Neither revenue sharing nor suburb-dwellers caused underfunding
Michigan and its local governments are facing cuts to shore up massively underfunded pension plans. Who is to blame for the problem? According to two recent essays in statewide media outlets, the blame lies with people who move out of cities and a state government that has cut revenue sharing. Neither explanation is correct and an accurate understanding of pension funding shows exactly why, as well as what to do about pensions.
At Michigan Radio, John Austin argues that city residents who leave for the suburbs are like people who run out on a dinner check. “We ordered up a lot of police, fire, parks, libraries, water mains and buses, but many of us left the table before it came time to pay.”
In the Detroit Free Press, Stephen Henderson argues that pension woes are the result of a state government that has reduced its support to local governments: “Adding to the woes in places like Port Huron are so-called legacy costs — promises made to previous employees about retirement benefits that cities have not had enough revenue to fully fund, largely because of state-imposed limitations.”
Both of these assertions are incorrect. Pension underfunding is generated neither by a decreasing population nor by a loss of revenue.
The answer to the question of “Why are pension systems in trouble?” lies in this: Pension benefits are supposed to be prefunded. According to the state constitution (Article IX, Sec. 24), pensions are supposed to be funded as they are earned. No government in the state is supposed to underfund pensions. If pensions were properly funded, they would be protected regardless of what happens to the city’s tax base or revenue streams.
A local government is supposed to set aside an adequate amount to pay for the pensions earned by employees as they are earned. This requires a series of assumptions about how much to put in the system based on when employees are going to start collecting their pensions and how long they are going to collect, as well as how much a dollar set aside today — placed in the financial markets — will be worth when they start collecting.
This last assumption is vitally important since we know that markets go up and markets go down. Use more cautious assumptions and you have to set more money in the pension fund; use more optimistic assumptions and you get to put in less money. (And no plan should be managed on the assumption that there will never be a recession.)
Unfortunately, governments in Michigan and across the country have been too optimistic. Investment assumptions tend to be in the 7-8 percent range and governments have struggled to realize such gains.
Governments need to use more conservative funding assumptions or convert to a defined-contribution system where they cannot defer the cost of retirement benefits. In contrast, neither a growing population nor more revenue from the state will prevent pensions from being underfunded.
Read more at www.mackinac.org/pension.
Executive Vice President Mike Reitz and Sen. Orrin Hatch advocate for reform
Mackinac Center for Public Policy Executive Vice President Michael Reitz co-authored an op-ed published in the Detroit News Tuesday. The op-ed – written with U.S. Sen. and member of the U.S. Senate Committee on the Judiciary Orrin Hatch (R-Utah) – explains why Michigan lawmakers should begin to address overcriminalization by adding a criminal intent provision to laws that are silent on the matter.
Michigan has thousands of regulations on its books that carry criminal sanctions, meaning people can be thrown in jail for unobjectionable acts they never realized were illegal. Reitz and Hatch draw attention to the story of Barry County resident Lisa Snyder, who was almost jailed after agreeing to watch her neighbor’s children before school so the neighbor could go to work. She was accused of operating an unlicensed daycare facility, something that could have landed her in jail.
Snyder’s story demonstrates why it is so crucial lawmakers impose a criminal intent requirement. Reitz and Hatch write:
Many laws fail to specify a criminal intent requirement, leaving people vulnerable to prosecution for committing a crime without intending to do so. For centuries, the legal system recognized that a crime consists of both a wrongful act and criminal intent on the part of the criminal. Words like “intentionally,” “willfully” and “recklessly” were commonly used to differentiate between an accident and an intentional, criminal act. This ensured that individuals were penalized according to their mental culpability.
Read the complete op-ed at the Detroit News.
Two bills passed by Michigan Senate will protect small businesses
The Michigan state Senate recently passed two bills that would preserve the independence of small businesses and their employees’ rights to decide for themselves whether to unionize. The bills — SB 492 and SB 493 — were approved by the senate on the same day union-backed protesters took to the streets to demand a $15 minimum wage and make it easier to unionize workers at franchised fast food restaurants.
Mackinac Center Director of Labor Policy F. Vincent Vernuccio authored an op-ed published by Forbes on Nov. 23 that explains why the Senate bills are so important to protecting the rights of mom-and-pop businesses:
The unions’ goal is to take away the secret ballot from employees by having corporations like McDonald’s recognize them without an election. Further, instead of having to convince millions of employees in thousands of small businesses to sign up for paying union dues, unions know it’s much easier to engage in one massive campaign across the country and put pressure on one large company.
