Law Would Make Bringing Large Amount of Alcohol into Michigan a Felony

Bills pushed by wholesalers to ‘keep a higher profit for themselves’

If you’re planning a party this summer, don’t let an out-of-state relative offer to stock your bar. The Michigan House passed a set of bills on Thursday that will create new civil and criminal penalties for individuals who bring too much alcohol into the state without a liquor distributor’s license.

Michigan is one of 18 “liquor control” states where the government acts as a statewide alcohol wholesaler. It maintains a Liquor Control Commission that publishes and maintains a Liquor Control Code and requires minimum prices for different beverages. (The requirements raise prices by as much as 20 percent, which encourages rampant smuggling). It completely monopolizes the wholesaling of hard liquor by purchasing all liquor before reselling it to wholesalers and heavily regulates the wholesaling, distribution and retail sale of beer and wine. In practice, this means that most alcoholic beverage producers must grant exclusive monopolies to private wholesalers to sell their beverages to stores within each of Michigan’s sales territories.

In states without government-run distribution systems, like Washington, beverage-makers can sell their products directly to retailers, increasing efficiency and lowering prices. But Michigan retailers are forced by the threat of criminal prosecution to use state-sanctioned middlemen to purchase and import their alcohol – and so are private people who want to obtain alcoholic beverages for personal consumption.

Under current Michigan law, individuals who want to bring alcohol into the state for personal consumption are capped at 312 liquid ounces – about 24 12-oz beers or 12 bottles of wine. No one may bring in any beverage that is more than 21 percent alcohol by volume (which would rule out some wines and basically all hard liquor). Anyone wishing to exceed these limits must submit a written application to the state liquor control commission.

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The sanctions for violating the law vary by substance. Criminal penalties for the illegal sale, importation or distribution of hard liquor vary from a civil infraction to a felony depending on the quantity. There are no specific quantity-dependent sanctions for other alcoholic beverages, only provisions that make violating the Liquor Control Code a misdemeanor. It also is a felony to do something for which a liquor control license is required without first obtaining that license.

The new bills under consideration in the House would set up harsher penalties for bringing in too much beer or wine, bringing the punishment up to the same standard as that for hard liquor. They would make exceeding the 312-ounce personal maximum a civil infraction with a potential $500 fine. Bringing in more than 45,000 milliliters of beer or wine (which is equivalent to about 60 bottles of wine or five cases of beer) would be a misdemeanor with a potential $2,500 fine and 93-day imprisonment. Bringing in more than 225,000 milliliters or beer or wine (300 bottles of wine , 26 cases of beer or 10 kegs) would be a felony. The felony would be a Class F “felony against the public order” with a potential $5,000 fine and four-year prison term.

The justification for creating these new crimes has nothing to do with protecting the public order. A House Fiscal Agency analysis reports that the bills are intended to crack down on some beer and wine retailers who are allegedly skirting the state’s ridiculous three-tier liquor distribution system “and thus keep a higher profit for themselves.” (The system prevents retailers from making direct purchases and deliveries of alcohol, requiring them to pay a state-licensed distributor to transport alcohol.) The House agency report explains that “some feel that if the penalty for the illegal purchase and transport of beer and wine across state lines” were higher, the retailers would stop trying to cut distributors out of the middle.

Of course, the report refers here to the distribution companies themselves. The state of Michigan has granted these companies a monopoly over the delivery of alcohol, and the House has introduced this legislation in response to the pressure that distributors are putting on lawmakers to continue protecting this monopoly.

Distribution companies know that local retailers and their customers could save money if the retailers weren’t forced to pay a third-party distributor, so they have pressured the Legislature to make it illegal for retailers to cut out distributors, with success.

The bills to create new liquor control crimes are on their way to the Michigan Senate, but senators should reject them. They would not meaningfully protect public safety and order. Their true purpose is to protect an unnecessary and expensive monopoly, and the Legislature should stop wielding the threat of criminal prosecution to bring individuals and small businesses to heel.


