The MC: The Mackinac Center Blog

You’re in the 1 Percent

We can have policy differences while keeping perspective

The Washington Post’s “Wonkblog” recently ran a piece titled, “What it’s like to be a part of the world’s richest 1 percent, in 15 incredible photos.” This features photos of a man floating in a swimming pool on top of a skyscraper, an in-home cinema, maids, the Opéra de Monte-Carlo, the Hollywood Walk of Fame, a patient about to undergo plastic surgery, a personal chef at a luxury lodge and a gated community.

The article is about a new photo collection which is attempting to draw more attention to wealth inequality. But those protesting about this issue in America may be surprised to find that they too are part of the 1 percent, that is, in terms of worldwide income distribution. Yes, the average "one-percenter" in the U.S. is exceedingly wealthy, but so is the average American compared to the rest of the world.

According to data from the World Bank, the annual income putting someone in the top 1 percent worldwide is $32,400. The author of the piece could have saved a lot of time by simply taking photos of people eating at Applebee's, strolling through Central Park, shopping at Wal-Mart or watching college football on their flat-screen TVs.

There has been a lot written in recent years on inequality and the wealth gap — some good and some not so good. Many people in America still struggle to get by and we should all work to create policies that improve their situation.

But at the same time, we should keep in mind a quote from the late science fiction writer, Robert A. Heinlein: “Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people."

On a worldwide scale, it is countries that embrace free markets, entrepreneurship and private property rights that succeed in creating large amounts of wealth for people fortunate enough to be citizens of these countries (the same often goes for noncitizen residents, too). Let’s count the blessings we have and appreciate living in a country that provides opportunities for nearly all of its citizens to be counted among the world's one-percenters.

Survey: Pennsylvania is School Contracting Leader

Of five states surveyed, Keystone State ranks highest

A recent survey of Pennsylvania’s conventional public school districts by a Michigan-based research institute indicates that 75.2 percent of those districts contract out with private vendors for at least one of the three major noninstructional services.

This makes the state a leader among five surveyed this year by the Mackinac Center for Public Policy. The reason for the Keystone State’s high overall contracting rate is its frequent use of private school bus transportation providers. While it is a leader among other states surveyed, many Pennsylvania school districts can and need to do more.

Of Pennsylvania’s 500 districts, officials from 499 of them were successfully interviewed by researchers at the Mackinac Center for Public Policy, which also surveyed four other states throughout the summer. The other states: Michigan, Georgia, Texas and Ohio have overall contracting rates of 70.8 percent, 38.3 percent, 22.8 percent and 16.6 percent, respectively. The laggard here — our neighbor, Ohio — may be a national champion in college football, but it falls short in K-12 competitive contracting.

Private transportation providers can be found in 66.3 percent of Pennsylvania districts, far more than second place Michigan, which has otherwise made dramatic contracting gains. High contracting rates for bus services are not uncommon for eastern states but they are rare nationally. Of Georgia’s 180 districts, only three (1.7 percent) contract out for bus services. In Allegheny County, we have surveyed all 43 of the 43 districts. Of those surveyed, 67.4 percent report contracting out for transportation services.

It is worth mentioning that the Mount Carmel school district is the only district in the entire state that has failed to respond to the Mackinac Center survey, and has thus far ignored an official Right-to-Know request. The Mackinac Center intends to pursue the information to which it is legally entitled.

Eastern states’ comfort with competitive contracting may simply be a function of history. In several states, districts that began providing transportation services did so privately and never looked back. As far back as 1840, schools in Massachusetts hired farmers under contract to transport children to school. Not only does Pennsylvania have many districts that contract for these services, they do so with multiple vendors. The Tuscarora school district alone has 17 bus contractors with whom it works. There are others with a high number of contractors as well.

Pennsylvania also has the highest rate for contracting out food service of any state in this year’s survey, at 44.5 percent. The next highest is again Michigan (42.8 percent) and the lowest is again Georgia (2.2 percent).

