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LANSING UPDATE

From: Ellen Hoekstra
Legislative Update
Date: March 17, 2008

115 Trusts-A Vehicle for Pre-funding?

One of the main reasons that there is a new House committee called "Retiree Health Care Reforms" is due to new General Accounting Standards Board (GASB) rule changes. These changes require all governmental retiree health plans to report their unfunded accrued liability and to do so in a way that is extremely conservative. For example, the assumptions include assuming that Medicare will be around for only one more year. These rules will inflate the size of the liabilities, causing this debt to appear substantially larger than it would be under more typical actuarial assumptions. According to rating agencies, if governments do not take steps towards reducing these large liabilities, it could negatively affect their ability to bond, which could increase costs at every level of government in Michigan.

The House Retiree Health Care Reforms Committee is trying to set up a framework that would enable prefunding to begin. 115 Trusts are set up under the Internal Revenue Code to protect funds that have been set aside for funding of future retirees health care. Only governmental units may set them up. The committee is reviewing a draft of legislation to fund five trusts: SERS, MPSERS, JRS, SPRS, and LRS. Two major issues are whether in addition to setting up prefunding accounts, the legislation will also set up medical reimbursement accounts, and whether there are any mechanisms to begin actually putting funding in. We will be actively involved in discussion on these bills.

Senate Retirement Subcommittee Holding Hearings

The Senate Appropriations Retirement Committee has begun holding hearings to gain background on all the various public retirement systems. This subcommittee has not met for many years. At this point, the subcommittee is at about the point the House Retiree Health Care Reforms Committee was last fall. Recently higher education groups testified in front of the subcommittee. The "MPSERS Seven" "as they c all themselves" testified that they are appalled at how much they have to spend on retiree costs, including retiree health care, given that for many years, new hires at these universities have been statutorily excluded from belonging to MPSERS. They seem to forget that they were the ones that asked to exclude new hires and apparently did not realize the extent of the unfunded accrued liability that would remain with them.

Speaking of appalling, at the same hearing, the Michigan Community College Association spoke asking that their new hires be excluded from MPSERS. They argued that it was a good idea because these new hires could then become members of the Optional Retirement Plans, which have no retiree health benefits; thus, this move would save community colleges a great deal of money. As part of the defense for their position, they pointed out that some of their employees had no health care benefits.

Fortunately, the subcommittee did not seem inclined to move forward with either measure, but we will need to keep an eye on these efforts.