Simple reforms lower the burden of debt
It’s not news that government employee pension systems across the nation have promised retirees billions in pensions and not saved enough to make good on those promises. But a related problem could pose an even greater risk to taxpayers: lifetime health insurance benefits provided through these systems.
Michigan may be showing governments across the country the way to resolve the fiscal challenge, however. Without much fanfare, the state and many local governments have stopped offering new employees open-ended post-retirement health insurance benefits. In doing so, they have contained their exposure to ever-increasing premiums that could one day threaten their solvency.
Governments have tended not to set aside money to pay for those benefits as employees work, but rather pay the insurance premiums as they come due. This means today’s taxpayers are paying payroll expenses incurred by government employees years or even decades in the past.
This is both unfair and imprudent. If such coverage is offered at all, a better course would be to place money in a health insurance trust fund as the benefits are earned, just as pension contributions are deposited annually into pension funds.
Such prefunding is what governments are supposed to do with pensions. Most have fallen short, though. The latest Pew report tallies nearly $3.7 trillion in pension liabilities that governments acknowledge; stricter pension assumptions can inflate this figure. Governments have saved $2.8 trillion to pay for pensions, leaving $934 billion in unfunded liabilities.
The retiree health insurance is a smaller, $627 billion gap, but fewer dollars have been set aside to pay these future benefits. The size of this gap is even more uncertain than that for pensions, given the employers’ exposure to rising health care costs and premiums.
This is a problem that the private sector has already resolved. A 2011 Mackinac Center study found that only three of 24 major private sector employers in Michigan provided any retirement health insurance benefits.
Michigan governments have started to change. The school system (with 425,000 total employees and retirees) and the state employee system (with 76,000 members) no longer offer to pick up post-retirement health insurance costs for their new employees. Instead, new employees are offered supplemental contributions to their retirement savings plans, which are intended to pay for any insurance coverage they choose upon retirement.
By closing these two systems to new hires, and trimming the benefit for current retirees, Gov. Rick Snyder and members of the 2011-12 Legislature deserve credit for refusing to kick this can down the road one more time. Instead, the state is now on course toward gradually eliminating the problem.
Local governments in Michigan have undertaken similar reforms. Only six of the state’s 30 largest cities and townships still offer new employees open-ended retiree health benefits. Even among the holdouts, some have made changes: Dearborn Heights no longer offers the benefit to entry level police; and Taylor also closed them to new officers in 2011.
Many counties have also stopped offering retiree health insurance benefits to new hires, including one perennial fiscal basket case, Wayne County.
None of this means the problem is solved, however, only that its growth has been contained. The state’s largest 30 municipalities have made $4.7 billion worth of promises for retiree health insurance coverage, and they have only saved $1.0 billion to cover it. Managing the $3.7 billion remainder will be a huge challenge.
There is a state constitutional guarantee for pension benefits that have been earned. State and local governments can, however, trim post-employment health benefits — not just for future retirees but for current ones as well.
Many Michigan governments have taken the less drastic but still extraordinary step of simply no longer offering this benefit to new employees. Their prudence will pay big dividends to both taxpayers and government employees in the future.
A state economy isn't made up of the biggest companies
According to MIRS News, Sen. Mike Kowall, R-White Lake, is pushing for driverless vehicle legislation, hoping to land a research center in Willow Run. The intent of the legislation, MIRS said, “is to propel Michigan to the head of the line in the highly competitive autonomous sweepstakes, which involves such states as California, Nevada, Texas and Florida.”
According to the news site, Kowall issued a warning: “If we do nothing, that would be irresponsible. We'd lose jobs. We'd lose people moving away wholesale and the universities promoting these studies, everybody would move out of state.”
There are often “competitions” between states for projects. Lawmakers tend to send heaps of taxpayer dollars to companies that try to play one state or locality off the other as they consider where to place new projects.
It’s a good thing that the state economy relies upon decentralized decision-making to create jobs instead of political deals. The deals are not the fountain of all economic activity, as portrayed by policymakers.
That is because a state economy is not the compilation of the biggest companies and favored industries, but rather the result of decisions made by thousands of business owners and managers. There are thousands of jobs created and lost every month. At best, politicians make deals for dozens, and these rarely come to fruition. And there is an economic cost to the taxpayer dollars used to lure companies not accounted for in the job announcements.
Some of Kowall’s proposals may prove to be valuable. Creating a legislative environment that allows self-driving vehicles is an important thing to do, considering that many of our laws on road and vehicle usage assume that there is a person driving.
