The MC: The Mackinac Center Blog

Incomplete Analysis of Pension Scheme Bill Paints False Picture

Fiscal Agency ignores benefit spiking costs, underfunding risks

A bill now pending before the Michigan Senate would prevent former school employees like Michigan Education Association union president Steve Cook and others from continuing to accrue benefits in Michigan’s school employee pension system. Yet a Senate Fiscal Agency summary of Senate Bill 279 claims the change would not save any taxpayer dollars. This is incorrect, because the analysis ignores the risks of underfunding pensions and the “benefit spiking” costs associated with this scheme.

What is muddying the waters in this unusual situation is that the union reimburses the district for the pension fund contributions made on behalf of Cook and others involved in the scheme. When one of these individuals leave the system two things happen: The person stops accruing (increasing) future benefits and the union stops contributing.

A proper analysis of this bill would assess the potential taxpayer gains, losses and risks associated with this event, but the Senate Fiscal Agency only considered the potential loss. But there are other fiscal considerations and taxpayer costs.

When an employee earns benefits under a defined-benefit pension system the employer must contribute a certain amount to cover the future payouts. Determining the correct contribution amount requires estimating various factors such as potential pension fund investment returns, life expectancies and more.

Getting those estimates right is tricky, and getting them wrong means that taxpayers are on the hook for the eventual shortfalls.

In the case of Michigan’s school pension system this risk is more than just hypothetical — the system has a $26.5 billion unfunded liability. This is not a temporary blip, either. According to state auditors, in 29 of the past 30 years the assets held by the system were not sufficient to cover future benefits. A long history of inadequate contributions makes it very likely that the union reimbursements in these deals are also inadequate — and that taxpayers will end up paying a price.

Yet this ongoing risk is not even mentioned in the fiscal agency’s summary of the bill. It instead discusses a separate issue — that the union’s reimbursements are being used to pay down the system’s unfunded liabilities, which is a positive for the state. Currently, 83 percent of pension contributions go toward “catching up” on past underfunding. Thus, the agency argues that stopping this arrangement will cost the state money.

The fiscal agency also ignores other critical factors. It fails to consider that the union president and others involved in these deals are also “spiking” their eventual pension benefit payouts.

In Steve Cook’s case, the years during which he earned a modest paraprofessional salary count as much in the formula used to calculate his benefits as his years of collecting a six-figure union official salary — yet it is that high salary that will determine the size of his eventual benefit checks.

The estimates used to determine proper pension contribution rates do not attempt to pay for this benefit spiking scheme. Those rates are set for the workforce as a whole, and do not try to calculate the correct contribution amount for particular individuals on a person-by-person basis. Union reimbursements based on those rates are unlikely to cover the difference between benefits based on the six-figure salary of a high ranking union official and benefits based on the modest pay of a public school parapro. That is true even if some of the reimbursement amounts go toward catching up on the system’s unfunded liabilities.

And even if the Senate Fiscal Agency wanted to estimate the contributions required for a beneficiary like Steve Cook, the state’s Office of Retirement Services has not maintained individual member accrued benefit and contribution records that would allow the agency to do so. (A Mackinac Center Freedom of Information Act request to the office was rejected for this reason.)

If such records did exist they could be used to estimate exactly how much these special deals have cost taxpayers and how much they have contributed to the system’s unfunded liabilities. The lack of such records raises additional questions about the costs claimed in the fiscal agency’s summary.

Here’s what we can say, however: Given that there are only 60 cents in the system for every dollar’s worth of pension benefits earned by its members, the taxpayer savings from this bill are likely to be substantial, even if they cannot be precisely quantified. The Senate Fiscal Agency’s analysis should reflect this.

National Conservative Groups Push to End Civil Asset Forfeiture

Is Michigan’s GOP Legislature listening?