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Incentive Programs Fail: Evidence is All Too Clear

Center Scholar Speaks to Tax Group in Florida

Editor's Note: These remarks were originally given before the Florida Tax Watch Spring Board Meeting on May 26, 2017.

Thank you. It’s a pleasure to be here today to talk about economic development. There are few areas of research where I find such widespread agreement in academic and other studies. In short, state and local “development” programs are ineffective and expensive. They don’t work, they’re unfair to those who pay full freight, and cost billions of dollars that could be better used elsewhere.

The modern “war between the states” over jobs has been active since the Great Depression. Fifty states run some 1,829 incentive programs designed to create jobs and wealth, according to the Council for Community and Economic Research and economists have written hundreds of studies trying to measure their effectiveness.

A “meta” review of the economic development literature was completed by economists from the University of Iowa in 2004. Their study was a literature review of the literature reviews in the field. Titled, “The Failures of Economic Development Incentives,” the professors argue that assertions that these programs improve economic growth or lead to net positive fiscal benefits for governments are probably false.

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Since this study was released, I found nothing in the literature to suggest anything has changed. In fact, if anything, the frequency and clarity of published evidence against such programs has only increased. Here’s some of what we’ve learned recently about different economic development programs:

  1. State tourism promotion: My 2016 co-authored study looked at 39 years of data from 48 states. We found that for every $1 million increase in promotion spending, there was an increase of just $20,000 in extra economic activity in the average state’s hotel and motel industry. Other sectors fared worse.
  2. Subsidies and loans: Another 2016 paper from Texas professor examined some high-profile jobs and capital-creation programs in Maryland and Virginia and found “no impact on growth or job creation.”
  3. Sports facilities: An April 2016 academic paper found the opening of a new facility does not increase new businesses, though it registers a slight uptick in additional workers. Most other academic papers on professional sports stadiums and teams also show zero to negative impacts.
  4. Tax Increment Financing: A 2015 study from Ball State University argued that TIFs in Indiana were “associated with less employment, less taxable income and slightly higher tax rates.”
  5. Tax Credits: There have been five scholarly studies since 2005 on Michigan’s huge refundable tax credit program called MEGA, which offered up billions in incentives during its lifespan. Four found an impact from zero to negative. One found a positive impact, but it was tiny.

The research is mixed but leans negative. The record gets worse when you consider opportunity cost. That is, if billions weren’t spent trying to create economic development, might they be used more effectively with across-the-board tax cuts or infrastructure improvements? A 2000 tally by professor Kenny Thomas said the annual value of incentives offered reach as much as $50 billion.

Why do incentive programs fail? I suggest three big reasons. 1) You can’t give anyone something you don’t first take from someone else. 2) They encourage rent seeking (a growth retardant) and distort decision-making, turning some market entrepreneurs into political ones. 3) The opportunity cost is high. Cutting taxes for a few politically well-connected firms makes it harder to cut taxes for everyone.

A better way to development is to take the “fair field and no favors” approach. People and markets were creating jobs and wealth long before government officials thought it should be their responsibility.


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Senate Bill 249, Ban government discrimination against charter schools in property sales: Passed 25 to 13 in the Senate

To prohibit a school district or local government from refusing to sell property to a charter or private school, or taking other actions designed to keep these potential conventional public school competitors from using property for a lawful educational purpose. Prohibited actions could also include imposing deed or zoning restrictions. A number of local governments and conventional school districts have adopted such restrictions in the past.

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Who Voted "Yes" and Who Voted "No"


Senate Bill 363, Let state pay more for road salt from Michigan company: Passed 36 to 2 in the Senate

To allow the state pay up to 8 percent more for road salt from the Detroit Salt Company. The bill would exempt these transactions from regular lowest-bidder contracting rules. Note: While Detroit Salt's mine is in Michigan, it is owned by a Canadian holding company.

