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LANSING UPDATE

From: Ellen Hoekstra
Legislative Update
November 2008

SB 1450 Reported Out of Senate Education Committee

SB 1450, legislation permitting community colleges to withdraw their employees from the school employees' retirement system, was reported out of the House Education Committee on a party-line vote before the legislature recessed for the Thanksgiving holidays.

This vote took place despite the Department of Management and Budget providing information to explain that a new defined contribution plan will be more expensive for community colleges. In fact, the defined benefit plan offered by the Michigan Public School Employees Retirement System (MPSERS) is a good value and cheaper than the defined contribution plan offered by the state. When PA 11 took effect on July 1 of this year, the employer normal cost of the defined benefits plan for new hires fell to merely 4.21% of payroll, an approximately 22% reduction in normal cost for both school districts and community colleges. By contrast, the state employees defined contribution plan costs 6.55% of payroll, 2.34% of payroll more than the MPSERS defined benefit plan. Thus, the employer's normal cost of the defined contribution plan for state employees is 55% more than the MPSERS cost for new hires. The main reason for this difference is that MPSERS is a contributory plan, whereas the state employee plan is not. For community college and school employees hired after July 1, the employee contribution costs increase to 6.4%.

Other major arguments against the bill include the fact that:

• The unfunded accrued liability (UAL), which is the debt that employers need to pay off, does not go away if this bill passes. If certain community colleges do not pay their fair share, these costs will shift to other community colleges and to K-12 and intermediate school districts.
• The bill is unfair to universities which since they left the MPSERS retirement system in the mid 1990's have continued to pay for their unfunded pension costs as well as their retiree health care benefits.
• Educational employees who move between school districts and community colleges now can do so knowing that their pension benefits travel with them. If this bill passes, that would not be true.
• Every time members leave a defined benefit pension plan, the costs of investing the funds and administering the benefits increases for the remaining members.

Please urge your senators to vote "no" on this bill.
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HB 6500 Would Enhance Asset Diversification for Public Pensions

The investment of your pension funds, as well as all other public pension funds in the state of Michigan, is done in compliance with the standards established by PA 314 of 1965. Periodically, the provisions of this act including asset allocations are reviewed and updated by the legislature to enable public pension funds to enhance their earnings in a manner that is prudent. This law has been updated in 1982, 1996, and 2000.

That is precisely what HB 6500 does, as does its senate counterpart, SB 1573 (Sen. Mark Jansen, R-Grand Rapids). The act applies to all public pension plans in the state, including the ones for whom the State Treasurer is the fiduciary, and the bill updates asset allocations both for those systems and for local ones. Changes that the bill makes include permitting increases in asset allocations for real estate investment trusts (REITs) or other forms of real estate investment, allowing funds to "form and invest in" rather than simply create limited partnerships and other entities to hold or operate real or personal property. The legislation also permits the State Treasurer to increase investments in investments not otherwise qualified under the act and in foreign securities. The bill allows both the state treasurer and local plans to invest in certain derivatives to enhance portfolio performances. Additionally, the bill removes private equity from the "basket clause" and sets it up as its own asset class.

The State Treasurer and his Bureau of Investments is very interested in some judicious expansion into private equity companies to diversify pension fund investments; private equity companies have been profitable investments for public systems, which have seen their publically traded equities, plummet this year. One example of a Michigan-based private equity company is Chrysler Cerberus. As we face a year in which we expect both state and local revenues decline, being able to invest more profitably would be very important. Please let your senators know that HB 6500 is important to your pension fund!

Other Public Pension Legislation of Interest

• Legislation is moving quickly through both the House and Senate to bring the state's public pension plans into compliance with the federal Pension Protection Act, passed in 2006. Although the changes are purely technical in nature, they are necessary to preserve the tax exempt status of the plans. The senate bill affecting MPSERS is SB 1638 (Senators Jansen, R-Grand Rapids and Switalski, D-Roseville), and its house counterpart is HB 6638 (Rep. Hopgood, D-Taylor).
• Representative Rebekah Warren (D- Ann Arbor) has introduced HB 6712, which would provide for post-retirement increases for older retirees, with the amount of increase determined by how long the individual had been retired. We appreciate Rep. Warren introducing this bill to help "catch up" older retirees.

By Ellen Hoekstra, Capitol Services Inc., for AFT Michigan
November 24, 2008