Pennsylvania custodial contracting rate is only 8.8 percent, which is especially low compared to Michigan’s 52.2 percent rate. Among the five states surveyed by the Mackinac Center this year Pennsylvania’s rate bests the Buckeyes (4.2 percent) only. Done correctly, competitive contracting of existing, in-house noninstructional functions such as transportation, food and janitorial services can save money and relieve management of some headaches. In Michigan — where the Mackinac Center has done school contracting surveys for more than 10 years — districts reported savings of $35 per pupil for contracting out food service and a savings of $191 per pupil for contracting custodial service.

Is there a school leader in the state that would turn down that kind of additional money if it had been offered by the state? Probably not. But the equivalent of that may be what is happening in districts that choose to keep such services in-house. There may be very legitimate cost and quality reasons for letting district employees provide the services, but until a district seeks out legitimate requests for proposals from private vendors, it is difficult to know.

Congratulations are in order for district officials across Pennsylvania. They are leaders in the use of this proven cost-containment technique. More needs to be done, however. Every dollar that is squandered on unnecessarily expensive support services is a dollar that can’t be driven back into the classroom.

Schoolchildren, Teachers, Taxpayers Harmed When Pension Managers Assume Too Much

The realities of Michigan's $26.5 billion pension liability

State law requires the managers of Michigan’s school employee retirement system to base annual pension contributions on an assumption that its investments will generate an average return of around 8 percent per year. If the actual returns don’t reliably meet or beat that level over time, it means contributions into the pension fund will be insufficient to pay for the retirement benefits of employees. The result is a long term unfunded liability that taxpayers eventually have to pay.

Michigan’s school pension system has put taxpayers on the hook for a $26.5 billion unfunded liability. The 6.5 percent return earned by its investments over the 12 months that ended June 30 means the hole got a little deeper last year.

Several state pension officials quoted in a recent MIRS News article about the shortfall noted that missing investment targets for one year is not a big deal.

They’re right, but what they didn’t mention is that this is not just a one-year problem. A 2014 auditor general report examined and found problems in some of the key assumptions used to estimate how much is needed each year to adequately fund the pension system. Failing to reach assumed investment return rates was the largest contributor to pension underfunding over the 10-year period examined.

This is hardly a surprise. Even before the 2008 recession, funding assumptions were not working to fully fund pensions. In fact, in 2003 Warren Buffett suggested that 6 percent is more realistic, and others routinely recommend 5 percent.

At their current $26.5 billion level, Michigan’s unfunded school pension liabilities are 13-times the total amount of state government debt owed to every general obligation bond holder. It’s equivalent to 88 percent of all the money the state will spend this year on schools, prisons, welfare and everything else (not including federal dollars). It would require an additional payment of $6,900 from every household in Michigan to satisfy this liability.

However, don’t expect state and school political leaders to say much about failing to meet the system’s Pollyanna funding assumptions, which were placed in statute by their predecessors in previous legislatures. Realistic assumptions would expose the entire system as an increasingly unsustainable house of cards. More to the point, current legislators would then have to find more money to cover the much higher annual contributions that better assumptions would make necessary.

The system is still a mess even with overly optimistic assumptions helping to mask the gaps. The state has only saved enough to cover 60 percent of every dollar’s worth of pension benefit that employees have earned. The underfunding has caused annual contribution rates to swell to 33.41 percent of school payroll, with 86 percent of this needed just to catch up on the past underfunding — underfunding enabled by the unrealistic assumptions.

In other words, taxpayers today are devoting more than a billion dollars each year to pay for previously earned pension benefits — money that would otherwise be available for other important needs.

To put that 33.41 percent figure in text, private-sector retirement benefits tend to cost 5 to 7 percent of payroll.

Going forward, the problem and solution are clear: Governments cannot be trusted to run a defined-benefit pension system, and Michigan’s should be wound down as quickly as possible.

For starters, that means closing the system to new employees, who would instead receive employer contributions to individual retirement savings accounts. This would contain the underfunding problem.

Unfortunately, whenever this is proposed pension managers are the first to object. In addition to downplaying missed assumptions, they bring up illusory “transition costs” as a barrier to converting.