But the competition for flashy projects results in taxpayer losses.
Michigan governments hold $3,800 per person in pension debt
Like state and local governments across the nation, Michigan has a variety of public entities that offer pensions to former and current employees. And like nearly all other governments, Michigan’s units have huge unfunded liabilities.
Unfunded liabilities exist because politicians have not saved enough money to pay for the pensions promised to employees and retirees.
Michigan’s public school employee system has an unfunded liability of $26.7 billion. Local governments, cities and counties, are behind more than $5.4 billion. The state employee system has an unfunded liability of $5.8 billion. So the most prominent public entities are behind a total of $37.9 billion, or $3,800 for every person in the state.
The state employee system was closed in 1997, meaning new employees were shifted to a defined contribution, 401(k)-type plan. These retirement plans pay for benefits as they are earned and cannot rack up unfunded liabilities. The unfunded liability of the state employee system, unlike that of other open pension systems, is trending down and will eventually be paid off.
Our study of Michigan’s pension systems, at all layers of government, show a hard truth: Pension systems don’t get funded – they get underfunded. Politicians simply cannot be trusted to put aside enough money for benefits later since they’d rather spend the money now.
It’s time to put the money back in our hands, and shift new employees off the pension system.
Medical marijuana crack-down, driverless trucks, dogs in outdoor cafés
House Bill 4209, Impose licensure, regulation on medical marijuana industry: Passed 25 to 12 in the Senate
To impose a 3 percent tax on retail medical marijuana sales, along with a licensure mandate and comprehensive regulatory regime for medical marijuana growers, transporters, dispensaries and more, with civil and criminal penalties for violations. This would be modeled on the state's "three tier" alcohol sales regime, which has been criticized for empowering anti-competitive regional distribution monopolies.
House Bill 4210, Authorize medical marijuana in edible form: 28 to 9 in the Senate
To authorize the use of edible marijuana infused products under the state’s medical marijuana law, and establish regulations for these substances.
House Bill 4827, Create "seed to sale" medical marijuana database: Passed 27 to 10 in the Senate
To require the state to develop a comprehensive “seed-to-sale” tracking system for commercial marijuana, with information on each step including recording final sales to individual customers. This would all be contained in a computer database and would not be a public record, but could be used for enforcing the medical marijuana law, including tracking how much individual card holders purchase and from whom.
Senate Bill 1014, Remove procedural restraints on regulating medical marijuana facilities: Passed 26 to 11 in the Senate
To exempt rules imposed on medical marijuana facilities from the requirements of the state administrative procedures act, which requires agencies to follow a specific process to ensure rules are reasonable, do not exceed the agency’s legal authority and are actually needed.
House Bill 5275, Require DNR create forest trail map: Passed 28 to 9 in the Senate
To require the Department of Natural Resources to create a comprehensive inventory of (unpaved) state forest roads that identifies their condition and development level, and shows the types of motorized and non-motorized uses currently restricted on each segment, including seasonal restrictions. Also, to allow the wider used of pack-saddle horses for purposes of hauling out game during hunting season.
Senate Bill 962, Revise details of legislature’s regulation oversight: Passed 26 to 11 in the Senate
To expand the authority of the legislature’s Joint Committee on Administrative Rules (JCAR) so it can delay a department rule for up to one year while the legislature tries to pass a bill to change the law that permits the rule.
Senate Bill 1019, Expand scope of practice for nurse anesthetists: Passed 22 to 15 in the Senate
To reduce the limitations on nurse anesthetist’s scope of practice, allowing them to provide anesthesia and analgesia services as the sole and independent anesthesia provider under certain conditions, and more.
Senate Bill 727, Allow dogs in outdoor cafés: Passed 32 to 4 in the Senate
To allow a restaurant to permit customers’ dogs in outside dining areas. Under current law only seeing-eye and other service dogs are allowed. Local governments could still choose to ban dogs.
Senate Bill 995, Authorize driverless vehicles on Michigan roads: Passed 36 to 0 in the Senate
To expand a law that permits operating automated driverless vehicles on Michigan roads, subject to detailed restrictions and conditions. The bill is part of a package comprised of Senate Bills 995 to 998 that would potentially repeal the requirement that a human operator be present to monitor performance and intervene if necessary, permit “platoons” of driverless trucks traveling together on highways, and create regulations for these and related autonomous vehicle activities. Local governments would be preempted from imposing more restrictive regulations.
