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LANSING UPDATE

From: Ellen Hoekstra
Legislative Update
November 17, 2011

AFT Michigan Retirees Lansing Update
November 2011

For school employees and retirees, the biggest concern is that some of the contents of the state employee retirement bill currently moving through the legislature will be included into legislation that will affect them as well. For retirees, it should be some comfort that nothing in the state employee bills --HB 4701-2, introduced by Representatives Bill Rogers R-Brighton) and Chuck Moss (R-Birmingham) respectively--affects current state retirees. The House passed these bills with a 63-45 vote that fell along party lines. The legislation is improved from the Governor's original proposal, chiefly because it does not eliminate health benefits for the current defined contribution employees. However, there are still major problems with it, including:

• Elimination of retiree health care for employees hired after January 1, with the substitution of a 2% matching plan that will do little for any but the highest income state employees;
• Elimination of future overtime pay as part of compensation within the final average compensation (FAC) for employees who are in the defined benefit plan--including mandatory overtime, which is common for state employees, particularly at state prisons and hospitals; and
• Requirement that defined benefit plan members pay 4% of their compensation so that they can continue to accrue service credit in the defined benefit plan, rather than being shifted to the defined contribution plan for the remainder of their careers.

The bills were referred to the Senate Appropriations Committee, whose Chair, Senator Roger Kahn (R-Saginaw), has introduced a counterpart to HB 4701 in SB 408. The Appropriations Committee's Subcommittee on Retirement has had one hearing on the House-passed bills and has another scheduled for November 22. At this point, we understand that no action will be taken at this subcommittee meeting, just more testimony and discussion.

What Next for School Employees Retirement?

It does not appear that the House and Senate Republican caucuses have agreed on a common approach. A number of concepts have been examined by senators interested in the issue, including Senators Pavlov (R- St.Clair) and Jansen (R-Grand Rapids). Additionally, Senator Rick Jones (R-Grand Ledge) has introduced SB 593, a bill that would transition MPSERS into a purely defined contribution system--despite that fact that the Michigan legislature just recently passed legislation placing newly hired school employees into a hybrid pension plan, that is, one with a limited defined benefit plan and a defined contribution component.

On the House side, a work group has been set up on the topic, with Representatives Chuck Moss (R-Birmingham), Rogers (R-Brighton), Olson (R-Saline), and Farrington (R-Utica) participating. What we have been hearing thus far suggests that the House members have been focusing on whether they should move future school employees into a defined contribution plan but not on removing school employees from retiree health care. Representative Moss, who chairs the House Appropriations Committee, has stated publicly and clearly that once the state employee retirement legislation is completed, school employees are "next".

From a retiree's perspective, it would not be good to have all future employees in a defined contribution plan. Why? Because that would result in the defined benefit plan becoming a "dying" plan, with negative implications for investment policies.

Other Legislation
Senator Jansen, along with a dozen co-sponsors from both parties, has introduced SB 797, legislation that essentially combines the proposed pension fund investment changes of last session's HB 5323 (Rep. Hammel) with the Governor's proposed changes in local pension board reform. Most of the changes to investment caps in the bill affect only local plans, but there are three that also affect the state's funds: an increase in the allowable investment in foreign securities from 20 to 30%; an increase in the basket clause from 20-30% and the ability to invest an additional 5% in private equity but only if it is Michigan private equity. The bill was sent to the Senate Appropriations Committee, where it will almost certainly first be heard by the Subcommittee on Retirement.

We are approaching the implementation of the changes in the state income tax law that affect how both private and public pensions are treated. This is one of those rare times when people are glad to have been born before 1946 because those retirees will see no increase in their taxes. Beginning in January, MPSERS will begin to withhold from retirees' pension checks,based their exemptions on whatever an individual is using for federal taxes. If you do not want to use the same exemptions for MPSERS withholding, you should contact them prior to December 23. For more information, please go to http://www.michigan.gov/treasury and then to the "Michigan Tax Changes Information" link.

October MPSERS Meeting

The MPSERS Board met on October 20 and dealt with several items of particular interest. First of all, the Board heard a presentation from Gabriel Roeder Smith & Company, the system's actuarial firm, to determine what retiree and dependent rates and premiums will be in calendar year 2012 for medical/prescription drug, dental, and vision coverage. Essentially, overall rates for medical/prescription drug are flat due to the changes made by the MPSERS Board and due to the fact that historical plan trends have been lower than historical national health care trends. Vision costs are going down but dental costs are going up. The total per member premium costs will go from $3.48 to $3.63 per month, a 4.3% increase.

The Board also had a presentation by Catalyst, the company that handles prescription drugs for MPSERS, regarding the managed prescription drug program. Despite an 11% growth in membership since 2007, the total prescription drug cost in 2010 is actually 2.4% less than in any of the preceding three years, with the cost per member per month having decreased by 7.1% during this same time period. This is despite the increase in name brand prescription drug costs. The lowered costs are mainly due both to the greater use of generics and the continued focus on "lowest net cost" approach to formulary and management programs. The biggest future challenge is the increase in cost of "specialty drugs."

Ellen Hoekstra
Capitol Services, Inc.
November 17, 2011