appeared in Duluth News Tribune on April 15, 2015.

Minnesota raised its excise tax by 130 percent in 2013, the consequences of which may not be fully understood. The large increase in price from that tax hike has created a yawning gap between the cost of cigarettes in Minnesota and elsewhere, spurring rampant smuggling, according to research conducted by my colleague Todd Nesbit and me.

We built a statistical model to measure the degree to which cigarettes are smuggled in 47 of the 48 contiguous states. We estimate that the 2013 excise tax hike on cigarettes helped lift Minnesota’s cigarette smuggling rate to more than 33 percent of the total market.

The good news is that lawmakers have recognized that an increase in smuggling is a real issue. The bad news is that their attempts to thwart it — including hiring more auditors — will not be very effective. The reason is simple. The profits (or savings) from tax evasion and avoidance are too great. Consumers and large-scale smugglers will find ways to avoid the higher taxes.

We expect legal paid sales of cigarettes to decline as a result of the last and forthcoming tax increases; however, the majority of the drop will not be a function of quitting smoking. This is important to recognize because health advocates and too many politicians point to these drops as evidence that their sin taxes have “worked.” That is only true to a small degree. A 2004 paper by economist Mark Stehr and published in the Journal of Health Economics found that up to 85 percent of the change in cigarette sales may be from tax avoidance and evasion and not from “kicking the habit.”

Taxpayers, be they smokers or otherwise, are not sheep queuing up to be sheared. Many will work to evade taxation. Even then, many people may think they are buying a legal product when they have in fact been smuggled. No amount of new bean counters or police officers will stop this trade.

In 2010, a corrections officer in Minnesota was sentenced to prison for taking $6,500 from a prisoner in exchange for smuggling cigarettes and other contraband items into the prison at which he worked, according to Minnesota Public Radio.

Even if Minnesota becomes a veritable police state, smuggled cigarettes still can get through its porous borders and into the hands of smokers.

A better solution to Minnesota’s smuggling problem is to either cut the current excise tax rate or not raise it any further, allowing the real price of smokes to drop back to more reasonable levels.

The Detroit News reports on the lack of transparency from Michigan’s corporate welfare program.

“Michigan taxpayers are on the hook for giving 96 percent of nearly $9.4 billion in tax credits to companies in the vaguely named ‘transportation’ sector, but a state agency that doles out the job-retaining incentives refuses to disclose the revised amounts owed to individual companies,” the article notes.

Reporter Chad Livengood notes that deals in the past were more open to the public than today and quotes the Mackinac Center's James Hohman:

"It's a huge expenditure of taxpayer dollars of which no one is allowed any details," said James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, a [free market] think tank in Midland. "A company's estimated tax credit amount has always been disclosable."

The Mackinac Center has documented the lack of openness from the MEDC about how they spend taxpayer money with nearly 200 articles, including in a 2009 policy brief “MEGA, the MEDC and the Loss of Sunshine.”

According to the Michigan Office of Highway Safety Planning, the rates of accidents, injuries, and fatalities on Michigan's roads have been decreasing for decades. Improved pavement conditions will make the roads safer, but drivers should feel at ease that transportation is less risky than it used to be.

The highway safety office reports that vehicle accidents are at all-time lows. There were 289,061 crashes in Michigan in 2013, when drivers traveled 95 billion miles on Michigan roads. Thus, there were three crashes per million miles traveled. Ten years ago, it was 3.9 crashes per million. Ten years before that it was 4.2 crashes per million. Ten years before that it was 4.7 crashes per million. Before that, it was even worse. (See the chart below.)

Fewer accidents mean fewer injuries on the roads. There are 0.7 injuries per million vehicle miles in 2013, a 53-percent reduction from 1993.

Deaths from road accidents have steadily decreased as well, with one fatality for every 100 million miles traveled. The state has not yet release the number of vehicle miles traveled in 2014, but the number of deaths in road accidents in 2014 was the lowest in a generation.

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When considering only at passenger cars and trucks, the situation is even better. The figures above include motorcyclists, bicyclists and pedestrians. For just cars and trucks, deaths per 100 million vehicle miles is less than half of what it was in 1995.