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.
The Legislature is considering a bill that would prohibit local governments from banning people from owning pit bulls. Senate Bill 239, sponsored by Sen. Dave Robertson, R-Grand Blanc Township, has passed the Senate and is being considered in the House.
According to the Detroit Free Press, 26 towns have enacted ordinances that restrict pit bulls and 14 outright ban them and other dog breeds.
It’s true that pit bulls harm more people than any other type of dog. According to one report, they have killed a total of 233 people since 1982. That makes them about 40 percent more likely to kill than Rottweilers — though, when the number of deaths is adjusted to reflect the number of each breed, huskies are actually far more dangerous. Other studies have a slightly higher estimate, with approximately 19 people per year dying because of dogs.
But the question is whether pit bulls are dangerous enough that governments should ban them. While the breed often makes the news, the number of injuries and deaths they cause is still very small.
Evidence suggests that pit bulls are not more inherently dangerous than some other types of dogs. The American Society for the Prevention of Cruelty to Animals (ASPCA) and the federal Centers for Disease Control are both opposed to breed-specific legislation because studies show them to be ineffective and harmful. Other research suggests that while pit bulls are aggressive, other breeds are even more hostile. In other words, pit bulls are only more dangerous because they are bred that way by their owners, meaning local bans just encourage people to train other types of dogs to be violent.
Many cities have ordinances that restrict residents from having any dog that is dangerous or out of their control. This policy is much better than a specific ban on pit bulls or other breeds.
Higher education costs are increasing, but why?
A study from the Michigan League for Public Policy says that Michigan should spend more taxpayer dollars on state universities. This would do little to lower tuition, though, until the schools stop their spending spree.
For universities, tuition and taxpayer support are revenues that pay for their expenses. The League states that cuts in taxpayer funding of universities are the culprit for tuition increases. The biggest driver for tuition increases, however, is not stagnant taxpayer support but university expenses.
Say that legislators wanted to use taxpayer money to keep tuition at what it was a decade ago. In that case, the state would need to spend another $1.5 billion, doubling what taxpayers currently spend.
Prospective students have largely ignored university sticker prices when making their selections. Easy credit (often subsidized) means that unaffordability does not limit their decisions. So universities tend to compete on things other than price. College support staff, in particular, is an ever-increasing expense.
The League makes no attempt to analyze the reasons for the increased expenses that are driving tuition up.
One day, students will be more cost conscious about the bill for higher education. That, rather than doubling taxpayer support, will provide a stronger incentive for universities to keep tuition low.
Local news covers pension problems in Norton Shores
One Michigan city’s unfunded pension liability was the subject of a city council meeting this week after a concerned resident read about the problem in Michigan Capitol Confidential and decided to call on local officials for a fix.
Norton Shores resident Jim Riley told Fox 17 — which covered the meeting after Riley encouraged other residents to attend — his city must begin to address its unfunded pension liability to avoid severe cuts to services, major tax hikes, or cuts to employee retirement.
These retirees are counting on this. … If you have a fiscal cancer, and you avoid doing any type of treatment for that fiscal cancer, it will get worse. And we have a fiscal cancer.
Riley raised the issue after reading a recent report in Capitol Confidential explaining that Michigan’s local government pensions have less than 65 percent of the funds they need to cover obligations to retirees. Norton Shores only has 49 percent of the funds it needs, with an unfunded liability of over $20 million.
Mackinac Center Community Engagement Manager Anne Schieber Dykstra attended the meeting and told Fox 17 that Norton Shores and other municipalities that have unfunded liabilities need to close the system to new employees. Instead, new hires should be offered defined contribution plans similar to 401(k) retirement accounts.
Read and watch the full coverage by Fox 17 here.
The second in a two-part series on Detroit Cristo Rey High School
You can read Part 1 here.
According to the Mackinac Center’s recent survey, nearly 90 percent of Michigan voters agree that students should be able to choose a private or parochial school.
However, many families are unable to afford the option. The average tuition at a private Michigan elementary school is $4,700 a year, and $7,800 a year for high school. But with its unusual model of financing through the Corporate Work Study Program, Detroit Cristo Rey High School makes a private education affordable.
Statewide, six in 10 voters back the idea of providing tax incentives to encourage more private contributions to fund tuition scholarships. A slightly smaller share of Michiganders support the creation of education savings accounts. That type of program would provide parents with government funds to cover tuition and a wide variety of educational services outside the traditional public school system.
