May Legislative Report by Todd Tennis of Capitol Services
The last month has been a whirlwind of conflicting budget numbers and proposals between the House, Senate and Governor Snyder. Complicating the annual appropriations process has been the agreement between Speaker of the House Tom Leonard and Senate Majority Leader Arlen Meekhof that the greatest threat to Michigan at this moment are public school pensions. Both leaders have threatened to hold up the budget process until Governor Snyder relents on their plan to spend $40 billion over the next 40 years to shut down the Michigan Public School Employees Retirement System (MPSERS).
Elsewhere, legislative appropriations leaders are wondering how the school pension fight will affect their final target numbers. Even without that uncertainty, there are several areas of major disagreement between the House and Senate on budget priorities. It looks increasingly likely that, for the first time in 6 years, the appropriations process will not be finished by June and could even extend into September.
MPSERS Issue Top Priority of Republican Legislators
Just over 20 years ago, Governor Engler signed into law legislation that closed the State Employee Pension System and shifted new hires into a 401k-style defined contribution plan. Now, Michigan lawmakers are aiming to make the same change for school employees, and ignoring the major lessons learned from twenty years ago. Moreover, the price tag for closing MPSERS is staggeringly high – $46 billion spread over the next 40 years – and if they are successful, the closure will have a major negative impact on state budgets for the next generation of state employees.
Proponents of Senate Bill 401 and House Bill 4647 claim that unfunded liabilities in the MPSERS plan are the greatest threat to Michigan’s future. They warn that if the plan is not closed immediately, those debts will one day bury the entire state. They point to a snapshot of the last 10 years where the fundedness level for the MPSERS plan has dropped from 90% to 60%, with liabilities climbing to $29 billion.
What they fail to acknowledge is that nearly every pension system in the country has accumulated debts over the last 10 years due to the fallout from the Great Recession. Moreover, the MPSERS system has also been beset with policy decisions at the state level that added to its liabilities. First, the expansion of charter schools and increased privatization has drastically reduced the number of active employees paying into the pool. Second, an early retirement plan passed in 2010 created a large amount of unfunded liabilities in order to save money for the budget in that fiscal year. Third, the fund would have seen reduced debts starting in 2017 if a decision to lower future assumed rates of investment returns had not been made. While that decision will be helpful in the long run, it added immediate liabilities to the system giving the impression that it is continuing to spiral downward.
In short, some legislative leaders in Lansing are panicking and are promoting legislation that would close the system and cost the state billions of dollars. In essence, they are willing to pay more for a retirement that offers fewer benefits to employees, all the while racking up huge costs for the state. The House and Senate Fiscal Agencies predict that in 2018 alone the cost will be over $400 million, and that number will go up every year for decades. Closing MPSERS will have the effect of draining the state of every new dollar in revenue for years to come and forcing drastic cuts to every state department.
Not only would this change be devastating to the state’s bottom line, it would force future school employees into the exact same 401k plan that state workers have been in since 1997. This is the plan that the National Institute for Retirement Security found was providing a benefit nearly a third less valuable on average than the previous State Employees Retirement System pension. Even worse, state workers average savings in the 401k plan were hugely impacted by the Great Recession, with many state workers seeing their retirement nest eggs all but wiped out. State lawmakers are apparently willing to gamble the same way with school employees’ retirement benefits, and pay billions of dollars to do it.
So far, Governor Snyder has been unwilling to back this legislation, citing changes made to MPSERS in 2010 and 2012 that have already drastically reduced benefits and shifted a great deal of future risk from the state to school workers. The Governor has stated that the new hybrid plan offered to school workers is working as intended, is 100% fully funded, and provides a minimum guaranteed retirement benefit that will ensure a level of security for school employees. He is also leery of spending hundreds of millions of dollars just over the next few years to fix a nonexistent problem – money that could be spent on a number of other priorities including roads, state facilities and health care.
House and Senate Republicans are getting the hard sell on this plan from groups such as Business Leaders of Michigan, the Mackinac Center for Public Policy, the Reason Foundation, and other organizations funded by out-of-state billionaires like former Enron executive and current hedge fund manager John Arnold. At last count, there are many Republican legislators in the House and Senate who are not convinced that closing MPSERS is necessary and who are very worried about the massive impact on the state budget. They join unified Democratic legislators in opposition to this plan. Over the next few weeks we will see if Speaker Leonard and Senate Majority Leader Meekhof can twist enough arms to glean the votes needed for passage.
Budget Discussions Difficult with Much Uncertainty
Earlier this year, House and Senate Appropriations committee members were instructed to look for major cuts in the 2017-18 budget. Since February, the House and Senate Appropriations Committees have been snipping millions and millions of dollars from Governor Snyder’s budget proposal. Rumors were that they were looking to reduce spending in order to pay for cut to the Michigan Income Tax. However, after the House failed to get the votes to pass such a tax cut earlier this year, many observers expected that those funds would be put back into the budget to restore many of the Governor’s spending priorities.
Instead, the House and Senate leadership shifted their focus on using those funds not for a tax cut, but rather to close the public school pension system (see above article). Complicating matters further were the results of the May Consensus Revenue Estimating Conference which found that the state was well short on predicted General Fund Revenue. The Conference did determine that the state was ahead of predictions for School Aid funding (which mostly comes from the Sales Tax) so overall the budget numbers were practically a wash. Still, while General Fund revenues can be spent on anything, School Aid revenues for the most part must be spent on public education. Backers of closing school pensions are arguing that those School Aid funds should be spent to pay for closing MPSERS.
Even without the cloud looming over the budget process from the school pension fight, there are many areas in which the House and Senate are finding disagreement with each other. Perhaps the most prominent of these centers on the Department of Corrections, where Senate Subcommittee Chair John Proos (R-St. Joseph) is propping a $40 million reduction to the Governor’s budget. Senator Proos argues that the cut is warranted based on prisoner population numbers. MDOC Director Heidi Washington disputed those findings, stating that such a funding reduction would force elimination of 387 staff members, on top of the 555 vacancies the department currently has. She claimed that such a move would jeopardize the safety of staff and inmates alike.
Funding for every department remains up in the air until the Legislature determines whether or not to close the school pension system, whether or not to try for another tax cut, and, failing those options, whether or not to place more money into the Budget Stabilization Fund in order to revisit those issues (and maybe others) over the next fiscal year. Most state employees are likely hoping that the situation will be resolved by moving closer to Governor Snyder’s budget proposal, which had modest increases for most departments. It may be September before we know for sure.
Safe Staffing Bills for Nurses Introduced
Legislation seeking to ensure minimum nurse-to-patient ratios and prohibit mandatory overtime for nurses in all but emergency situations have been introduced in the House and Senate. House Bills 4629-4631 and Senate Bills 387-389, were introduced by Representatives Hoadley (D-Kalamazoo), Chang (D-Detroit) and Miller (R-Sturgis); and Senators Warren (D-Ann Arbor), Casperson (R-Escanaba) and Hune (R-Whitmore Lake). The bills would require hospitals to develop a safe staffing level plan with minimum nurse to patient ratios depending on the type of care being provided. The bills would also prohibit hospitals from requiring nurses to work mandatory overtime with exceptions for emergency situations.
The bills at this time only cover private hospitals and do not include state-run hospitals. However, the bill sponsors have indicated a willingness to amend the bills so that state-operated facilities are included in the requirements. The bills were referred to the House and Senate Health Policy Committees.