Who Voted "Yes" and Who Voted "No"


Senate Bill 290, Increase election recount deposit requirements: Passed 27 to 11 in the Senate

To increase to $250 per precinct the deposit that a candidate must make to get an election recount if the winner’s vote margin was 5 percent or more. This relates to the actions of the 2016 Green Party presidential candidate and Democratic Party operatives after the defeat of Hillary Clinton in Michigan. These persons orchestrated a statewide recount allegedly on behalf of a Green Party candidate who received less than 2 percent of the Michigan vote.

Who Voted "Yes" and Who Voted "No"


Senate Bill 122, Allow dogs in outdoor cafés: Passed 32 to 6 in the Senate

To permit a restaurant to allow customers’ dogs in outside dining areas. Under current law only seeing-eye and other service dogs are allowed in restaurants. Local governments could still choose to ban dogs.

Who Voted "Yes" and Who Voted "No"


House Bill 4611, Facilitate horse race gambling by cell phone: Passed 65 to 43 in the House

To establish a new kind of horse race gambling license called a third party facilitator license, for persons who facilitate off-track betting on live and simulcast horseraces. This is said to facilitate using cell phones to place bets.

Who Voted "Yes" and Who Voted "No"


House Bill 4559, Permit beer and wine cartel members to hold tastings for staff: Passed 108 to 0 in the House

To permit the handful of members in the state-protected beer and wine wholesale and distribution cartel to hold educational product sampling sessions for employees.

Who Voted "Yes" and Who Voted "No"


House Bill 4557, Authorize prison for bringing 26 cases of beer or wine into state: Passed 99 to 8 in the House

To authorize up to four years in prison and a $5,000 fine for bringing more than around 26 cases of wine or beer into the state without all the required licenses mandated by the state. Smaller quantities would be subject to 93 days in jail.

Who Voted "Yes" and Who Voted "No"


House Bill 4351, Exempt private aircraft owners from sales tax on parts: Passed 70 to 38 in the House

To exempt owners of private aircraft from having to pay sales tax on parts. An existing exemption benefits out of state aircraft owners (as an incentive to buy parts in Michigan). The bill would extend this to owners of private aircraft who live here. This will save aircraft owners $4 million annually, and reduce state revenue by the same amount.

Who Voted "Yes" and Who Voted "No"


Senate Bill 163, Authorize “Choose Life” license plate: Passed 65 to 43 in the House

To require the Secretary of State to develop a “Choose Life” license plate, with the profits from its sale spent on "life-affirming programs and projects."

Who Voted "Yes" and Who Voted "No"


House Bill 4427, Regulate access to police body camera images: Passed 108 to 0 in the House

To establish that police body camera recordings taken in a private place are exempt from disclosure under the Freedom of Information Act. Individuals whose image is captured, owners of property seized or damaged in a crime and some others could still request a copy of the recordings subject to privacy exemptions. Police body camera recordings would have to be kept for at least 30 days, or longer if there is an related investigation.

Who Voted "Yes" and Who Voted "No"


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


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State Retirement Managers Develop Convenient, Hypocritical Excuse

Tantamount to only brushing your teeth when you go to the dentist

Michigan lawmakers might offer new school employees defined-contribution, 401(k)-style retirement benefits instead of defined-benefit pensions. The state-run pension system’s managers in the Office of Retirement Services contend that this will generate large and unavoidable “transition costs.” But their reasoning for defending the status quo suggests that they are more interested in pressuring lawmakers away from reform than in maintaining a well-funded pension system.

ORS argues that moving to a 401(k)-style plan would force them to change the way they pay off the $29.1 billion in unfunded liabilities in the system. Right now, they have chosen to pay this off over the next 21 years by increasing the payments by 3.5 percent per year, the rate at which they assume schools’ payroll will grow annually.

If the system goes to a defined-contribution retirement plan, they argue, “best practices” recommend they stop assuming that payroll will grow. Thus, they would need to put more cash into the system in the near term, since they would no longer be able to backload payments. This is what they mean by transition costs.

One problem with invoking so-called best practices, however, is that ORS has a history of ignoring them when it’s convenient. And while it’s true that best practices do call for not assuming payroll growth when a pension plan gets closed, this is something the state should have been doing all along.

