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March Legislative Report from Capitol Services

MAGE Legislative Report, March 2015

The Legislature has been moving at a frantic pace through February and March.  Every budget committee in both the House and Senate are meeting simultaneously, while the standing committees are either voting out legislation or hosting testimony from relevant interest groups.  It has been a whirlwind for legislators, staff, and lobbyists trying to keep up.  The appropriations subcommittees for both the House and Senate are planning on reporting out their initial budget drafts before the Legislature leaves for its Spring Recess on March 27.  The Legislature will return to session on April 21.

First Round of Budget Discussions Wraps Up in Lansing

After the Governor issued his budget recommendation in February, the House and Senate Appropriations Subcommittees began work on the state budget in piecemeal.  Each subcommittee is responsible for a portion of the overall budget – usually a single department.  Those subcommittees completed their work this past week, but there is still a long way to go, especially since the House and Senate went in largely different directions in some departmental budgets.

For example, the Senate Department of Human Services Subcommittee’s DHS budget document would close Maxey Training School – something not contained in the Governor’s recommendations.  Additionally, the Senate version of the DHS budget would slash money from the 2-1-1 program and add $275,000 for a program to drug test welfare recipients.  The House Subcommittee adhered much closer to the Governor’s recommendations.  While the House version would keep Maxey open, it nonetheless accepts the Governor’s recommendation to cut its budget by $400,000.  Both the House and Senate also concur with the Governor’s recommendation to obtain $5 million in savings by closing and consolidating various (as yet undetermined) DHS offices. 

The House and Senate differed even more starkly from the Governor’s recommendation on the Department of Community Health budget.  The Governor had proposed an increase in the Health Insurance Claims Assessment Tax that would raise $180 million.  However, both the House and Senate DCH Appropriations Subcommittees rejected that proposal, and instead sought to make up for those funds by making cuts in the DCH budget and other areas of state spending.  For example, both the House and Senate Subcommittees scaled back the Governor’s proposal to increase funding for adult dental services.  While many of the cuts came to services, the House also wrote in $2.2 million in “administrative savings” based on the pending merger of the Department of Community Health and Department of Human Services.  The House expects to save $350,000 by having a single director for the new department, $1.65 million in savings from administration and management, and $243,000 in information technology savings.

The House Department of Corrections Subcommittee recommended a 2.8% reduction in funding for the department.  Cuts included in the House version of the budget include $1 million for field operations that covers parole and probation workers, $100,000 for Northern Region Administration, $250,000 for Southern Region Administration and $100,000 for administrative hearing officers who handle prisoner grievance hearings.  The Senate had less specific language, but recommended an overall cut of $11 million for “facility operating efficiencies.”  The Senate also reduced inmate health care spending by $15 million due to anticipated savings from combining physical and mental health into a single contractual arrangement.  The House agreed with unifying physical and mental health services with one vendor, but is much less optimistic about the savings that might produce, budgeting only $1 million in savings.

Overall, the Legislature seems to be heading to even deeper cuts than recommended by the Governor.  This is primarily due to a reluctance to adopt numerous fee increases proposed by Governor Snyder, which would have made up for some of the budget shortfall caused by business tax cuts.  The Legislature will be on recess until mid-April, when the full House and Senate Appropriations Committees will review the work of the subcommittees. 

Privatization and Closures Once Again in the Spotlight

The major bombshell in the Governor’s budget recommendation was the combination of the Department of Community Health and Department of Human Services into a combined Department of Health and Human Services.  While, the merger itself did not specifically call for contracting of services or a reduction in staff, most observers in Lansing expect one or the other (or both) to be on the table soon.  However, Governor Snyder has not specifically called for further closures or privatization in his budget recommendation.

Nonetheless, the Senate DHS Appropriations Subcommittee included the closure of Maxey Training School in their proposed budget.  There are also rumors of efforts to privatize large portions of DHS programming including Adult Protective Services, Independent Living services and Adult Foster Care services.  It does not seem at this point to be on the Governor’s agenda, but we expect to see an attempt to push forward some or all of these goals in the Legislature’s budget.

