The MC: The Mackinac Center Blog

It is Fine to Get Detroit Out of the School Pension System

Other districts already pay for Detroit's liabilities

Detroit Public Schools has been in financial trouble for a long time, and ensuring that DPS can pay its bills is likely to require further state funding. As plans for fixing DPS are debated, school officials throughout Michigan have begun to worry that their state funding will be reduced when a bailout for DPS is finalized.

What these officials don’t realize is that their districts are already paying to catch up on Detroit’s pension liabilities. Every school district is a cost-sharing member of the Michigan Public School Employee Retirement System, which is drastically underfunded. MPSERS costs are not calculated by determining each district’s individual share of retirement costs and accumulated liabilities, but for all districts as a whole. The total costs are then converted to a single percentage of payroll and assessed on districts statewide.

Unfortunately, the assessments have been insufficient to cover the benefits earned by employees. Currently, MPSERS requires $26.5 billion more than it has in the pension fund to cover these benefits.

The result of this underfunding is that Detroit has already off-loaded the bulk of its pension cost onto other districts. DPS employees earned more retirement benefits when the district was three times larger than it is today. According to MPSERS’ annual report, close to 25,000 DPS employees paid into MPSERS in 2004, compared to just 9,118 in 2013. 

Now, as a smaller district, DPS is paying less to catch up on those underfunded benefits. In other words, DPS added to the state’s pension liabilities when it was large and is not paying as much for them now that it is smaller.

Indeed, DPS is behind even on the smaller amounts it is assessed now. The district owes more than $80 million to MPSERS, because DPS has failed to make mandated payments in the past.

None of this would be a problem if retirement benefits were paid as they were earned, (as required by the state constitution). But you can’t turn back the clock and do it over again.

Of total current MPSERS contributions, 83 percent go to pay for underfunding of the pension system and to catch up on retiree health care obligations. It is unknown just how much of that the $26.5 billion MPSERS shortfall is caused by Detroit. The retirement system is not set up to answer that question. But it is likely that Detroit’s past employees played a significant role.

MPSERS contributions are tremendously burdensome for school districts and school employees. In 2014, school districts paid $2.4 billion in retirement contributions. That’s roughly 17 percent of the entire school aid budget.

These are mandated costs and providing relief from them can help Detroit pay its other bills. Doing so may increase contribution rates in the rest of the system by another point or so. But those rates are already increasing. The state added another billion in unfunded liabilities this year alone. Rather than worry about Detroit, the best thing school officials can do for their districts’ future is to advocate for responsible and comprehensive MPSERS reform.

The state school pension system is broken. It is not an invalid choice to release a district in an emergency like Detroit’s from MPSERS and the it increasing burdens. More than half decade of state management of DPS is an argument for absolving it from the state-mandated retirement system.

In addition to saving Detroit from having to pay 33 percent of its payroll to MPSERS like other districts, removing DPS from the pension system would mean its new employees we be offered benefits that are paid as they are earned instead of deferring obligations to the future. In other words, retirement benefits will no longer become long-term liabilities.

Detroit may lose out on special payments the state is making to assist schools with their pension contributions, but those payments do not cover the full contribution cost anyway.

There much for legislators to consider in finding a solution for Detroit — getting rid of geographically assigned schools and possibly converting the district to a charter district, to cite two possibilities — and their impact on short-term retirement contribution rates should sidetrack such discussions.

The Real-World Costs of Union Release Time

Proposed law would require public workers to work for the public

The Michigan Senate is considering a bill that would prevent taxpayer-funded union “release time” in most settings. There is a real-world cost to this practice, which allows union stewards to spend time working for a private entity when they are supposed to be working for the public.

Senate Bill 280, introduced by Sen. Marty Knollenberg, R-Troy, would prevent collective bargaining agreements from offering paid release time used by teachers or other school district employees to conduct union business. While still allowing employees to spend time working on union negotiations, this would be paid for by the union rather than taxpayers. This would relieve taxpayers from footing the bill for employees who perform no educational services.

In 2011, documents obtained by Michigan Capitol Confidential showed that taxpayers were spending millions of dollars on these special arrangements. Thirty-nine districts had employees who were released from their normal job to spend at least half their time working for the union at a cost of at least $2.7 million.