ORS has assumed that payroll would grow 3.5 percent per year, which equates to 60 percent growth over the past 15 years. But payroll hasn’t grown at all over this period — in fact, it has steadily declined. Keeping this in mind, what ORS calls “transition costs” might be better called “the cost of doing what you should have done all along.” Basically, ORS is saying that you don’t need to brush your teeth until you go to the dentist.

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ORS officials say they will still pay off the unfunded liabilities over time, pointing out that they make extra payments if their assumptions are faulty and they fail to put enough money into the system. But it’s important to remember these payments are made entirely at their own discretion, and they can simply cancel the process, as they did from 2012 to 2015.

Using this artificial price tag, ORS has succeeded at scaring a lot of lawmakers away from voting in favor of fiscal prudence and closing, once and for all, the school pension system. But the reality is that there is no mandate to pay the so-called transition costs, and keeping the state’s plan to pay down unfunded liabilities would be just as prudent with a closed system as it would be with an open one.

If state lawmakers can find money in the budget to pay ORS’s transition costs, great; they would be paying down the state’s largest debt at a faster pace. That would also be prudent, saving interest expenses over the long term. But there is no mandate that lawmakers do so, and ORS managers are hypocritical for even raising this as a reason to oppose switching to a defined-contribution retirement system.


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School Funding in Michigan Reaches All-Time High

Record revenues for schools likely will continue

Last summer’s release of a $400,000 taxpayer-funded study generated a number of headlines proclaiming that Michigan schools received insufficient funding.

“The adequacy study released today proves what many of us in public education have been saying for years: Michigan’s education funding is inadequate, and it’s harming student performance,” Michigan Education Association president Steve Cook told Michigan Radio.

Backers of a proposed follow-up report have shied away from definitively saying schools need additional funds to improve. Small Business Association of Michigan CEO Rob Fowler was quoted in MLive earlier this year: “I don't know that more money is the answer. It could be that if we spent the resources we have today differently, that we would do a much better job of educating across the board.”

A look at the latest overall education funding picture suggests this cautious statement is well-informed, even if the typical Michigan resident has little idea how much schools already are spending. When looking at all sources of income, state figures for 2016 show that public schools brought in $14,108 for each student enrolled, the highest ever.

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Even after adjusting for changing dollar values, that per-pupil revenue figure surpasses the previous high of 2010. This chart shows that schools experienced their biggest funding boost between 1995 and 2002. After falling from the previous high, real per- pupil revenues have increased the last three years running.

Data for total revenues are complete through 2016, and don’t take into account dollars collected or spent this year. It’s likely that the line will go up for 2017, as well.

Lansing’s fiscal analysts now estimate that the state’s School Aid Fund will take in $153 million more this year than they projected just four months ago. The forecast for next year’s fund revenues is nearly $13 billion, up $189 million from the January projection and more than $800 million greater than the 2016 total. For the average district, 96 percent or more of state tax dollars comes from the School Aid Fund.

Local property taxes also remain a sizable part of the K-12 funding picture. Some local school districts are starting to raise more funds from one type of property tax, the regional enhancement millage, which pools and redistributes money across several school districts. Voters in two of the state’s largest intermediate school districts recently approved increases. Wayne County taxpayers are on the hook for another $80 million after last November’s election, while Kent County passed a $20 million measure earlier this month.

It’s time to put to rest the myth that Michigan schools are starving for lack of funds and have serious policy conversations about how to use current dollars more effectively.


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May 19, 2017 MichiganVotes weekly roll call report

Senate Bill 337, Criminalize female genital mutilation of minors: Passed 37 to 0 in the Senate

To make it a crime subject to 15 years in prison to perform a clitoridectomy, infibulation, or other female genital mutilation on person less than age 18. Claims that the procedure is required by custom or ritual would be explicitly excluded as a defense to prosecution.

