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LANSING UPDATE

From: Ellen Hoekstra
Legislative Update
June 21, 2011

June Updates on Pension Issues

Does it seem like just last month when legislators were "reforming" public employee pensions? That's probably because it was nearly that recently when the previous Governor and legislature decided to implement early retirement incentives for both school and state employees which have increased employer contributions over the next five years). The new legislation also reduced pension benefits for new hires and imposed a 3% contribution for retiree health care that is being challenged in the courts.

We have heard numerous rumblings about legislators considering changes to school employee pension benefits to make them less costly, but so far no bills have been introduced except for a couple that affect community college employees and will be described later in this report.

The same is not true for state employees, whose pensions were already reduced below those which school employees receive under legislation implemented under the Engler Administration. All state employees hired since 1997 receive a defined contribution pension--not the hybrid "defined contribution/defined benefit recently enacted for newly hired school employees but ONLY the 401k. At the time that state employee legislation was enacted, state employees were assured that the new hires would continue to receive identical health benefits as their predecessors.

Unfortunately, the new legislation would go back on that "promise" and replace the retiree health insurance for all of those newer retirees with a Health Retirement Account. The amount of funding the state would contribute to the HRAs is higher for longer-term defined contribution members and drops down to a one-time total of $2000 for employees with less than four years of service and new hires. That's right--one payment of $2000, given one time, upon the employee's retirement, to replace a comprehensive retiree health benefit plan.

The proposal also has a number of other negative features, including implementing a "voluntary" contribution of 4% for members in the defined benefit plan-more of a coerced 4%, since if they don't pay, their benefits will be diminished.

This legislation--HB 4701 (Rep. Bill Rogers, R-Brighton) and HB 4702 (Rep. Chuck Moss, R-Birmingham)--has has one hearing before the House Appropriations Committee. At that hearing, state employees learned one good thing: these bills are not on a fast track. They also learned one bad thing: although the 4% "saves" the state $50 million in the first year, only $25 million gets counted towards the $145 million in further concessions they are supposed to bear.

How is this relevant to school employees and retirees? Clearly, these bills that affected the second largest state operated pension plan could set a major, and very bad, precedent for MPSERS, the largest state operated plan.

Governor Fast Tracking Pension Tax Ruling

In other major public pension related news, the Governor has staged a pre-emptive strike on the anticipated constitutional challenges to the recently signed taxation legislation, PA 38, which included a significant "pension tax" component. The objective was obviously to clear the way to collect the new revenue expected from this and other sources in that comprehensive piece of legislation. To no one's great surprise, the Supreme Court has agreed to hear the arguments regarding whether PA 38 violates the constitutional protections against the diminishment or impairment of public pension benefits. They will also review the issues of whether the enacted changes create a graduated income tax and whether defining if a person is exempt from taxes on his or her pension based on age violates equal protection provisions in the U.S. Constitution. The hearings will take place on September 7.

Community College "Retirement" Bills

Two bills have been introduced that could impact community college employees' pension benefits. On the House side, Rep. John Walsh (R-Livonia) has introduced HB 4420. This bill, which is a reintroduction, amends the retirement act to permit public community colleges to "opt out" of MPSERS, if they do so prior to December 1, 2011. This bill was originally referred to the House Committee on Oversight, Reform and Ethics but was subsequently referred to the Education Committee. There is no requirement in the bill that any alternative pension be provided to the community college employee at a college which opts out, and so this is obviously a very bad piece of legislation.

On the Senate side, Senator Bruce Caswell (R-Hillsdale) has introduced SB 121, which would permit part-time faculty and administrative staff at community colleges to elect the Optional Retirement Program, rather than MPSERS. The optional plan (so far, totally TIAA-CREF) is currently available to full-time faculty and administrative staff at community colleges. This bill was reported from the Appropriations Subcommittee on Retirement to the full committee, which has yet to take it up. On the one hand, the bill would enable a number of employees who do not accrue enough service credit to vest in MPSERS to collect a pension benefit of some kind. On the other, the cost per member to all other MPSERS employees would be increased, should this bill move forward.

Proposed Changes to MPSERS Health Benefits

At the June 9 MPSERS meeting, a number of changes to retiree health care were introduced. The goal is to limit the rate of cost growth to the compound rate of inflation and real economic growth while maintaining a health plan that is affordable to retirees and to employers. The proposed changes are:

• Operating both a base Medicare Prescription Drug plan (PDP) and a second plan known as a "Wrap" to maximize Medicare negotiated discounts on "doughnut hole" claims and to tap Medicare subsidies in the catastrophic range. Although this will be more administratively challenging, there is no additional member cost and retirees will not find any difference in getting scripts filled.
• Eliminating prescription coverage for Proton Pump Inhibitors used to treat conditions like heartburn, ulcers, or reflux and for non-sedating anti-histamines used to treat allergies. Many plans are eliminating coverage for these classes because over the counter options are now available that are less costly than current member co-insurance. Thus, retirees should not experience any cost increase.
• Eliminating coverage for prescription medication to cover erectile dysfunction currently covered at 6 pills per month or 72 pills annually. However, members can use the retirement system pharmacy card to purchase the drug at the negotiated discount price, which is less than the market price.
  Increasing the Medical Coinsurance Maximum from the current $700 to $800 and the deductible from $400 to $500.

The total changes proposed would range from $48 to $68 million. The initial proposal provides the largest share of savings, ranging from $34 million to $40 million. The second and third together would provide $6 to $11 million, and the final, between $8 to $13 million.

We will be participating in meetings to discuss these proposals on July 5 and 8. The proposals then go to the MPSERS Board on July 28.