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LANSING UPDATE

From: Ellen Hoekstra
Legislative Update
Date: April 11, 2008

Status of Efforts to Prefund Retiree Healthcare
As a result of some recent changes in the accounting reporting rules (GASB) that all public retirement systems are to follow, those units of government in Michigan that offer retiree health benefits under a "pay as you go" system are concerned that following these new rules will affect their bond ratings and cause bonding costs to go up. Essentially, the new GASB rules require such conservative accounting that the unfunded accrued liability-- i.e., the debt that they have to report-- will appear much greater than under past standards. All of the state operated pension systems, the legislative pension system, and most local units of government that provide retiree health care do so on a pay as you go system, so the issue is statewide. The GASB rules have actually given the issue of prefunding public pensions, long supported by AFT Michigan, somewhat of a jump start.

As a result of concerns over the GASB rules, the Michigan House leadership has been looking for a vehicle-- some kind of legal entity-- to pre-fund retirement benefits for future retirees in all systems managed by the State of Michigan, the largest of which are the school employees' and the state employees' pension plans. As a means of accomplishing that goal, the House Retirement Health Reforms Committee has taken up HB 5913 (Rep. Richard Hammel, D-Flushing), which-- in its substitute form-- seeks to set up five 115 trusts, one for each of the state operated and the legislative retirement fund and to set up two mechanisms under these trusts: a funding account to prefund GASB liabilities and a medical reimbursement account.

AFT Michigan and most if not all labor groups would strongly prefer that the legislation deal only with prefunding, not with the medical reimbursement accounts. That matter aside, there are many complex legal questions relative to 115 trusts that require some careful examination to answer. Probably the most important question is whether it is possible to have the legislation drafted in such a way that we will not see a repeat of what happened previously: the prefunding accounts being used to pay current retirees' health care costs. If it is possible to draft legislation that would at least statutorily guarantee protection against such raiding, how must it be worded? Other important questions include how to word the language regarding fiduciary standards for the trustees and how to craft language that will come as close as we can in statute to creating a contractual right to retiree health care, something that recent state Supreme Court decisions have moved us further away from. AFT Michigan will be taking a careful look at some of the legal elements of these trusts.

Committee chair Mark Meadows held a workgroup on HB 5913 (H-1) last week. AFT Michigan was an active participant in this meeting, at which issues in the draft bill were discussed, but many not yet answered, as indicated above. At the end of the meeting, Rep. Meadows indicated that there would be a new substitute bill developed with some of the changes discussed. He also indicated some willingness to keep the bill in committee while changes are worked on, which was the preference of all the interest groups attending. There was discussion regarding how these vehicles might be funded but certainly no resolution by the end of the meeting. We will continue to keep AFT Michigan retirees updated on this issue.

Prepared by Ellen Hoekstra at Capitol Services, Inc., April 11, 2008