Missing funding assumptions is a big deal and state officials should not shrug off this failure. Pension underfunding hurts taxpayers and threatens the retirement of hundreds of thousands of people. It harms schoolchildren by draining other classroom resources. The underfunding problem cannot be quickly or easily solved but the damage can be contained by not enrolling new employees in the current plan.

August 28, 2015 MichiganVotes Weekly Roll Call

Recently introduced bills of interest

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

The House and Senate are not in session until Sept. 9 and Sept. 1, respectively. Therefore, this report contains several recently introduced bills of interest.

Senate Bill 371: Ban intent to sell ivory and rhinoceros horn products

Introduced by Sen. Steve Bieda (D), to ban the importation, sale, purchase, barter, or possession with intent to sell of ivory or rhinoceros horns and products, subject to fines $5,000 or double the value of the products for second offenses. Referred to committee, no further action at this time.

2015 Senate Bill 383: Impose licensure on midwives

Introduced by Sen. Michael Green (R), to impose a state licensure mandate on midwives (as distinct from “nurse midwives”), including regulations and license fees. Referred to committee, no further action at this time.

Senate Bill 387: Restrict injection well placement

Introduced by Sen. Dale W. Zorn (R), to prohibit locating an “injection” well for disposing of hazardous material, or for storing other material (potentially including carbon dioxide), in a region determined to have “Karst geology.” Referred to committee, no further action at this time.

Senate Bill 398: Create government sickle cell awareness campaign

Introduced by Sen. Jim Ananich (D), to require the Department of Community Health to create a sickle cell disease public awareness campaign and to “coordinate services available” from state, federal, and voluntary sickle cell disease programs. Referred to committee, no further action at this time.

Senate Bill 409: Expand meth-related pseudoephedrine restrictions

Introduced by Sen. Margaret O'Brien (R), to authorize up to one year in prison and a $1,000 fine for attempting to persuade a person to purchase ephedrine or pseudoephedrine while knowing that it will be used to manufacture methamphetamine. Current penalties apply only if the attempt succeeds in persuading someone. Referred to committee, no further action at this time.

Senate Bill 431: Establish process for removing elected official for mismanagement

Introduced by Sen. Rick Jones (R), to establish a process by which the governing body of a city, village, or county can file a petition in circuit court to remove from office an elected official for misfeasance, malfeasance or nonfeasance related to the custody and accounting of public money, or for failing to obtain or maintain a performance bond that is statutorily required for the office. Referred to committee, no further action at this time.

House Bill 4567: Let public schools engage in commercial business

Introduced by Rep. Bradford Jacobsen (R), to establish that property owned or leased by a public school is considered “exempt and immune” from local zoning ordinances, and establish very broad definitions of “school building” and “school purpose.” “School purpose" would be defined as “any purpose that may provide a benefit to a public school or its governing board, including…a benefit of a commercial or financial nature.” Referred to committee, no further action at this time.

House Bill 4578: Authorize school recreation millages

Introduced by Rep. Phil Potvin (R), to revise the law which authorizes recreational authorities to be created by several local governments, so that the districts could be organized by a school district. The authorities have the power to levy up to one-mill of property tax for swimming pools, recreation centers, public auditoriums, public conference centers, and parks, upon the approval of voters in each municipality in which the school district is located. The law itself is silent on whether the recreational facilities of an authority may be located at a school, or may be school facilities themselves, but it does require them to be open to the public. Referred to committee, no further action at this time.

House Bill 4580: Let local governments selectively revoke selective property tax breaks

Introduced by Rep. Andy Schor (D), to allow local governments to revoke certain property tax breaks selectively granted to particular corporations or developers if the beneficiary does not abide by the terms of the tax break agreement, or is judged to no longer meet the criteria under which the tax break was authorized. Referred to committee, no further action at this time.