To do this, they are trying to destroy the independence of thousands of small mom and pop-owned businesses through the federal National Labor Relations Board.
And that is where the Michigan state Senate weighed in, passing two bills that essentially say, “Not in our state you don’t.”
The full op-ed can be read at the Forbes website.
Prohibition by price drives consumers to alternatives
Last week, several health-related nonprofits released a poll that asked 600 voters in Michigan about the idea of increasing the cigarette tax by $1 a pack. The sponsors report strong support for an increase if the funds are channeled to health-related government spending.
But research by the Mackinac Center for Public Policy and others has shown how very high tobacco taxes come with negative unintended consequences — and don’t necessarily improve health outcomes either.
The Mackinac Center research focused primarily on the amount of smuggling these high taxes generate (also called “diversion”). The original 2008 study has been updated several times, and estimates the proportion of cigarettes sold in each state that are smuggled in to avoid high taxes.
For Michigan, the study’s model shows that as of 2013, 25 percent of all the cigarettes smoked here were smuggled in. It shows also that raising Michigan’s $2 per pack tax by 50 percent will almost certainly drive the proportion of smuggled smokes much higher — to 35.1 percent of the total market. This would put Michigan in the top five cigarette diversion states in the nation.
If the goal is to persuade people to quit by raising the price of cigarettes, it is undermined by the increased smuggling that accompanies a tax hike. The amount of new government money flowing into the health care sector from a tax hike is also likely to disappoint proponents.
Those conclusions are supported by other studies, such as one titled, “Do Higher Taxes Reduce Adult Smoking” published in the Journal of Economic Inquiry in 2014. Its authors pointed out that since current smokers have demonstrated a strong preference for the habit they may resort to the illegal market for cigarettes. Their analysis found that tax increases of 100 percent will decrease adult smoking by only five percent.
Nor will a higher tobacco tax have the hoped-for impact on smoking among young people. A 2015 National Bureau of Economic Research study found that, “Youths have become much less responsive to cigarette taxes since 2005. In fact, we find little evidence of a negative relationship between cigarette taxes and youth smoking when we restrict our attention to the period 2007-2013.”
The occurrence of smuggling also means that declines in the sale of legally taxed cigarettes do not necessarily mean fewer people are smoking. A 2005 Journal of Health Economics paper by Mark Stehr, “Cigarette Tax Avoidance and Evasion,” argued that up to 85 percent of the change in legal sales after a tax increase can be explained by tax avoidance and evasion and not by quitting.
A new 2015 study in the journal Marketing Science called “The Unintended Consequences of Countermarketing Strategies: How Particular Antismoking Measures May Shift Consumers to More Dangerous Cigarettes,” finds that higher taxes may cause people to seek products with higher nicotine content. This is especially true of people with lower incomes, they reported.
Mackinac Center research has addressed this substitution effect, citing individuals who switch to “roll-your-own” cigarettes with loose tobacco. People who do so have the option of leaving out a filter, increasing the amount of nicotine (and tar) they ingest.
This is hardly a complete survey of research in the field, and as usual with academic literature the findings can be mixed due to different data sets, time periods and other methodological differences. But the examples above represent some of the most recent or oft-cited scholarly papers on the subject.
None of this, of course, will surprise students of America’s experiment in alcohol prohibition.
The Iron Law of Prohibition states that the more intense the effort to stop consumption becomes, the more powerful the banned product becomes. For 1920s bootleggers, whiskey was where the action was, not beer, because it gave more bang for the alcohol buck.
The same goes for nicotine in an era we have called “prohibition by price”: The product may be legal, but it has been (artificially) priced beyond the reach of many who want it.
Cigarette tax hike advocates should undertake their own review of the evidence before advocating measures that may do more harm than good.
Drone wars, fantasy football, more corporate subsidies
Now with one click you can approve or disapprove of key votes by your legislators using the VoteSpotter smart phone app. Visit votespotter.com and download VoteSpotter today!
The Legislature is on a two weeks break with no voting. Therefore, this report contains several recently introduced bills of interest. Note: There will be no Roll Call Report next week, Thanksgiving week.
Senate Bill 440 and House Bill 4748: Require health department inspection of privatized prison kitchens
Introduced by Sen. Tom Casperson (R) and Rep. John Kivela (D), respectively, to give local health departments the authority to inspect prison kitchens that are run by employees of a private contractor, and require the contractor to pay for these. Prison kitchens operated by government employees would not get health department inspections. Referred to committee, no further action at this time.