The continuing gap in the state General Fund makes such attempts even more likely.  Even though contracting out services has usually been shown to cost the state money in the long run, lawmakers desperate to achieve short-term savings may be tempted to privatize.  Once such a move is made, it is very difficult to reverse, so a coalition of state employees including AFSCME, UAW Local 6000 and the SEIU has been working hard to push back against these moves.

National Study Shows Major Problems in State Employee Retirement System

The Michigan State Employee Retirement System was converted from a traditional defined benefit pension to a 401(k)-style defined contribution system in 1997.  State employees hired before that could remain in the old DB system, but all state workers hired since that date have only had an option of a DC plan.  A recent study conducted by the National Institute for Retirement Security found that both the state and its workers may have been better sticking to the old system.

The study found that, at the time MSERS was converted from DB to DC, it was over 100% funded.  This means that it had no unfunded liabilities and was a healthy system.  As of 2012, it had dropped to only 60% funded and had accumulated over $6 billion in unfunded accrued liabilities.  The economic improvement over the last few years has buoyed the system so that today it is 77% funded (and hopefully it will continue to improve), but it still belies the notion that closing the old system would provide a cost saving to the state.

Even more troubling was what the study found about members in the new defined contribution plan.  It showed that the average state employee in the DC system has accumulated only $50,000 in retirement savings.  Moreover, employees nearing retirement age (60+) have only an average of $123,000.  That figure, when annuitized, would provide approximately $8,000 per year for the worker’s retirement.  This compares to the average $20,000 that state employees in the old system receive per year. 

The private sector has largely abandoned traditional pensions over the last few decades, replacing them (if they are even replaced) with 401(k)-style personal retirement accounts.  While there are some advantages for the employee with a defined contribution system (such as portability and the ability to choose one’s own investment strategy), they come at the cost of higher administrative costs and a huge amount of uncertainty.  The NIRS study found similar statistics for other major pension systems that had been shifted from DB to DC including the West Virginia Public School Pension System and the Alaska State Employee Pension System. 

Voters to Decide Fate of Transportation Funding

For the past few years, Governor Snyder and the Michigan Legislature have worked on a variety of options to address Michigan’s crumbling transportation infrastructure.  After last winter, the condition of Michigan’s roads and bridges made the issue even more urgent.  Both the Michigan House and Michigan Senate passed competing proposals throughout the year, but were not able to reach agreement on any solution that would avoid a constitutional change.  After a wild and frantic lame duck session, the Legislature finally sent to the Governor a package that will only come to fruition if it is approved by the voters in a May election.

In the run-up to the final version, both the House and Senate generated proposals that would have been devastating to public education, local governments and public transportation.  Opponents of tax increases called for shifting funds from the School Aid Fund and the General Fund to help pay for road and bridge repair.  However, few of those proposals explained how the School Aid Fund would absorb the hit or which programs supported by the General Fund would be diminished or eliminated to pay for the transfer.  Fortunately for those who depend on General Fund dollars, the Legislature chose a path that avoided cuts to other programs to fund transportation.  Unfortunately, the Legislature’s solution will need to go before the voters in May in order to be adopted.  Anti-tax and anti-government billionaires are already opening up their wallets to convince the Michigan electorate to say “no” to this proposal, and it will be a challenge to help voters separate fact from fiction.

Here are the facts of the proposal.  If passed, it will:

• Transform the current per-gallon motor fuel tax to a wholesale motor fuel tax;

• Eliminate the existing Sales Tax on motor fuel;

• Increase the Sales Tax from 6% to 7%;

• Restore the Earned Income Tax Credit;

• Increase auto registration fees, including a special assessment on electric vehicles.

The resulting changes will create approximately $1.2 billion for road and bridge funding, $300 million for public education, $100 million for public transit, $100 million for local governments, and $260 million for the Earned Income Tax Credit (the last of which is actually a tax reduction for working families).

The voters will decide whether to approve or kill the proposal on May 5.