House Bill 4585: Authorize a state “free speech defense act”

Introduced by Rep. Thomas Hooker (R), to adopt a “free speech defense act” that would prohibit Michigan courts from enforcing a libel judgement issued by a court in a country that does not practice specified due process safeguards, or that upholds a cause deemed “repugnant to the public policy of this state.” Similar laws adopted by other states are seen as a response to so-called “libel tourism,” and in particular to perceived Islamicist persecution. Referred to committee, no further action at this time.

House Bill 4619: Ban state contracts with firms that collect bulk “metadata” on residents

Introduced by Rep. Cindy Gamrat (R), to prohibit giving state contracts to companies that participate in the bulk collection of electronic data and “metadata” on residents without informed consent or a warrant. Referred to committee, no further action at this time.

House Bill 4629: Repeal “bond” requirement to contest civil asset forfeiture

Introduced by Rep. Peter Lucido (R), to repeal a requirement for property owner whose property has been seized by police and is subject to “civil forfeiture” to provide a cash “bond” to contest the taking, and if unsuccessful to pay all the expenses of the proceedings. Under civil forfeiture laws, police can seize any property that may be associated with a crime using extremely broad definition, and then keep the property even if the owner is never convicted or even charged with a crime. Referred to committee, no further action at this time.

SOURCE:, 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

Authors’ note: The following was first posted by the Georgia Public Policy Foundation August 27, 2015.The Mackinac Center’s annual survey of conventional public school district contracting was expanded this year to include four other states.

More than a third of all conventional pubic school districts in Georgia contract out one of the three major noninstructional services, according to survey data collected this summer by a the Mackinac Center for Public Policy, a Michigan-based research institute.

The Mackinac Center survey of Georgia and four other states found that 38 percent of Georgia districts contract out for at least one of the “big three” noninstructional services: food, transportation and custodial services.

Done right, contracting out can save money and relieve management headaches, too. But Mackinac found a curious pattern in Georgia: Just three districts — 1.7 percent — contract out transportation (bus) services, and only four, or 2.2 percent, contract out for food services.

These are the lowest food and transportation outsourcing rates among the states surveyed: Georgia, Michigan, Pennsylvania, Ohio and Texas.

While this finding might suggest hostility to competitive contracting, such a conclusion belies the fact that 36.7 percent of Georgia school districts use private vendors to provide custodial services.

So why do districts appear comfortable contracting in one area but not others?

When done correctly, privatization can both improve service and reduce costs by 10-20 percent or more. In research going back more than 10 years, the Mackinac Center has found that privatization saved Michigan school districts from $35 to as much as $191 per pupil, depending on various factors.

The Mackinac Center also found nothing inherently problematic about contracting for transportation or food services compared to custodians. Ten years ago, only 3.8 percent of Michigan school districts contracted out for transportation services; today, that figure stands at 26.6 percent, and 42.8 percent for food services (see graph). In Pennsylvania, 66.5 percent of districts contract out some or all of their bus services, and 44.4 percent do so for food.

The Mackinac Center sought answers for the divergence in two places. First, it asked school district officials in their survey interviews. They provided no particular reason to explain why so many districts outsourced janitors but not the other services.

It also investigated whether some provision of state law may be responsible. The research, while not exhaustive, revealed no obvious obstacles.

All this suggests that competitive contracting for food and bus services could be ripe for expansion in Georgia schools. Few district superintendents would turn down an extra $100 per pupil in savings, which is essentially what happens when districts forego this opportunity.

If competitive contracting was not a useful management tool, far fewer schools in states like Michigan and Pennsylvania would embrace it. By their actions, school superintendents there have demonstrated that the practice that can save money and improve quality.

As Georgia continues to investigate education funding, this timely survey by the Mackinac Center highlights an opportunity ripe for school systems to create savings and shift more funding into Georgia classrooms.

Michael LaFaive is director of the Morey Fiscal Policy Initiative for the Mackinac Center for Public Policy in Michigan and Kelly McCutchen is president and CEO of the Georgia Public Policy Foundation.