Who Voted "Yes" and Who Voted "No"

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Senate Bill 98, Authorize Flint “promise zone” tax increment financing authority: Passed 35 to 2 in the Senate

To expand from 10 to 11 the number of “promise zone” tax increment financing authorities located in low income and “low educational attainment” areas, with the new one in Flint. These entities “capture" a portion of increases in school property tax revenue and use the money to partially subsidize college tuition for local students.

Who Voted "Yes" and Who Voted "No"


Senate Bill 103, Revise school truancy and chronic absence rules: Passed 28 to 9 in the Senate

To prohibit a public school from suspending or expelling a child solely for truancy or chronic absence. Senate Bill 104 would require school officials to attempt to meet with a parent, and authorize legal action if other steps don't work.

Who Voted "Yes" and Who Voted "No"


House Bill 4065, Let Corrections Department hire former prisoners: Passed 104 to 3 in the House

To repeal a prohibition on the Department of Corrections hiring former convicts. Individual hires would require permission from the department director.

Who Voted "Yes" and Who Voted "No"


House Bill 4205, Limit state department rulemaking authority: Passed 57 to 50 in the House

To prohibit a state department from promulgating rules more stringent than required by federal standards, unless specifically required by state statute, or if the department director determines "the preponderance of the evidence" shows a need to do so. Republican Gov. Rick Snyder has vetoed a previous version of this proposal.

Who Voted "Yes" and Who Voted "No"


House Joint Resolution C, Protect "electronic data and communications" from unreasonable search and seizure: Passed 107 to 0 in the House

To place before voters in the next general election a constitutional amendment to add “electronic data and communications” to the Article I provision that recognizes the right of the people to be secure from unreasonable government searches and seizures of their “person, houses, papers, and possessions.”

Who Voted "Yes" and Who Voted "No"


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


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Why Michigan Has a Pension Problem

Everyone wants to avoid responsibilities on retiree benefits

The largest fiscal issue facing the state of Michigan is retiree benefits. For decades, the state and local municipalities have promised more retirement benefits to employees than they have set aside to pay for.

Gov. Rick Snyder and the Legislature are debating what to do about this. There is nothing inherently wrong with pension systems — the problem is that politicians simply don’t fund them and instead pass the costs of today’s government onto future taxpayers. For example, the state has saved $29 billion less than what is needed to fund the school employee retirement system and local government pension systems are similarly underfunded. That being the case, state and local governments should shift new employees to 401(k)-type plans, which pay the full cost of retiree benefits as they are earned and cannot be underfunded and passed along to future taxpayers.

But interest groups are resistant. Unions, which have largely kept quiet while governments shortchanged their members’ retiree benefits, defend the status quo. And local governments, especially those who have not properly funded their systems, are pushing back on reforms.

The governor has a committee which is supposed to be figuring out the problem and suggest reforms for municipalities. But by all appearances, the local government and employee unions are using that committee to simply call for higher taxes.

The Lansing State Journal provides a vivid example of how this is framed in the media:

Despite the improving economy, local government leaders have said property taxes and revenue sharing from the state have not risen fast enough to keep up with those and other rising costs.

For example, the state paid Lansing $15.9 million in 2007, before the recession. Keeping up with inflation would have meant an $18.4 million payment last year, but the state actually paid the city $13.6 million. The city took in $43.9 million in property taxes in 2007, which would have equaled $50.8 million last year based on the rate of inflation. The city actually took in about $43.5 million in taxes last year.

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Such shortfalls across the state put services such as police and firefighting at risk, officials have said.

So, according to this framing, local governments’ debt is a result of a lack of revenue from the state and local property taxes. Putting the picture into perspective shows that that’s not the real issue.

The city of Lansing had unfunded liabilities in its pension systems of $113.6 million at the end of 2007 ($45.8 million for general employees and $67.8 million for public safety employees). That increased to $382.3 million in liabilities at the end of 2015 ($132.8 million for general, $250.4 million for public safety).

Lansing would have gained an extra $10 million if the state had increased revenue sharing and property taxes had been recession-proof. But the city added nearly $270 million in debt over that time — the extra $10 million would have been about as useful as a band-aid on a gunshot wound. The problem is not one of revenue; it’s that the city has not set aside enough to pay for the benefits that they promise their employees in retirement.

