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LANSING UPDATE

From: Ellen Hoekstra
Legislative Update
March 2009
UPDATE ON PUBLIC PENSION ISSUES

Status of Retirement Supplement Legislation
The status of SB 255 (Sen. Wayne Kuipers, R-Holland) and HB 4285 (Rep. Fred Miller, D-Mt. Clemens), the retirement supplement bill for employees covered under MPSERS, is that both bills remain in committee. However, the word on the street is that these bills will soon be declared officially "dead".

The bills would have permitted employees covered by the Michigan Public School Employees Retirement System (MPSERS) to retire with a 2% final average compensation rather than a 1.5% during a one-year time period. A $1.5 billion cost cap would restrict the impact of the bill to about 14.629 employees (around 9000 MPSERS members retire in a typical year and 55,000 school employees are eligible to retire currently). The thinking is that priority would go to those employees with the greatest number of earned service credits (as opposed to purchased service credits).SB 255 has had two hearings before the Senate Education Committee, chaired by Senator Kuipers. HB 4285 has also been heard before committee on the House side; however, the chair of the House Education Committee, Rep. Tim Melton (D-Auburn Hills) has said that he wants to see Senate action on the bill before the House goes further on the legislation. Senator Kuipers has made it clear that he will not act on the bill unless he is convinced that there is good evidence that implementing this one-time measure will not cause major financing problems for employers in the future.

The Governor has indicated that she is not in support of the legislation as introduced. The administration has floated as an alternative a one-time pool of funding with a match required from those employers who wanted to have some kind of incentive available to their employees. A meeting that had been scheduled for the Senate Education Committee for last Thursday on the bill was cancelled to allow the Senate Fiscal Agency more time to develop alternatives that are less costly. At a previous meeting, an alternative version of the bill that would increase the multiplier to 1.75% was discussed.

Proponents of the legislation contend that school districts and community colleges would save money by replacing older retirees with new college graduates and that the proposal would enable them to avoid laying off younger employees. Opponents of the bill counter that contention by pointing out that early retirement options generally save money only if they do not replace the retirees and that the costs to finance the additional years of retiree health care would be onerous for all employers and unfair to those who did not have anyone utilize this provision. The other question that has arisen is why the legislation is needed at all, given the large proportion of MPSERS members who retire within four years of eligibility. No one disagrees that there are costs to the proposal, which would be paid by school districts, community colleges, and certain universities in the future. In its "costing out" of these proposals, analysts are proposing that the costs be spread over a five year period, which is general practice for a onetime benefit.

Legislators involved with this bill had agreed that if they are not able to reach agreement on this bill soon that they will declare it dead, and--as mentioned--we expect that to happen soon. One unintended consequence of the introduction of this measure has been that the number of employees retiring has dwindled to a trickle. A decision must be reached so that school employees considering retirement can get on with their lives.

Trust Fund Legislation Pass the House
Legislation regarding the funding of public retirement system health care benefits--that underwent substantial discussion and revision last session--has now passed the House and been referred to the Senate Appropriations Committee. We expect the Subcommittee on Retirement, chaired by Senator Mark Jansen (R-Gaines Twp.) to address the legislation first before it goes to the full Senate Appropriations Committee.

The bill creates the Public Employee Retirement Health Care Funding Act to set up and create five different irrevocable trusts under Section 115 of the Internal Revenue Code. One of the trusts is for the Public School Employees Retirement System. Each trust must be managed separately with services provided by the Departments of Management and Budget, Treasury and the Attorney General to provide services as needed by trustees. The governing board of each retirement system is the trust grantor, and the members of each retirement board act as trustees.

While the bill does not change retiree health benefits, it creates the legal framework for an irrevocable trust for the deposit of funds for retiree health care benefits. All funds deposited must be invested in accordance with PA 314 of 1965. In essence, the legislation sets the groundwork for prefunding retiree health benefits so that, like your pension fund, prefunded dollars can growth through investment, as opposed to the current "pay as you go" system. Also, the wording of the house passed bill provides that members and past members have contractual rights to a health care benefit provided in statute at the time of their separation from employment--one step towards overturning the Supreme Court ruling that retiree health care benefits are not protected by the state constitution. AFT Michigan strongly supported this addition to the legislation.

Along with HB 4073, a series of other bills passed the House that would place all of the state run retiree group health care plans and the legislative retirement system under the Office of Retirement Services, which currently administers the MPSERS system, the largest of the state operated systems. The bill making this change for the state system was opposed by state retirees, but the legislation was approved by the House nonetheless. Other systems affected by this change include the legislative, state police, and judges' systems. These bills are also now in the Senate's hands and we expect no action on them until at least mid April.