Raiding Car Crash Victim Insurance Reserves No Way to Fund Roads

A one-time funding blip won't solve Michigan's road funding problem

Perhaps no two human activities are more antithetical to each other than politics and the business of insurance. Insurance is all about prudence and taking the long view, while politics is — not.

An example is House Bill 4560, introduced by Rep. Peter Lucido, R-Shelby Township. To provide a one-time infusion of road repair money this would authorize a $1 billion raid on the reserve fund that the Michigan Catastrophic Claims Association draws on to reimburse auto crash victims for very expensive medical costs.

The MCCA is the entity created by Michigan’s no-fault auto insurance law to cover those expensive claims, under a provision that requires drivers to carry personal injury protection coverage with no cap on benefits. The medical service reimbursements are financed by an annual assessment tacked on to auto insurance bills, in amounts determined by the association’s board.

The current assessment is $150 per year for each vehicle, which was set last March. The document announcing this reported that in the fiscal year ending June 30, 2014, the MCCA had paid out slightly more than $1 billion in claims, which is up sharply from $765 million five years earlier. Also, actuarial projections indicate it has a $292 million reserve fund deficit for outstanding claims. Many of these claims are for medical costs that will extend decades into the future, because they include providing lifetime care for individuals permanently disabled in tragic car crashes.

House Bill 4560 essentially directs the MCCA to recover from the fund raid by increasing future customer assessments and with magic — increasing returns on the fund’s investments. Presumably the association’s fund managers already work to maximize those returns within the bounds of prudent investment practices, so this provision is pure eyewash.

The future rate hike potential is real though. As Michigan Department of Insurance and Financial Services (DIFS) Director Patrick McPharlin put it in a statement on the department’s website, “[R]educing money in the fund could result in the need for the MCCA to increase its assessment on insurance companies — further driving up the cost of auto insurance in our state.”

The bill recalls a previous MCCA fund raid, which occurred in 1998. In contrast to the current reserve fund deficit, at that time the association had accumulated a $2.5 billion surplus above the amounts projected to cover medical claims then outstanding. Politicians saw an opportunity to pander, and the House passed a bill mandating that the MCCA rebate $1.2 billion to auto insurance customers. Rather than wait for the Senate to enshrine this bit of political opportunism into statute, the MCCA agreed to send out checks without a legislative fiat.

Various factors had caused MCCA assessments to fall dramatically. Among other things, these include lower than projected medical costs, a strong state economy and a booming U.S. stock market. Having ample reserves also contributed. After the rebate, customer assessments remained low for a few more years, but in 2002 they were back up to $71 per vehicle, and by the middle of the decade they were close to the current $150 level. It is likely that rates would have stayed lower for longer without the 1998 fund raid, and the temporary customer windfall probably ended up being a net loss for insurance buyers over time.

Taking money that is set aside to pay the medical expenses of people severely injured or disabled in car crashes to provide a one-time funding blip won’t solve Michigan’s road funding problem. But it will cause new problems, and probably subject vehicle owners to higher insurance rates in coming years. This is no way to run a state, a road budget or an insurance plan.

Unions Should Get Serious About Pension Underfunding

A $2.7 million shortfall causes concern in Grand Rapids

Grand Rapids’ public bus system, The Rapid (or Interurban Transit Partnership), and its union are negotiating over a plan to freeze and close its employee retirement system. Union president Larry Hanley is adamant that the plan remain open.

"This is not contract negotiation; this is a political attack on working people with no good financial reason. It's not that the agency's in trouble," Hanley told the Grand Rapids Press. "The system's not in any state of crisis. The benefits have been established for many years."

It is discouraging when union officials that are supposed to be protecting their members ignore pension underfunding.

The Rapids’ employee pension system is 73.5 percent funded and owes its members $2.7 million more than has been saved, according to the system’s most recent financial report.

In order to make sure that pensions are paid, government entities have to devote more money to catch up on this underfunding. Governments tap the same funds they use to pay employees and roll them into the costs of fringe benefits.