The issue is the same across Michigan, and the only way to solve it is to stop letting the hole get bigger by closing the system to new employees and offering them defined-contribution, 401(k)-type plans instead. Only then will cities like Lansing and other municipalities around the state and the state government be able to meaningfully address the debt owed to current workers and retirees.


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School employees are the state’s largest creditors

Defined benefit pensions could work just fine for both employers and employees. But government pensions have a major problem: They are ultimately run by politicians who are good at and used to making promises, but also good at and used to passing the bill to somebody else. The consequences of failing to pay the true cost of these promised pensions occur decades into the future, so it’s very easy for politicians to just push the burden onto future taxpayers.

Michigan’s largest government pension system, the one for school employees, is a slow-motion fiscal disaster. Lawmakers have promised current and past employees some $72.3 billion in benefits but only saved enough to pay 60 cents on the dollar of those promises. The pension fund, then, is $29.1 billion short of the amount the state’s own actuaries estimate is needed.

The costs of the shortfall are immense. The annual interest payments on this debt alone cost more than what the state spends annually on prisons.

In fact, that $29.1 billion unfunded liability makes school employees and retirees the state’s largest creditors. This is not fair. School employees never consented to let the state borrow money from them.

Under a defined-benefit pension system, when an employee earns benefits, the employer is supposed to set aside enough money in the same year to pay the costs of that benefit. In the case of public employment, this practice keeps the costs of today’s service from being a burden on future taxpayers and assures employees their benefits will be there when they retire.

The future is uncertain, so to determine how much to save and invest to meet the system’s promises, pension managers must make assumptions: how much will employees earn, how long they will live, and what kind of returns can be expected from pension fund investments going forward are three key assumptions.

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There are many ways to get it wrong, and the perhaps the easiest one is to make overly optimistic assumptions, particularly about investment returns. Unfortunately, the state’s been too optimistic for a long time. The result is that Michigan’s school pension system has been underfunded in 42 of the past 43 years.

When pension administrators recognize there’s a funding gap, they develop a plan to fill it. But the plan that Michigan’s pension managers chose for the school system was so inadequate that, until recently, it wasn’t even paying the full interest costs on the system’s debt.

The solution is simple: State leaders must stop the practice of promising benefits now and trying to pay for them later. This means no longer promising lifetime pension benefits to every new employee hired by a Michigan school. New employees should instead be offered automatic contributions, with optional matching funds, to 401(k)-style savings plans that generate no long-term taxpayer liabilities. People still in the system can continue to earn pensions, and the state will continue to pay out what has been promised, but over the long haul, lawmakers will be prevented from pushing retirement costs onto future taxpayers.

Some interest groups are concerned about this proposal. They include school administrators, unions and the managers of the current school pension system. Some of them have falsely claimed that the current system poses little risk to taxpayers and that no longer enrolling new hires would incur “transition costs.”

But this is not correct. Such costs are entirely optional, and even if they are paid, it saves taxpayers in the long run. Interest on pension debt is one of the most expensive types of state debt that taxpayers are responsible for.

The other claim is that a newer, so-called “hybrid” retirement plan has fixed all the problems. It remains susceptible to underfunding like the older plans and has only existed since 2010. During its brief life, the plan has benefited from stellar returns from the stock and bond markets; even so, it has just 0.1 percent more in assets than liabilities. So to say that the plan will never go into debt is Panglossian and irresponsible.

Finally, the system’s defenders argue that defined-benefit pensions are inherently better for employees than a 401(k)-style, defined-contribution plans. If they really believe this, though, they have a moral obligation to match their deeds to their words to ensure that pensions are funded as they are earned.

This means that pension managers should have used realistic assumptions — not pie-in-the-sky ones — about future payroll growth and investment returns. They should have actually made the required annual contributions. And long ago, they would have stopped kicking the costs into the future. School interest groups would have to have been watchdogs to ensure that this happened.