Michigan’s restrictive state constitution currently stands in the way of providing children opportunity through such programs. But the U.S. Supreme Court has given them clearance, since parents are making the choice among different secular and religious options. Twenty-five states, including all of Michigan’s neighbors, offer at least some families a form of private educational choice.
In the meantime, a small number of families have access to Detroit Cristo Rey High School, where motivated students can succeed. About a quarter to a third of arriving freshmen have attended one of the schools in the city’s shrinking Catholic school system, while the rest come from district or charter schools.
The growing professional obligations students face as part of the Work Study Program are accompanied by a demanding 25-course credit graduation requirement. Students must take four years each of English, math, and science, and three years of Latin and social studies. One Advancement Placement class is offered to seniors.
Teachers clearly post daily goals and expectations (“Students will be able to….”) on classroom walls, and then issue an “exit ticket” to students if they demonstrate knowledge of a relevant piece of material. “I think it’s something they subconsciously rely on without realizing it that every time they walk into a classroom there is an expectation that they are going to walk out being able to do that,” math teacher Abigail Carter observed.
Cristo Rey students wear uniforms, earning the occasional “Free Dress Day” as an incentive for achievements and good behavior.
A culture that supports campus safety is an attraction. School President Mike Khoury said that in the school’s earliest days, they were approached by a security company selling paid protection services. The school declined the offer, a decision it never has never regretted. “I can’t imagine having armed guards at Cristo Rey,” he said.
The academic year is longer than most nearby schools, starting before Labor Day and going beyond the first week of June. Students arrive before 7:30 a.m. for the all-school assembly, then head off to class or board one of a dozen different vans to be transported to their work sites. Classes dismiss at 4:00 p.m.
Cristo Rey does not rely on importing the cream of the crop. Most students enter one to two years behind grade level. Comparisons of state standardized tests, including the ACT, show that within Detroit, Cristo Rey students trail only those at one charter and DPS’ two selective high schools. “The vast majority of our kids couldn’t get into Renaissance or Cass Tech,” Khoury said, referring to the two schools’ admission testing requirements.
Seeing students accepted into postsecondary institutions does not mark the end of the high school’s commitment to the youth it serves. Every year, Khoury visits different college campuses to check in personally with some of the school’s alumni. Students make the transition with more confidence because of the job experience, he said. The class of 2016 earned the highest marks possible on the school’s own measures of college readiness.
Cristo Rey tracks the academic progress of alumni who give the school permission to keep tabs on their college career. Currently, just under half of the school’s graduates end up earning a college diploma, twice the national average for high-minority, low-income urban schools. School leaders aim for a 70 percent college completion rate.
The raw numbers may not be spectacular, but Detroit Cristo Rey helps to place its students on a positive trajectory. Chris was part of the school’s inaugural Class of 2012. During the spring of his junior year he scored a 14 on his ACT, improving to a 17 on his second try in the fall. He pieced together a resume that earned him admission to Michigan State University. Four years later, he emerged not only with a communications degree but also a $5,000 competitive grant to help him produce his first film.
Cristo Rey High School need not be an anomaly in Detroit’s educational landscape. The school’s innovative model makes a unique opportunity accessible to low-income families, while helping to continue the strong legacy of urban Catholic education.
Those who want to give Detroit parents access to a variety of effective educational choices can find inspiration at Cristo Rey.
The first in a two-part series on Detroit Cristo Rey High School
While most of their neighboring peers soaked in the last days of summer vacation, incoming students at Detroit Cristo Rey High School spent much of their time in training sessions before the academic year started on Aug. 29.
The payoff for their small sacrifice may end up being life changing. The proof is in the record, and in the students’ own stories.
“In Cristo Rey, we really believe we are an exclusive school but for different reasons,” said school President Mike Khoury.
The school’s 315 students don’t come from wealth or privilege. Families seeking enrollment must demonstrate that their income falls below $15,000 per household member. It turns the notion of private schools as elite institutions upside down.
Detroit’s deep educational woes are well documented. For most students, the outlook is bleak. The availability of charter schools has helped some, providing students on average with two to three months extra learning in key subjects each year. But access to high-quality options and better opportunities is uneven across the region and grade levels, while progress toward acceptable results remains painfully slow.
A May 2016 survey by the Mackinac Center estimates 21,000 available seats in existing Michigan private schools. The number of openings within reach of Detroit families is probably far smaller — not nearly enough to provide educational opportunity to all the city’s kids in need, nor enough to add much healthy competitive pressure to the system.