Senate Bill 445: Ban local “sanctuary city” policies
Introduced by Sen. Mike Kowall (R), to prohibit local governments from adopting or enforcing a policy that limits officials or police from communicating or cooperating with appropriate federal officials concerning the status of illegal aliens. Referred to committee, no further action at this time.
Senate Bill 450 and House Bill 4726: Repeal 2012 legalization of small fireworks
Introduced by Sen. David Knezek (D) and Rep. Henry Yanez (D), respectively, to repeal the 2012 law that legalized the sale and use of “consumer fireworks” including firecrackers, bottle rockets, aerial spinners, Roman candles, etc. Referred to committee, no further action at this time.
Senate Bill 459: Decriminalize fantasy football betting
Introduced by Sen. Curtis Hertel, Jr. (D), to decriminalize betting on “fantasy football” and other “simulation or educational” games and contests. Referred to committee, no further action at this time.
Senate Bill 465: Authorize legislative vote on EPA-mandated electric generation plan
Introduced by Sen. Mike Shirkey (R), to require the Department of Environmental Quality to submit to the legislature its plan to comply with recent federal greenhouse gas emissions mandates, and prohibit the DEQ from submitting the plan to the feds if the legislature votes to disapprove it within 30 days. The recently imposed federal mandate would reportedly require 60 percent of the state’s coal-fired generator plants to be shut down and replaced. Referred to committee, no further action at this time.
Senate Bill 476: Authorize higher cigar tax
Introduced by Sen. Wayne Schmidt (R), to repeal the Oct. 1, 2016 sunset on a law that caps the tobacco tax imposed on cigars at 50 cents per cigar. Referred to committee, no further action at this time.
House Bill 4698: Authorize drivers license, state ID gender change
Introduced by Rep. Brian Banks (D), to require the Secretary of State to change the gender indicated on the driver's license of a person who requests this if the individual has obtained a sex change operation, or produces a court order authorizing the change in designation, or other official identification to that effect. Referred to committee, no further action at this time.
House Bill 4706: Let state enforce city income taxes
Introduced by Rep. Wendell Byrd (D), to authorize cities and the state Department of Treasury to enter agreements under which the Department could use its full state income tax enforcement powers to enforce the city’s income tax (including Detroit). The bill has been reported from committee and is pending before the full House.
House Bill 4714: Require more corporate subsidy cost disclosures
Introduced by Rep. Jim Runestad (R), to require the Department of Treasury to notify the legislature of the number of claimants for tax credits granted under the former Michigan Economic Growth Authority law, listed by size of the final liability to the state and the amount of foregone taxes attributable to particular firms. It was recently revealed that tax breaks and subsidies granted under this program represent a nearly $10 billion unfunded liability that will not be extinguished almost nearly 20 years. Under current law, key information about these special deals is kept secret. Referred to committee, no further action at this time.
House Bill 4750: Authorize state job training subsidies through ISDs
Introduced by Rep. Phil Potvin (R), to authorize another government job training subsidy program for particular employers at intermediate school districts, similar to the one allowed for community colleges. Under the scheme an ISD could borrow to pay for training a particular employer’s new hires, and with the loans paid by the state in the form of an income tax earmark. ISDs statewide could borrow up to $50 million for this. Referred to committee, no further action at this time.
Note: Earlier this year the Legislature passed and the Governor signed an eight-year extension of the community college version of this scheme, and also eliminated a $50 million annual cap on the subsidies.
Bills to ban drones in various places
Several bills have been introduced to ban remote control drones from flying in various specified places. They include:
Senate Bill 432: Ban drones near the Mackinac Bridge, introduced by Sen. Tom Casperson (R)
Senate Bill 487 and House Bill 4866: Ban drones near prisons, introduced by Sen. Darwin Booher (R) and Rep. Kurt Heise (R)
House Bill 4868: Ban drone interference with public safety, introduced by Rep. Kurt Heise (R)
Senate Bill 549: Ban drones over Capitol, introduced by Sen. Rick Jones (R)
SOURCE: MichiganVotes.org, a free, non-partisan website created by the Mackinac Center for Public Policy, providing concise, non-partisan, plain-English descriptions of every bill and vote in the Michigan House and Senate. Please visit http://www.MichiganVotes.org.
Will GOP backtrack on select deals?