The system’s current $29.1 billion unfunded liability is a testament to how far short these groups fell in this endeavor.


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Claims of AFSCME aside, an underfunded pension plan benefits from closing it, not keeping it open

Nick Ciaramitaro of the American Federation of State, County and Municipal Employees union argued on a MIRS podcast that transitioning to a defined contribution plan would “cost a half billion” to “provide significantly less benefits” to employees. I guess he is proposing a paradox that the plan would both cost more and be less generous. He is mistaken. The proposed 401(k) plan would be more generous, but not trigger huge transition costs.

The 401(k) plan proposed last year was, on paper, more generous than the state’s plan. It would cost 10 percent if an employee maxed out contributions, with the employee putting in 3 percent and getting 7 percent from the employer. The current system for members costs 12.5 percent, with employees responsible for up to 8.4 percent and employers pitching in just 4.1 percent. So the 401(k) defined contribution plan costs slightly less, but employees receive more in employer contributions.

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Of course, if the state were good at estimating the costs of pension plans, they wouldn’t be underfunded by $29.1 billion.

There is an additional cost to employers for the increased generosity of a 401(k) plan. Last year, the state estimated it at $16 million for the first year of implementation. There would be savings to employees, however, of around $40 million.

But the extra employer contribution was not the cost Ciaramitaro was complaining about. The state’s pension fund managers have manipulated accounting rules to argue that offering new employees 401(k) benefits would trigger massive “transition costs” for the legacy plan. Yet the payments the state would make to shoulder these allegedly new costs would not make the legacy pension plan more expensive. Instead, they would simply bolster the health of the plan.

Nothing in the design of a 401(k) plan requires the state to make those payments for the transition costs. Lawmakers get to control how the state pays down the unfunded liabilities of the pension plan, regardless of when or whether they launch a 401(k) plan. Abstaining from the managers’ recommendation to make transition-cost payments would be as prudent as the current payment plan.

If lawmakers decide to put more cash into the retirement system, that’s great. Its debt increases at the state’s assumed rate of return of 7.5 percent, making it some of the highest-interest debt in the state, so decreasing the debt makes financial sense.

That’s why it seems odd that the union president is arguing against putting more money into the pension system. Doing so would secure more worker benefits and save money over the long term.

Ciaramitaro says that the state’s move to offer new employees 401(k)s, starting in 1997, caused underfunding of the legacy state employee retirement system. There were $0 in unfunded liabilities in 1997 and there are $5.8 billion of them now, he observes. Thus, closing the plan to new hires caused it to be underfunded.

But he is mistaken, and we can see that by comparing the closed pension plan for state employees to a pension plan that is still open. In 2004, Gov. Granholm and other policymakers put only 40 percent of the actuarially recommended amounts into the state employee plan. They put 71 percent of the recommended amount in the school retirement system. They repeated the pattern in 2007, when they put 48 percent of the recommended amount into the state plan but 91 percent in the school system.

So naturally you would expect the school plan to be better funded now. Even though the still-open plan for school employees received more cash than the closed plan for state employees, it is the latter plan that is in better shape today. So the key difference is whether the plan is closed or open. Closed is better.

When policymakers closed the state pension plan to new employees, they gave them a 401(k) plan. In raw numbers, that plan, which now covers the majority of state workers, cost state taxpayers $116 million in employer contributions in 2016. Meanwhile, the legacy pension plan cost $716 million, largely to pay down unfunded liabilities in the system. The costs of underfunding are the prime pension system costs, and they cannot be written off.

Ciaramitaro also says that the hybrid plan splits the risk between employees and employers. This is incorrect. The underfunding risk is exclusively borne by the employer, and thus the taxpayer. Employees do not share it.

He does make one agreeable point: “You don’t do something that specifically is known to not work.” Pension managers have promised benefits now and deferred costs to the future. The result is a broken system that has accidentally made school employees the state’s largest creditor. As Ciaramitaro’s actions demonstrate, unions have been poor watchdogs at ensuring that pensions are properly funded. Transitioning to a 401(k) plan is better and it’s good that lawmakers are interested in it.