This increases spending on employee benefits and makes less money available for salary increases. Also, even though more is being spent on benefits, employees aren’t gaining anything, as it does not make their pensions any more generous. Indeed, this money just goes to pay for pensions benefits earned by workers in the past and should have been set aside at the time they were earned, like the state constitution requires.

You might think that a union head would care to make sure that pensions are well-funded so that current and former employees are protected. A properly funded retirement plan protects retirees and frees up money for spending on current workers’ salaries or other benefits.

Yet this hasn’t happened in Michigan, as the situation in Grand Rapids shows. Read more about pension problems across the state at

Government Price Controllers Can’t Make Up Their Minds

Supermarket chain investigated for low prices

Gas stations have heavy competition. There are stations all over the place and everyone publicly displays their prices. Owners operate on very thin profit margins, and there is lots of incentive to keep prices as low as possible. Almost everyone uses gas and nobody likes paying higher prices. So when prices increase, politicians on both sides of the aisle demand and promise investigations. Oil companies are roundly demonized. (Of course, nobody is sending them a thank-you card when prices come down).

When it comes to crops, government bureaucrats take a different approach. When the price of products like corn, soybeans, sugar, cherries, and raisins is low, that’s good for consumers, but bad for some farmers. So the government price controllers step in, using old, inefficient laws to limit supply and drive up prices.

Some states go further. Michigan-headquartered Meijer opened two stores in Wisconsin and is now being investigated for its prices … being too low. A Depression-era law says items cannot be sold “below cost” — a restriction that costs the residents of the state tens of millions of dollars annually.

“This is a bit peculiar for us, we are not accustomed to regulations that limit our customers' ability to save money when they shop with us," said Frank Guglielmi, Meijer's director of communications, in an MLive report.

Public officials should spend less time interfering in the free market and more time focusing on ways to eliminate the monopolies that government mandates in education, alcohol, energy, electricity, unionization, law and more. That would actually help people.

Michigan House Passes Package Repealing Outdated Laws

Taking the first step toward crucial reforms

There are over 3,000 criminal statutes in Michigan, but a recent unanimous vote in the Michigan House will trim that number, eliminating several outdated laws in the first step toward simplifying the state’s enormous penal code.

Overcriminalization has recently come into the spotlight in Michigan as part of a larger movement pursuing criminal justice reform. In 2014, the Mackinac Center and the Manhattan Institute published a study on the topic, Overcriminalizing the Wolverine State. The study advocated for clarification and consolidation of the current criminal code, guidelines to govern the creation of new criminal offenses and enactment of a default mens rea provision — requiring the state to consider a person’s intent before convicting them of a crime.

Since its publication, several organizations have relied on the research, and Gov. Rick Snyder used it as the basis for several recommendations he gave in a recent plan to reform the criminal justice system. The House Fiscal Agency also pointed to the study in its analysis of the bills passed in the House this week.

As reported by MLive, those bills include measures to repeal such irrelevancies as prohibitions of duels, trespassing in oddly specific areas and using the term “lost manhood” in advertising. Some of the more pertinent repeals include laws that criminalize embellishing the national anthem, cursing in front of women and children and hosting a walkathon or similar contest of endurance.

I have never trespassed in a huckleberry marsh and I do my best not to embellish The Star Spangled-Banner beyond sense or recognition, but the existence of these laws is a sobering insight into the state of Michigan’s current criminal code. Even after the repeal of these laws, there will still be over 3,000 that I (and almost every other Michigander) could potentially break without intention or malice.

The recent House repeals address laws that are mostly redundant and silly, but many others among those 3,000 fall into the dangerous category of unknown and enforceable. That’s how people go to jail for keeping rabbits.

There is much more work to be done on the subject of overcriminalization, but the House's action is a good start toward more meaningful reforms.

Vernuccio Interviewed for Ohio Watchdog

Examining the economic effects of right-to-work laws

At a recent Americans for Prosperity event in Ohio, Mackinac Center Director of Labor Policy F. Vincent Vernuccio discussed right-to-work policies and how states have fared with them in recent years with

His interview begins in the video below at 2:44.

Watchdog's full article on the subject is available at its website.