For years, bipartisan majorities of Republicans and Democrats approved massive tax credits to select corporations and industries. The bulk of these coincided with the “lost decade” in Michigan, in which the state lost more jobs than any other. These credits have caused a nearly $9 billion hole in the state budget. This hole is crushing citizens who must now pay higher taxes for an increasing state budget to fund basic government services such as road maintenance.
In 2011, Republicans were swept into power with a mandate for change. One policy pushed by Gov. Rick Snyder was to stop issuing new credits. Michigan citizens are still on the hook for past promises, but at least state officials limited their long-term liabilities.
But the Legislature is poised to throw that act of good government and fiscal restraint out the window.
A new data center is interested in moving into the empty Steelcase pyramid building in West Michigan, but only if the state approves a bevy of tax incentives – exempting the new company from property, sales and use taxes.
The media reports of this project include the usual: Job promises, potential future revenue gains, a vitalization of an area, etc. This all may or may not come to be (historically, these job creation expectations are rarely met), but that’s not the main point.
The real issue is whether state legislators are going to make residents and other companies pay higher taxes to support one company or industry. Republicans claim to dislike central planning and Democrats often complain about “corporate handouts” – but the bills supporting this proposal have wide bipartisan support.
State aid could easily fluctuate
The state’s 2012 retirement reforms changed the way that pension benefits offered in Michigan school districts are paid. It capped a school district’s contributions to the retirement system, with the state pledging to pay the amounts required above the district cap. But this may not have changed the policy picture as much as legislators hoped.
When a school district pays an employee, it also sends a check to Lansing to pay for the expected costs of providing that employee with retirement benefits. The district’s payments cover the benefits earned by employees and also the costs to catch up on the system’s unfunded liabilities for pension and retirement health benefits (the difference between what those benefits cost and how much the state has actually set aside to pay those costs). After the 2012 changes, the unfunded liability portion of the payments is capped at 20.96 percent of payroll.
Currently, the state is paying beyond its capped contributions. Unfunded liability payments alone cost 23.73 percent of payroll and the state is contributing 10.53 percent of payroll toward the 23.73 percent contribution, while districts contribute 13.2 percent of payroll.
These contribution rates take some of the burden off long-term school personnel decisions. Districts can more easily budget for personnel costs now that the state has limited their contributions to liability payments. This would encourage school hiring to the extent that superintendents in the past may have held off on hiring teachers because of an uncertain exposure to retirement costs.
Participation in the state’s school retirement plan is not an option for school officials; it is a statutory mandate. So the state may be acting responsibly by making these contributions instead of asking districts to look within their budgets when retirement system underfunding increases.
It is an expensive obligation, though. The extra payments cost $993.5 million for the current fiscal year. So far, the state uses School Aid Fund revenue to pay for these enormous retirement costs. This means there has been less money available to boost the state’s foundation allowance or any other areas of education budgets that policymakers may have been interested in funding. Charter schools, where employees generally are not in the pension system, receive no benefit from these extra state payments. But neither have they had the responsibility to look within their budgets to pay for growing retirement contributions.
The state has been good at paying for the contributions above the cap since starting this policy. This is no guarantee that it will do so in the future. The protections are set in statute, but the budgets needed to make good on the promise require annual legislative approval. A legislature that does not believe it has sufficient cash to pay for the capped amounts may find that it has the votes necessary to eliminate the statutory requirement and could push some or all those costs back onto school districts.
Thus, the impact of capping district contribution rates is uncertain. As long as the retirement funds continue to develop unfunded liabilities, there will be difficult discussions over how to pay for them. Mitigating the ability to develop unfunded liabilities in the system would do more to protect long-term district finances than this statutory contribution cap.
Funding liabilities would cost $5,400 per capita
According to the Detroit Free Press, the city of Detroit must make a $195 million balloon payment to its pension systems in 2024, which is some 71 percent higher than the amount approved in city’s bankruptcy plan. New hiring, delayed pension cuts, and longer life expectancies have left the city responsible for a growing retirement-benefit liability.
Statewide, the situation is not much better. Recent financial statements for pension plans covering Michigan’s state employees, teachers and police officers indicate that those plans are underfunded by some $33 billion, an increase of about $1.5 billion over last year. Adding insult to injury, the state estimates that health and other retirement benefits for those same employees are underfunded by another $21 billion.
Taken together, that’s almost $5,400 per capita — and there is no sign of improvement on the horizon.
