Legislative Report by Todd Tennis of Capitol Services
The 99th Michigan Legislature was seated in Lansing this month. The term begins with a new Speaker, Representative Tom Leonard (R-DeWitt) in the Chair, but the same Republican/Democrat split of 63-47. It is widely believed that the Republican caucus has become more politically conservative as a result of the election, but that has yet to be seen. The House Democrats are led by Representative Sam Singh (D-East Lansing). Committee Chairs and committee assignments were released in late January, with Representative Laura Cox (R-Livonia) being named chair of the powerful House Appropriations Committee.
The Governor gave his seventh State of the State address on January 17, and in addition to calling for continued investment in job training and increased investment in infrastructure, he expressed concern about upcoming changes in healthcare policy nationally. Gov. Snyder said that the state’s Medicaid expansion program, the Healthy Michigan plan, can stand as a model for the nation, and he hoped to work with “our federal partners” to make that case. While not mentioned in his speech, the administration confirmed that the Governor will testify about Healthy Michigan to congressional committees in Washington, D.C., later this week.
Changes in Washington Could have Big Impact on Michigan
Many questions accompany President Trump into the White House. How will he work with Congress? Will the ACA be repealed, and if so, will it be replaced? If it is replaced, we have no clear direction as to when that would be accomplished or what type of plan will be passed. Answers from the President have been vague at best. Additionally, in recent weeks there has been widespread discussion of block-granting Medicaid to states, and again, details are non-existent. Add to these issues the myriad uncertainties that seem to follow the new administration, and we have a potential for federal issues to have a chaotic impact on state governments. There will almost certainly be discussions at the state level about participation in, and repeal of, the Healthy Michigan plan, made possible because of the ACA.
The state budget, when considered apart from these ‘unknowns’ at the federal level, is stable but not thriving. There was a $151 million carryover in state General Fund/General Purpose (GF/GP) for Fiscal Year 2016 that just ended. GF/GP revenue estimates are down by $84 million for Fiscal Year 2017, our current year budget, due to slower than expected growth. Estimates for GF/GP in Fiscal Year 2018 are up by $66 million. This represents essentially flat revenue in a $10.5 billion GF/GP budget. On top of that, the first bills introduced in each chamber this session were income tax elimination bills, which would throw a monkey wrench into the appropriations process, as nearly $7 billion in state GF/GP comes from income tax.
Report: State Workers Face Shaky Retirement Prospects
A report in the Gongwer Newsletter published on January 27 detailed grim news for many state employees who are in the defined contribution retirement plan. The headline proclaimed that the median retirement savings for state workers in that plan is a mere $37,000 – a starkly low number.
In 1997, Governor Engler signed a law enacting the closure of the State Employees Retirement System to new hires. This defined benefit plan provided a stable and measurable retirement income for state workers who stayed in state employ long enough to become vested (for most, this was 10 years). Not only did this plan encourage state employees to remain at jobs that were frequently lower-paid than similar private-sector careers, it ensured that retired state workers would be able to reasonably support themselves and be a boon rather than a drain on the economy.
Since 1997, new state employees have been shut out of the SERS plan and offered a 401(k)-style defined contribution (DC) retirement plan. It is this group of employees that are facing a significant shortfall in retirement savings. The state’s relatively low contribution rate (the plan maxes out at a 7% employer match) combined with two major downturns in the stock market in the last 15 years have left a large proportion of state employees in the DC plan poorly prepared for retirement.
The report estimates that the average retirement age for those in the DC plan will be much higher than those in the old SERS plan. SERS members retired at an average age of 58. Members in the new DC plan are expected to retire at least 10 years later, with the high end being around 75 years of age. The main reason for this is that older state workers simply will not have the resources, even after factoring in Social Security and other personal savings, to retire with an income above the poverty line.
An example of the problem stems from a 2015 study conducted by the National Institute for Retirement Security. They found that the average retirement balance for Michigan state employees nearing retirement age (60 and above) was only $123,000. While this is a large improvement over the $37,000 median for all state workers, it still amounts to an annuitized monthly benefit of less than $1,000. Many state workers will be forced to continue working well past their preferred retirement age simply because they have no other choice.
Supporters of the DC plan argue that the low account balances stem from poor decision-making on behalf of the employees. They claim that some of the trouble stems from a percentage of state workers who do now contribute enough to their own retirement fund. While it is true that state workers who fail to at least contribute a sufficient amount of their salary to maximize the state match (3%) are hamstringing their own retirement prospects, even the maximum matched amount sets aside only 10% of an employee’s salary (7% from the state and 3% from the employee). This is still less than the recommended 12%-15% that most financial experts recommend as necessary to provide for a secure retirement. Members in the DC plan are also beset by a lower average return on their investments than received by professionally managed funds, and higher administrative fees that eat into their potential growth.
We have heard a lot about a “pension crisis” in Michigan from leaders who argue that traditional defined benefit plans are too costly for public employers. However, if the trends found in this report on Michigan state workers hold true for all employees who have been shifted into a 401(k)-style plan over the past few decades, the real retirement crisis will be much different: It will be that hardly anyone will be able to retire at all.
Governor’s Budget Proposal Set for February 8
While Governor Snyder outlined a few issue areas he hopes to focus upon in his State of the State address (including infrastructure funding and skilled trades training), he will have a further opportunity to flesh out his vision for the last two years of governorship in the 2018 budget proposal scheduled for February 8. The latest Consensus Revenue Estimating Conference found that overall state revenues will be little changed in the upcoming year. However, the state is already facing a number of possible expenditures.
First and foremost will be funding to implement the “Road Funding” plan passed by the Legislature in 2015. Much of the funding for that plan will come from existing General Fund revenues, meaning that potentially hundreds of millions of dollars will need to be found in order to dedicate them to road and bridge construction. The state is also facing possible funding needs for health care in the event that the Affordable Care Act is repealed. 600,000 Michigan citizens are enrolled in the Healthy Michigan plan which was made possible by expanded Medicaid eligibility. If Medicaid sees substantial changes coming out of Washington (including the possibility of block granting the program), Michigan could see a huge decrease in federal assistance to provide health care to low income citizens.
Lastly, one of the main pieces of legislation to surface in both the House and Senate are bills to eliminate the Michigan Income Tax. Current language in the bills would phase-out the tax (the Senate version over 5 years; the House version over 40 years), and most observers in Lansing do not expect the Legislature to pass such an extreme measure (but who knows?). Even if they abstain from a full abolishment over time of the Michigan Income Tax (which generates the bulk of the state’s non-restricted General Fund revenue), it is certainly conceivable that we could see a reduction in the rate. That would leave the Governor an unspecified reduction in funds to implement his agenda.
Once the Governor makes his budget proposal, the House and Senate Appropriations Committees will begin the budget process in earnest. They will work over the next several months to develop the 2018 budget and will likely complete that process by June.