We are currently updating that analysis. Early results show that dozens of districts are still offering full or partial release time at a large cost to taxpayers.

For example, the union president in Livonia Public Schools earns a full salary and benefits at a cost of nearly $98,000. But Joanmary Nenninger is not teaching in a classroom – she spends her time working on union business at taxpayer cost.

Taxpayers are paying double for these types of arrangements — once for the union workers and again for a substitute or another school employee to take their place in the classroom. That’s a bad deal for our public education system.

Debate on Money in Politics Featured in Media

Michigan press features arguments in advance of Thursday's debate

On Thursday, June 25th, the Mackinac Center will hold the Arthur N. Rupe Foundation Debate on the topic of Money in Politics. The debate will address the competing claims of disclosure and privacy/free speech in politics today. Registration for the event guarantees refreshments and seating, and closes on June 22.

Several media outlets have covered the question in advance of Thursday's debate. On June 22, MLive published an overview of the event and the Lansing State Journal published editorials from Bradley Smith and Rich Robinson.

Both debaters joined Kyle Melinn, who will moderate the debate, on Michigan's Big Show June 22, to preview their arguments.

On June 24, Rich Robinson and Bradley Smith discussed the debate and their opinions on it with Frank Beckmann. The segment is available here.

The Fight for Free Speech

Think tanks juggle privacy and advocacy

Things aren’t looking good for individual privacy – at least for those who wish to participate in public policy debates. Despite the First Amendment’s strong defense of free expression, speech is increasingly regulated – especially political and policy dialogue.  For an increasing number of nonprofit organizations, disclosing contributors’ identities is the price paid to be allowed to advocate in the public square. Some fight back against these regulations, arguing in the name of free speech and individual privacy that promoting public policy should not be regulated in the same way as funding a political candidate. A timely example is playing out in the courts right now.

In the fall of 2014, the Independence Institute, a free-market think tank, sued the Federal Elections Commission (FEC). The institute wanted to run a radio ad in support of a bill establishing new federal sentencing guidelines. The ad would have urged listeners to contact their legislators, and would have given the names of two senators supporting the bill. The Independence Institute is a 501(c)(3) research and education entity, meaning that it can publicly advocate for the policies it favors. However, since it is not a political organization, the institute cannot campaign in order to support or oppose politicians. But because one of the legislators named in the ad was running for reelection, the institute feared that airing the ad would subject it to FEC enforcement for having made an “electioneering communication,” and that it would be forced to disclose the names and addresses of its donors.

Under the Bipartisan Campaign Reform Act (better known as McCain-Feingold), an “electioneering communication” is any communication which refers to a candidate for federal office, which is made within 60 days of the election in which that candidate will run, and which is targeted at the “relevant electorate.” Any entity that spends at least $10,000 per year on electioneering communications is required to disclose the names and addresses of contributors who made aggregated donations of $1,000 or more.

Rather than broadcast the ad, the Independence Institute sued the FEC in federal court, arguing that the definition of electioneering communication is too broad and that regulation of such communication ‘chills’ policy discussion by burdening speakers for merely mentioning candidates. It attempted to distinguish between “issue advocacy” (arguing for a bill or policy) and “express advocacy” (campaigning for a politician) – but the court didn’t buy the distinction, citing Supreme Court precedent explicitly rejecting attempts to limit disclosure requirements to express advocacy.

The Independence Institute appealed the case this spring (and the appellate court denied motions for summary judgment which means the institute will at least have the opportunity to be heard), but, as the district court pointed out, no other appellate court has ever held contrary to the Supreme Court that the government may not impose disclosure requirements on speech, or that those requirements may not constitutionally apply to issue advocacy. The institute has an uphill battle.

However, privacy advocates have had a few minor victories (most recently in Delaware and Indiana), but those decisions are narrower in scope than some of the broad disclosure-mandating decisions handed down elsewhere in the last year. For instance, the DC Circuit ruled in November that organizations making electioneering communications must disclose all donors over a certain giving level – regardless of whether or not those donors knew about the communication or intended to fund it.

