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LANSING UPDATE

From: Ellen Hoekstra
Legislative Update
September 16, 2011

September 2011 Update for AFT Michigan Retirees

School Employee Pension Bill Introduced

Senator Rick Jones (R-Grand Ledge) has introduced SB 593, which would transition school employees into defined contribution pension plans. Legislation enacted last session placed newly hired school employees into a hybrid pension plan, with slimmed down benefits for these new employees. Apparently that did not go far enough! Essentially SB 593 creates a "Tier 3" defined contribution retirement plan that employees hired on or after July 1, 2011 would enter. The bill also permits Tier 1 and Tier 2 employees to opt into the Tier 3 plan, a defined contribution plan similar to those which state employees hired after 1997 have been in: a mandated 4% by the employer, with an optional member contribution up to 3% that the employer must match. The vesting schedule would be 50% after two years of service, 75% after 3 years, and 100% after 4 year. Members in Tier 3 would, like state employees in that system*s defined contribution plan, also continue to be eligible for retiree health benefits as well as for duty and non-duty disability.

The bill was referred to the Senate Appropriations Committee, which has a subcommittee on Retirement, chaired by Senator Mark Jansen (R-Grand Rapids). Other members of that subcommittee are Senator Bruce Caswell (R-Hillsdale), Patrick Colbeck (R-Canton Twp.), and Morris Hood (D-Detroit). Thus far, we have no indication that this bill will be taken up quickly. We also do not know whether this will be the *favored* approach to school employees* retirement benefit changes by the Senate Republicans and are aware that Senator Phil Pavlov (R, St. Clair) is also drafting legislation to reduce the cost of school retirement benefits to employers. A lot of options are still under discussion, so stay tuned!

Supreme Court Hears Pension Tax Arguments

On September 7, the Michigan Supreme Court heard oral arguments regarding the constitutionality of taxing public pensions, with particular focus on whether PA 38 created a graduated income tax. State Solicitor John Bursch argued that the law was constitutional, but Assistant Solicitor Eric Restuccia argued that it was unconstitutional if the exemptions created a constitutionally prohibited graduated income tax. In their questions, the justices referred repeatedly to the transcript of the 1961 Constitutional Convention on the question of graduation. The expedited hearing on the issue came at the request of Governor Snyder.

Administrative Issues Affecting Retirees

At its July 28 meeting, the Michigan Public School Employees Retirement System Board reviewed its annual actuarial report, with cautious optimism for the long term, given that the plan going forward is more financially conservative in contribution and benefit levels. Because of an aging workforce, plan demographics are accelerating, requiring greater liquidity in investment funds, and thus restricting investment options to a degree.

At the same meeting, the Board approved the MPSERS health benefit plans to meet its long term goal of limiting cost increases to the compound rate of inflation plus real economic growth, while maintaining a health plan affordable to both retirees and employees. AFT Michigan signed off on these changes because they will have relatively modest cost increase for retirees and hopefully will stave off move draconian reductions. Of the estimated $48-$68 in annual savings, the first of these changes provides the bulk of the savings, somewhere between $34 to $40 million:

• 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. There are no added costs to members and no difference in how scripts will be filled, although all members will be getting new prescription cards before January 1, 2012.
• Eliminating prescription coverage for Proton Pump Inhibitors now available over the counter at less cost than current member co-insurance.
  
• Eliminating coverage for prescription medication for erectile dysfunction, although members can still use the retirement system pharmacy card to purchase these drugs at a negotiated discount.
  
• Increasing the Medical Coinsurance Maximum from $700 to $800 and the deductible from $400 to $500.

The Investment Advisory Board had its quarterly meeting on September 1 to review investment performance of all the state administered pension funds for the last quarter, as well as current asset allocation. Discussion centered in the impact of sovereign debt (in Europe as well as in the US) as well as the negative impact of decisions made ten years ago not to move into small and mid-sized caps, in addition to the focus on value that missed the run-up in growth. Finally, there was a great deal of conversation about the fact that with the exception of absolute return, many other financial sectors now correlate more strongly with the publically traded markets, making it more challenging to diversify to protect pension funds against market downturns.

By: Ellen Hoekstra
September 16, 2011