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Aside from the quality of pavement, other factors contribute to road accidents: According to the National Highway Transportation Safety Agency, 27 percent of road fatalities in Michigan involved a drunk driver and 7 percent involved motorcyclists riding without a helmet.

The May 5 vote on Proposal 1 has many talking about road safety. Road conditions are a relevant factor, and the state certainly should not wait for safety rates to worsen before addressing necessary road repairs.  

In addition to raising taxes to spend more on the roads, the proposal makes a number of other changes to the Michigan Constitution and state statutes.

Improved road quality may lower these numbers even further and deteriorating roads would be detrimental to safety. Voters may want to shore up further gains through road improvements, but should feel comfortable that traffic safety trends continue to improve.

LaTanya Dorsey is a mother who sends her daughter to a public charter school in Eastpointe. Her daughter is on the honor roll and doing very well.

Dorsey didn't expect to have a say in where her daughter went to school.

“Usually, it's the district that you're in is the school that you would have to attend,” Dorsey said. “That kind of surprised me — that I did have a choice to send her to another school, so I was real grateful for that.”

Dorsey said that parental choice is critical to helping students attend a school that is the best fit for their needs. It doesn't make much sense, she said, to only use a child's home address to determine where he or she goes to school.

“We know what's best for our kids,” Dorsey said. “I know what's best for my daughter, and the school she attends is a great school.”

To meet more Detroit-area parents who value school choice, visit http://www.mackinac.org/ourchoice.

Policy Analyst Jarrett Skorup and Assistant Director of Fiscal Policy James Hohman explain in an MLive.com column why the state should get out of the business of subsidizing film production companies.

Skorup and Hohman note:

Despite handing out nearly $500 million over the years, the program has failed to create a sustainable film industry in Michigan. According to the federal Bureau of Labor Statistics, there are fewer film jobs in Michigan today (1,561) then when the program began in 2008 (1,663). In 2013, there were zero full-time jobs created by these subsidies, according to the latest reportfrom the Michigan Film Office.

Over the years, the program has taken $131 from each household in Michigan and given it mostly to Hollywood film producers and studios. And while film producers certainly spend some of that money here in Michigan, taxpayers never come out ahead. The Senate Fiscal Agency found in 2010 that the program returned only 11 cents on the dollar. That's a poor investment.

Independent research on these types of programs is almost unanimous: Film subsidies just don't work. The fiscally conservative Tax Foundation says they "are costly and fail to live up to their promises." The left-of-center Center on Budget and Policy Priorities says movie production incentives are "a classic race to the bottom" with the economic benefits "more fiction than fact." The studies favoring these programs are usually sponsored by the film industry.

Mackinac Center experts have written repeatedly about how Michigan's Film Incentive Program fails to provide any benefits to taxpayers.

An Associated Press story about Proposal 1, the May 5 sales and gas tax ballot question, prominently features Mackinac Center research. From the article:

The state sales tax would go up a penny on the dollar. The gasoline tax would rise with inflation, likely more. The annual vehicle registration tax would be higher.

If voters approve a measure on Michigan's May 5 ballot to improve roads and bridges, the $2.1 billion tax hike would average $545 per household in 2016 — or $45 a month — according to calculations by The Associated Press. The per-household tax increase would fall to $474, or $40 per month, in 2017 when low- to moderate-income residents become eligible for a larger tax credit under Proposal 1.

The Mackinac Center for Public Policy, a free-market think tank in Midland, says it is tough to estimate Proposal 1's impact on a typical resident because the measure has so many components. The group's estimated increased tax burden is $477 to $525 per household, with Earned Income Tax Credit recipients receiving an average $69 tax cut.

The story was featured in the following news sources: Detroit News, Lansing State Journal, WXYZ, Oakland Press, Crain’s Detroit Business, Grand Haven Tribune, Monroe News, Midland Daily News, and elsewhere around the country.

Other stories about our work and the study have recently appeared on MLive, MI NBC News, WILX, WHTC, and the Port Huron Times Herald.

To see more information about Proposal 1, go here.