In California, the Ninth Circuit just upheld a requirement that every nonprofit that solicits charitable contributions must register and reveal the names and contributions of all donors who give more than $5,000 annually. Florida, Hawaii, Kentucky, New York, and Mississippi also demand donor lists from nonprofit organizations seeking to operate in those states. Meanwhile, think tanks in Connecticut and Montana are, like the Independence Institute, struggling against regulations that classify issue advocacy as political activity requiring donor disclosure.

Residents of the Wolverine State may be relieved to know that their donor privacy freedoms remain largely intact. Michigan modified its laws in 2013 to call for identifying information on political ads, ‘robocalls’ and mail, but it still falls well short of requiring full disclosure. In fact, Governor Snyder authored an opinion piece shortly after implementing those reforms, pledging to protect Michiganders’ speech rights. “There’s a movement afoot to require organizations to issue new disclosures – to name names of those who donated money for issue advocacy,” he wrote. “[D]isclosing donors’ names results in the use of scare tactics that are designed to suppress speech and participation in the political process. That … cannot be tolerated.” Perhaps eventually the judiciary will agree. 

June 19, 2015 MichiganVotes Weekly Roll Call

Green light to Uber; red light to film subsidies; mobile beer bars and more

House Bill 4122, Repeal state film producer subsidies: Passed 24 to 13 in the Senate

To repeal the program that gives Michigan tax dollars to film producers. Since 2008 some $500 million has been distributed to producers. This week's votes send the bill to the Governor for approval or veto.

Who Voted “Yes” and Who Voted “No”


House Bill 4325, Establish overspending public school “early warning system”: Passed 25 to 12 in the Senate

To require school districts to submit their annual budget projections and assumptions to the state each July, and establish a process of review and concurrence involving intermediate school districts. Non-concurrence would trigger reporting and oversight requirements. Related bills would require funding be withheld from districts that fail to reduce their overspending.

Who Voted “Yes” and Who Voted “No”


House Bill 4328, Authorize withholding state money from overspending school districts: Passed 25 to 12 in the Senate

To give the Department of Treasury the authority to withhold state school aid payments from an overspending school district that fails to submit an acceptable “deficit elimination plan,” or that then falls more deeply into financial trouble.

Who Voted “Yes” and Who Voted “No”


House Bill 4329, Authorize emergency manager for chronically overspending school district: Passed 25 to 12 in the Senate

To authorize appointment of an Emergency Manager for an overspending public school district that fails to comply with the deficit reduction plans and procedures required by House Bill 4325 and related bills.

Who Voted “Yes” and Who Voted “No”


House Bill 4273, Eliminate February election date: Passed 30 to 7 in the Senate

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 328, Authorize more State Police officer grades: Passed 35 to 0 in the Senate

To create two new grades of State Police officer, called "inspector" and "recruit." The current grades are colonel, lieutenant colonel, major, captain, lieutenant, sergeant and trooper.

Who Voted “Yes” and Who Voted “No”


Senate Bill 165, Authorize pedal-powered beer bars: Passed 96 to 13 in the House

To establish in statute that a “commercial quadricycle,” which is a pedal-powered mobile beer bar, is not considered a “motor vehicle” even if it has auxiliary power, and instead would be subject to much less onerous regulations. Under this and Senate Bill 166 passengers would be allowed to have open beer or wine containers, but the driver would be required to have a blood alcohol level of zero.

Who Voted “Yes” and Who Voted “No”


House Bill 4640, Regulate Uber, Lyft, etc. - insurance provision: Passed 70 to 40 in the House

To establish that passengers using services like Uber and Lyft would be covered by the same type of insurance as passengers in taxicabs. This means the unlimited personal injury protection (PIP) coverage required by the state no-fault insurance law would be provided by the passenger's own auto insurance, and by the driver's policy only if the passenger had none.

Who Voted “Yes” and Who Voted “No”


House Bill 4637, Regulate Uber, Lyft, etc.; preempt local bans: Passed 71 to 39 in the House

To establish a regulatory framework that would enable “transportation network companies” like Uber and Lyft to operate in this state, including a preemption on local government regulations or bans. The companies would have to get a state permit and carry liability insurance. The bill requires background checks on drivers and annual vehicle inspections.

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.