Related Articles:

Unions Fight their Members’ Interests on Pensions

The Lose-Lose Situation in Pension Funding

Pension Protestors Should Be 401(k) Supporters

Don’t Blame Employees for Pension Underfunding

Why Michigan Has a Pension Problem

A Sad Passing, and Some Budget Votes

May 12, 2017 MichiganVotes weekly roll call report

House and Senate sessions were shortened this week due to the tragic death by suicide of Rep. John Kivela from Marquette after a second drunk driving arrest. This report includes some Senate budget votes and amendments from the previous week.


Senate Bill 135, Senate version, 2017-18 Health and Human Services budget: Passed 25 to 13 in the Senate

The Senate version of the Department of Health and Human Services budget for the fiscal year that begins Oct. 1, 2017. This covers Medicaid and welfare programs and is by far the largest state budget. The Senate proposes $25.401 billion in gross spending, with $18.345 billion being federal money and the rest from state and local taxes and fees. The House-passed version (part of a multi-department "omnibus" spending bill) proposes spending $25.171 billion, or around $230 million less.

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Who Voted "Yes" and Who Voted "No"


Senate Bill 135, David Knezek amendment, add refugee assistance spending: Failed in the Senate 12 to 26

To spend $1 million from state tax revenue on a refugee assistance program. Michigan already has this program, which is paid for with federal money. The amendment would add state tax money also.

Who Voted "Yes" and Who Voted "No"


Senate Bill 135, Bert Johnson amendment, add homelessness spending: Failed in the Senate 12 to 26

To spend an additional $3.7 million on government homeless programs. Specifically, to give private and government social service agencies $16 for each night an individual stays, to be used for efforts to get these individuals into permanent housing and reduce recidivism. The budget includes a $100 "placeholder" for this and talks are continuing.

Who Voted "Yes" and Who Voted "No"


Senate Bill 135, Vincent Gregory amendment, increase Medicaid "behavior services" spending: Failed 15 to 23 in the Senate

To add an additional $196 million for spending on Medicaid behavior-related mental health services, and move forward a scheduled pay increase for direct care workers from next April to this October.

Who Voted "Yes" and Who Voted "No"


Senate Bill 140, Senate version, 2017-18 Department of Environmental Quality budget: Passed 26 to 12 in the Senate

The Senate version of the Department of Environmental Quality budget for the fiscal year that begins Oct. 1, 2017. This would appropriate $490 million in gross spending, of which $170 million is federal money, and the rest is from state and local taxes and fees.

Who Voted "Yes" and Who Voted "No"


Senate Bill 140, Hoon-Yung Hopgood amendment, give Flint more for water contamination response: Failed 12 to 26 in the Senate

To give the city of Flint an additional $15 million to cover water bill reimbursements to residents after its 2015 drinking water contamination crisis.

Who Voted "Yes" and Who Voted "No"


Senate Bill 149, Senate version, 2017-18 K-12 School Aid budget: Passed 23 to 15 in the Senate

The Senate version of the K-12 school aid budget for the fiscal year that begins Oct 1, 2017. This bill would appropriate a total of $14.414 billion, compared to $14.161 billion approved last year. The House proposes to spend $14.309 billion, and in both versions $1.726 billion is federal money.

Who Voted "Yes" and Who Voted "No"


Senate Bill 149, Coleman Young II amendment, give Detroit schools money for students who left: Failed 11 to 27 in the Senate

To allow the Detroit School District to keep getting per-pupil state money next year for students who had been enrolled in one of its schools that closed, but now go to a different school district.

Who Voted "Yes" and Who Voted "No"


Senate Bill 149, Hoon-Yung Hopgood amendment, remove private school "unfunded mandate" money: Failed 13 to 25 in the Senate

To remove $2.5 million allocated to reimburse private schools for the costs they incur meeting various unfunded state mandates.

Who Voted "Yes" and Who Voted "No"


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


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