Februay Legislative Update
Budget cuts and a major departmental overhaul topped the headlines in Lansing this month. In January, the House Fiscal Agency discovered a major shortfall in the current year budget, forcing over $300 million in cuts and transfers to bring the budget back into balance. The trouble is predicted to carry over into next year as well, and Governor Snyder’s 2015-16 budget proposal reflects that.
Additionally, Governor Snyder signed an executive order combining the Department of Community Health and Department of Human Services into a single mega-department. Exactly what this means for workers in both departments is yet to be determined, but consolidations like this at the very least create uncertainty and instability and at worst could lead to more staffing reductions. More details below.
Governor’s Executive Order Trims $100 million
In an effort to address a major shortfall in the current year budget, Governor Snyder on February 11 signed an executive order making $102 million in direct cuts across several departments (a copy of the executive order is attached to this report). The Governor stated that the majority of these cuts would avoid staffing reductions, and are focused on program areas and payments to grantees and vendors. Examples of major reductions include a $12 million cut in film tax credits, a $7 million cut to hospital services and therapy, a $5 million cut to the Graduate Medical Education program, and a $6.5 million cut to adoption subsidies.
The remainder of the $330 million shortfall is expected to be filled with a $100 million cut to Medicaid (based on an assumption of lower caseloads), and a little over $100 million in transfers – the majority of which will shift some higher education costs from the General Fund to the School Aid Fund.
Governor’s Budget Proposal for 2015-16 Relies more Heavily on Federal Funding
Governor Snyder presented his proposal for next year’s state budget on February 11. If enacted as is, it would increase the overall state budget by 1.3% to a total of $54 billion. However, the state’s General Fund portion would drop from $10.1 billion to $9.6 billion, meaning that there will be less unrestricted money in next year’s budget. This primarily stems from an unforeseen increase in the use of business tax credits which have placed not only the current year budget in deficit, but will continue to have a drag on the state budget for years to come.
Many of these tax credits were left over from the Engler and Granholm administrations, and many in Lansing were quick to assign blame to previous governors and legislatures. However, Governor Snyder had an opportunity to end these credits when he passed his business tax overhaul in his first term which slashed business taxes by nearly $2 billion. Even now, Governor Snyder has stopped short of calling for an end to these credits, though he has firmly stated that he would not sign any legislation to expand them.
Key features of the Governor’s 2015-16 budget proposal include:
• Increases in training funds for skilled trades education;
• Expansion of dental coverage for low-income families;
• Small increases for higher education, community colleges and K-12 schools;
• Increasing federal funds for child care subsidies.
The House and Senate Appropriations Subcommittees are expected to begin their work on the Governor’s proposal starting next week.
Combination of DCH and DHS Raises Many Questions
Governor Snyder signed an executive order on February 6 which combines the Department of Community Health and the Department of Human Services into a single new entity – the Michigan Department of Health and Human Services. Nick Lyon, who is currently the director of DCH and interim director of DHS will continue to lead the new department. The order will take effect in April, and it is still unclear how the change will actually be carried out.
It is expected that many agencies within the two departments will be combined or rearranged, but details at this point are few. Part of the announcement of the merger talked about eliminating the Office of Services to the Aging and blending it into a larger bureau that would oversee not only services to the elderly but also include oversight of programs for vulnerable adults. It is also expected that many of the programs currently split between departments (e.g. Medicaid) would be combined.
Organizations representing DCH and DHS clients have expressed trepidation about the merger, and showed concern that it could lead to cuts in services to low-income populations. Groups representing state employees are also nervous, since mergers like this often result in staffing reductions. We will continue to keep close watch as this develops over the next two months.
New Study Points out Looming Retirement Crisis for State Employees
A study released on February 10 by the National Institute of Retirement Security took a detailed look at Michigan state employees who are in the defined contribution pension plan. In 1997, the Legislature amended the State Employees Retirement System (SERS) so that individuals hired after the law took effect could only participate in the defined contribution system. This was hailed as a way to save the state money while preserving a quality retirement for state workers. According to the NIRS study results, neither of these goals are being met.
At the time the old defined benefit SERS system was closed to new hires, it was fully funded at 109%. Since then, the system has gone into deficit, racking up unfunded liabilities of over $6 billion and as of 2012 was only 60% funded. This is due not only to the major economic downturns in the last 15 years that have harmed all traditional pension systems, but was also exacerbated by the shrinking number of active employees in the system. Whatever the reason, promises to reduce retirement costs to the state by eliminating traditional pensions for state workers have not been kept.
However, that was not the most shocking finding in the study. When the shift to defined contribution was made, politicians promised that it would provide the same quality of retirement benefit as the traditional defined benefit system. The NIRS study found, however, that the average savings in Michigan state employee defined contribution accounts is only $50,000. What’s worse, for those state workers nearing retirement age – those aged 60 or older – the study showed their average account balance at only $123,000. If that amount were to be annuitized, it would provide a mere $8,200 per year for a retiree to live on. That compares to the average $20,000 per year for those workers in the old defined benefit system.
This news is not only awful for state workers, but it foreshadows a much larger pending crisis across our entire economy. For the last 40 years, traditional pensions have been the backbone of retirement security and a strong engine for a consumer economy. Not only have defined benefit pensions helped reduce senior poverty levels by providing secure retirement income, they have provided a stabilizing effect on the economy as a whole. Unfortunately, as the private sector has all but eliminated defined benefit pensions over the last few decades, we are witnessing the last generation where a majority of workers will have access to stable pensions.
If the results of the NIRS study which demonstrate severely underfunded defined contribution pension funds for state employees hold true for the millions of workers relying on a 401(k)-style pension to provide for their retirement, we may be facing another era of massive senior poverty and economic decline. Meanwhile, politicians continue to press for further elimination of traditional pensions, and even the shift of Social Security into privatized accounts. Sadly, we may not realize the folly of these changes until it is too late.
Written by Todd Tennis, Capitol Services
February 13, 2015