A Look Back at Michigan's Battery Subsidies

Mackinac Center policy analysts discuss A123

Watchdog.org took a look back at the hundreds of millions of dollars approved for the battery maker, A123 Systems. The Mackinac Center and Michigan Capitol Confidential covered the deals between the state and company for years, before the entity went bankrupt.

Policy Analyst Jarrett Skorup was quoted in the story:

“The general lesson for policy makers is that they make very poor venture capitalists because they’re not spending their own money,” said Skorup. “They’re spending other people’s money and those politicians weren’t putting their own stock portfolios into A123 Systems. They were putting taxpayer money into them.

“And the lesson for taxpayers should be, when politicians are making these claims about job projections they should be extremely skeptical. In Michigan, almost none of those — we’ve done multiple studies, other news organizations have done multiple studies — reach the actual projections that they promise.”

A123 has been bought out by another group and is set to turn a profit in 2015 - without new state support.

In a separate Watchdog.org article, assistant director of fiscal policy James Hohman was quoted on A123 developments and the company's connection to Fisker, another company that received government subsidies and later declared bankruptcy.

MEDC vs. Road Spending Poll Featured in Daily Caller

Two-thirds of voters support turning subsidy money over to roads

The Mackinac Center recently released the results of a poll conducted by Mitchell Research & Communications, Inc. showing two-thirds of respondents preferred putting money currently spent on corporate subsidies through MEDC toward roads.

The poll was featured in a June 17 article at the Daily Caller, which also referenced an earlier poll commissioned by the Mackinac Center indicating strong voter support for the end of the state's film subsidy program in favor of road funding.

Incomplete Analysis of Pension Scheme Bill Paints False Picture

Fiscal Agency ignores benefit spiking costs, underfunding risks

A bill now pending before the Michigan Senate would prevent former school employees like Michigan Education Association union president Steve Cook and others from continuing to accrue benefits in Michigan’s school employee pension system. Yet a Senate Fiscal Agency summary of Senate Bill 279 claims the change would not save any taxpayer dollars. This is incorrect, because the analysis ignores the risks of underfunding pensions and the “benefit spiking” costs associated with this scheme.

What is muddying the waters in this unusual situation is that the union reimburses the district for the pension fund contributions made on behalf of Cook and others involved in the scheme. When one of these individuals leave the system two things happen: The person stops accruing (increasing) future benefits and the union stops contributing.

A proper analysis of this bill would assess the potential taxpayer gains, losses and risks associated with this event, but the Senate Fiscal Agency only considered the potential loss. But there are other fiscal considerations and taxpayer costs.

When an employee earns benefits under a defined-benefit pension system the employer must contribute a certain amount to cover the future payouts. Determining the correct contribution amount requires estimating various factors such as potential pension fund investment returns, life expectancies and more.

Getting those estimates right is tricky, and getting them wrong means that taxpayers are on the hook for the eventual shortfalls.

In the case of Michigan’s school pension system this risk is more than just hypothetical — the system has a $26.5 billion unfunded liability. This is not a temporary blip, either. According to state auditors, in 29 of the past 30 years the assets held by the system were not sufficient to cover future benefits. A long history of inadequate contributions makes it very likely that the union reimbursements in these deals are also inadequate — and that taxpayers will end up paying a price.

Yet this ongoing risk is not even mentioned in the fiscal agency’s summary of the bill. It instead discusses a separate issue — that the union’s reimbursements are being used to pay down the system’s unfunded liabilities, which is a positive for the state. Currently, 83 percent of pension contributions go toward “catching up” on past underfunding. Thus, the agency argues that stopping this arrangement will cost the state money.

The fiscal agency also ignores other critical factors. It fails to consider that the union president and others involved in these deals are also “spiking” their eventual pension benefit payouts.

In Steve Cook’s case, the years during which he earned a modest paraprofessional salary count as much in the formula used to calculate his benefits as his years of collecting a six-figure union official salary — yet it is that high salary that will determine the size of his eventual benefit checks.

The estimates used to determine proper pension contribution rates do not attempt to pay for this benefit spiking scheme. Those rates are set for the workforce as a whole, and do not try to calculate the correct contribution amount for particular individuals on a person-by-person basis. Union reimbursements based on those rates are unlikely to cover the difference between benefits based on the six-figure salary of a high ranking union official and benefits based on the modest pay of a public school parapro. That is true even if some of the reimbursement amounts go toward catching up on the system’s unfunded liabilities.