But some private schools continue to thrive. Located in the city’s southwest Mexicantown neighborhood, Detroit Cristo Rey High School is seeking to raise the standard. The school has celebrated five classes of graduating seniors since its opening in 2008. Every one of those 257 graduates has been accepted to college, with about 85 percent enrolling in a postsecondary institution.
Cristo Rey graduates have been accepted into local institutions like Wayne State University and Henry Ford Community College, as well as Michigan’s flagship state universities and several of the region’s historically Catholic colleges.
Neither of Edgar Servin’s parents completed a high school education, but he has his sights set on that and more. He has every reason to hope he will continue the school’s perfect record. A rising senior in the class of 2017, he will join all his classmates in applying to three different colleges by October. He said his preference would be to go to Oakland University in the suburban metro area. His goal is to become a mechanical engineer.
But for the lifelong native of southwest Detroit, his ambition and aspirations don’t end with a career. “When I’m grown, in 10 years maybe, I want to give back to the community, since I grew up here and I want to visually see the difference and impact that I make into society,” Edgar said.
Abigail Carter teaches Algebra 2 and precalculus to the school’s upperclassmen, including Servin. She began teaching at Cristo Rey in 2015, after working in a diverse set of public school classrooms. “Cristo Rey has the most unique positive and supportive atmosphere in a school that I have ever seen,” she said.
“The School That Works”
Detroit Cristo Rey styles itself as “the school that works.” A unique arrangement offers students valuable workplace experience and makes tuition much more affordable.
Following a model aligned with the national Cristo Rey Network’s 32 schools, the Corporate Work Study Program gives a four-year student the equivalent of one year’s worth of full-time, entry-level professional experience. Students are released from the regular academic schedule five days a month on a rotating schedule to work at an off-site job assignment.
Detroit Cristo Rey’s three biggest corporate partners are General Motors, DTE Energy and Fiat Chrysler, though opportunities also exist with smaller firms in the areas of health care and law. Servin has gained a head start on an engineering career with the hands-on work he’s doing for Dearborn Mid-West Company in Taylor.
“In their neighborhood, [our students] may not encounter a lot of people who’ve gone to college and had a successful career,” Khoury said. “But now one day a week, they are in a job environment where they are working with college graduates who are very successful and have become mentors to our students, and our students quickly begin to see the value of a college education.”
In all, 65 participating businesses provide low-income students experiences and connections that give them a leg up if they persist in their educational careers. Cristo Rey gives incoming students a head start on the workforce experience with three weeks of August training sessions that impart everything from the proper way to shake hands and tie a necktie to using basic office software.
The money students earn on the job covers more than half of the school’s operating budget. Philanthropic support underwrites another significant portion. (Money from the Detroit-based Skillman Foundation and national partners like the Bill and Melinda Gates Foundation was essential to getting the school off the ground.)
As a result, the typical annual tuition burden falls between $600 and $800. This practice lines up with the vision of Cristo Rey Network founder Father John P. Foley, who believes that students tend to benefit more when even the most struggling families have some level of direct investment in the school.
“It’s for their sense of self-worth and dignity so when their child receives their diploma from Detroit Cristo Rey that family can correctly say, ‘We paid for that education,’” noted Khoury.
Op-ed on top reforms in The Detroit News
Michigan’s economy has been on the upswing since it passed right-to-work legislation in 2012, with employment climbing 7 percent, private-sector wages increasing 4.9 percent, an unemployment falling from 9 percent to 4.5 percent – below even the national average.
Right to work has even helped unions, which have seen numbers climb now that they must earn the business of members. Mackinac Center’s Director of Labor Policy F. Vincent Vernuccio and adjunct scholar Jeremy Lott argue in an op-ed published by The Detroit News that Michigan’s labor reforms should continue.
They suggest four reforms that could help Michigan and its unions see continued growth: Enact Worker’s Choice, require re-certification, demand transparency and reform release time, each of which is detailed in the op-ed.
The more we can root out many of the entrenched problems associated with compulsory unionism, the better. While much has been done in private sector unions, it’s important to move serious union reforms further in the public sector.
Just in time for Labor Day, the Mackinac Center for Public Policy has released Top Labor Reforms for Michigan. The guide, authored by Vernuccio, includes 13 reforms lawmakers could make to further improve the workplace and support workers. A copy of the guide has been sent to every state lawmaker in Michigan.
Read the full op-ed in The Detroit News here.