Most private sector employers have attacked their pension funding challenges by moving employees into defined contribution plans, such as 401(k) or 403(b) accounts. Starting in 1997, the state of Michigan joined them – but only for new state government employees. The Mackinac Center found that this move reduced pension costs by $167 million and helped the state avoid accruing as much as $4.3 billion in unfunded pension liabilities. Michigan is not the only state to achieve savings from defined contribution plans. Studies from the Manhattan Institute and multiple peer-reviewed journals find that defined contribution plans have lower contribution costs, administrative costs, or both.
Not surprisingly, about 80 percent of the state’s unfunded pension liabilities have accrued in the public school employee pension plan that made no such transition. To get the situation under control, it’s time Michigan transitioned public school employees into a defined-contribution plan. The move would reduce costs, control liabilities and eliminate a number of pension-specific perverse incentives that put taxpayers at risk for unforeseen costs.
MEA may not enforce August Window while waiting for appeal
In September, the Michigan Employment Relations Commission concurred with an administrative law judge and found the MEA's August window (the policy of requiring all resignations to occur in August) illegal. MERC ordered the MEA to begin taking resignations year round, but the MEA filed with the Court of Appeals, asking it to reconsider the decision and to order a stay in the meantime, which would keep the August window in effect for at least a year.
Many economic development programs receive bipartisan support
Monday morning, reporters Zoe Clark and Rick Pluta published a radio story and article about how Lansing Republicans “had adopted the tax break religion” on targeted tax breaks. As evidence, there is apparently a deal in the works that would provide taxpayer funds of some sort to a particular business in exchange for a promise to locate or expand in West Michigan.
The article tries to make the case that Republicans have been opposed to tax credits. But this is hardly the case, whether in the early to mid-2000s or even more recently.
Consider the evidence presented by the authors. Under the heading “GOP Economic Theory” they say this:
In the early to mid-2000s, Republicans mocked former Democratic Governor Jennifer Granholm over her backing of tax credits that benefited particular industries (think movie tax credits, alternative energy or next-generation batteries) and the idea of the government picking economic winners and losers. [Emphasis added]
Governor Rick Snyder reiterated that, under his watch, Michigan is getting out of the business of industry-targeted tax breaks.
“We are focused on creating the best environment and climate for success, and letting free enterprise work.”
Consider for a moment these claims.
- Only one Republican in the entire Legislature — Nancy Cassis — opposed the creation of a movie production tax credit, casting a “no” vote.
- In 2008, House Bill 6611 — a bill to give $100 million in tax credits for makers of battery packs — passed unanimously in the House. That is, no Republicans voted against it. The bill was passed 33-3 in the Senate, with only 3 Republicans voting against it.
- A different battery tax credit bill — Senate Bill 855 — passed the Senate in 2011 with 21 Republicans voting “yes” to establish up to $50 million in credits. Only five Republicans voted “no.” On the House side, 38 Republicans voted in favor of the bill while 23 opposed it.
- In 2005, Senate Bill 583 assured that targeted tax breaks were available to companies involved in alternative energy research and manufacturing. The Senate and House versions of the bill were both passed. Unanimously: Not a single Republican voted against the legislation.
Republicans, then, have not mocked targeted business favors so much as cheered them on.
In 2003, Republicans in both chambers announced their new jobs initiative. Their press announcement read: “Republicans Vow: ‘We Will Fight for Every Michigan Job,’” and “Legislative Leaders Announce Jobs and Economic Stimulus Plan: Creating Manufacturing Jobs, Spurring Business Investment top GOP Proposal.” Their nine-point plan featured prominently the renewal of the Michigan Economic Growth Authority tax credit program, the highest-profile and most expensive (and now defunct) of all the state’s incentive programs.
These are just a few examples that refute the claim that Republicans in the Legislature have a history of strongly opposing targeted incentives. The list of past tax credit and incentive programs and legislation supported by state Republicans is long. But the results have not necessarily been distinguished by success in creating jobs.
Gov. Snyder phased out the failed MEGA program — to his credit — but he simply replaced it with a smaller subsidy program. He also approved a $4 million increase in the state industrial subsidy for tourism advertising, a program that the Mackinac Center has demonstrated is ineffective. (See the analysis here.)
The evidence very clearly shows that Lansing Republicans have long had a fetish for targeted tax credits, subsidies and the central planning of our economic lives. They should not have in the past and they should not in the future. Research shows that such programs are ineffective at creating jobs and wealth and are unfair to those who are forced to foot the bill.