And even if the Senate Fiscal Agency wanted to estimate the contributions required for a beneficiary like Steve Cook, the state’s Office of Retirement Services has not maintained individual member accrued benefit and contribution records that would allow the agency to do so. (A Mackinac Center Freedom of Information Act request to the office was rejected for this reason.)

If such records did exist they could be used to estimate exactly how much these special deals have cost taxpayers and how much they have contributed to the system’s unfunded liabilities. The lack of such records raises additional questions about the costs claimed in the fiscal agency’s summary.

Here’s what we can say, however: Given that there are only 60 cents in the system for every dollar’s worth of pension benefits earned by its members, the taxpayer savings from this bill are likely to be substantial, even if they cannot be precisely quantified. The Senate Fiscal Agency’s analysis should reflect this.

National Conservative Groups Push to End Civil Asset Forfeiture

Is Michigan’s GOP Legislature listening?

A new article on the Heritage Foundation’s “Daily Signal” website highlights the problem with civil asset forfeiture, which is the subject of several bills currently being considered in the Michigan Legislature. The piece, “9 Times the Government Stole Americans’ Cars, Cash” features a case study that originated in Detroit:

At the Contemporary Art Institute in Detroit, Mich., in 2008, a fun night out at a “Funk Night” event for 130 attendees morphed into a scene out of an action movie. Armor-clad police stormed the party with their guns drawn, forced attendees to the floor and seized 40 vehicles from those in attendance.

What heinous crime necessitated this treatment? It turned out that, unbeknownst to Funk Night patrons, the Art Institute failed to get a permit to serve alco­hol. Using Prohibition-era reasoning combined with modern civil asset forfeiture law, the police determined that merely attending made everyone complicit.

And because the cars were used to transport their users to the party, the cars were also “guilty” and subject to sei­zure. Police even seized a car parked in a friend’s drive­way over a mile away from the Art Institute.

Attendees had to pay $900 each to have their vehicles returned. Ironically, one of the patron’s vehicles was stolen from the impound lot—a crime made possible by the Detroit Police. Thankfully, a federal district court judge held the Funk Night seizures unconstitutional, calling the incident part of a “widespread practice” of detaining everyone present at a venue without an alcohol permit, searching them and seizing their cars simply because of their presence.

Heritage is not alone among the national conservative and free-market groups raising alarms about civil asset forfeiture. They are joined by FreedomWorks, Institute for Justice, Manhattan Institute, Right on Crime, and Americans for Tax Reform. There have also been articles on the troubling practice from the American Enterprise Institute, the Hoover Institution, the National Taxpayers Union and others. The Mackinac Center and ACLU have teamed up to push this issue in Michigan.

In addition to being the right thing to do, all of this is something the Republican majorities in the Michigan Legislature should heed. On the other side, lawmakers are being pressured by the state branch of the criminal justice industrial complex to adopt as little reform as possible

Michigan’s forfeiture laws are rated among the worst in the nation.  Pending legislation would increase transparency and raise the standard of evidence required before the state could claim a person’s property through forfeiture. While positive, these are half-steps toward real reform. Ultimately, this state should require a criminal conviction before law enforcement agencies can take a person’s money and cars and cash in on the proceeds.

Coverage of Steve Cook Pension Spiking in Detroit News

Two Senate bills would prevent union abuse of public funds

Earlier this year, Michigan Capitol Confidential broke the story of MEA President Steve Cook spiking his public school employee pension. He will be able to collect over $100,000 a year from the underfunded system when he retires, despite working only part time as a paraprofessional in the Lansing School District over twenty years ago.

Several news outlets picked up on the story, which led to the creation of several bills currently under consideration in the legislature: SB 279, which makes pension spiking illegal; and SB 280, which would prevent taxpayers from funding the “release time” teachers use to work on union business. 

In its coverage of the two bills in the June 16 edition, The Detroit News credited the Mackinac Center and Michigan Capitol Confidential for coverage of Steve Cook's pension spiking with bringing these issues to the table.