A new article on the Heritage Foundation’s “Daily Signal” website highlights the problem with civil asset forfeiture, which is the subject of several bills currently being considered in the Michigan Legislature. The piece, “9 Times the Government Stole Americans’ Cars, Cash” features a case study that originated in Detroit:

At the Contemporary Art Institute in Detroit, Mich., in 2008, a fun night out at a “Funk Night” event for 130 attendees morphed into a scene out of an action movie. Armor-clad police stormed the party with their guns drawn, forced attendees to the floor and seized 40 vehicles from those in attendance.

What heinous crime necessitated this treatment? It turned out that, unbeknownst to Funk Night patrons, the Art Institute failed to get a permit to serve alco­hol. Using Prohibition-era reasoning combined with modern civil asset forfeiture law, the police determined that merely attending made everyone complicit.

And because the cars were used to transport their users to the party, the cars were also “guilty” and subject to sei­zure. Police even seized a car parked in a friend’s drive­way over a mile away from the Art Institute.

Attendees had to pay $900 each to have their vehicles returned. Ironically, one of the patron’s vehicles was stolen from the impound lot—a crime made possible by the Detroit Police. Thankfully, a federal district court judge held the Funk Night seizures unconstitutional, calling the incident part of a “widespread practice” of detaining everyone present at a venue without an alcohol permit, searching them and seizing their cars simply because of their presence.

Heritage is not alone among the national conservative and free-market groups raising alarms about civil asset forfeiture. They are joined by FreedomWorks, Institute for Justice, Manhattan Institute, Right on Crime, and Americans for Tax Reform. There have also been articles on the troubling practice from the American Enterprise Institute, the Hoover Institution, the National Taxpayers Union and others. The Mackinac Center and ACLU have teamed up to push this issue in Michigan.

In addition to being the right thing to do, all of this is something the Republican majorities in the Michigan Legislature should heed. On the other side, lawmakers are being pressured by the state branch of the criminal justice industrial complex to adopt as little reform as possible

Michigan’s forfeiture laws are rated among the worst in the nation.  Pending legislation would increase transparency and raise the standard of evidence required before the state could claim a person’s property through forfeiture. While positive, these are half-steps toward real reform. Ultimately, this state should require a criminal conviction before law enforcement agencies can take a person’s money and cars and cash in on the proceeds.

Requiring Unions to Pay for Their Own Employees Saves Taxpayer Money

Senate Bill 280 takes union leaders off the public payroll

Should taxpayers be forced to pay for union leaders working on union business? Or should education dollars go to education?

Senate Bill 280, sponsored by Sen. Marty Knollenberg, R-Troy, recently passed out of committee and will go to the full Senate. As noted by MichiganVotes.org, the bill would “ban government employee union contracts that pay employees who are union officials for time they spend on the job conducting union business (which they call ‘release time’). Among other government employers, many public school districts give local union officials full teacher salary and benefits but do not require them to teach or perform any other educational function.”

The Mackinac Center compiled all the local union leaders who were paid by taxpayers while not working in the schools. This cost a very minimum of $2.7 million in 2011. We are currently updating that number and early results show many districts still have those special arrangements in their contracts.

A fiscal analysis of the bill says the savings to taxpayers is “indeterminate,” but it does not take into consideration how many contracts include release time provisions. It also ignores that this special deal means districts and taxpayers are paying twice – once for the union leader’s salary, and again to replace that person in the classroom while they work for the union. Savings to the state is only “indeterminate” if you ignore all the costs.

Taxpayers expect school funding to go to education. Not as a jobs program for unions.

Michigan Film Incentives ‘All But Dead’

But if the MEDC wants them, it can keep them

A Senate panel has voted to eliminate Michigan’s film incentive program from the state budget beginning next year. The bill will move on to the full Senate.

Senate Majority Leader Arlan Meekhof, R-West Olive, told the Detroit Free Press that roads are a higher priority for the state.

Former Senate Majority Leader Randy Richardville (R-Monroe) was a big booster of the program and has been trying to save it. He told MIRS News, “I do think it's all but considered dead.”

The state House has already voted to end the subsidies. The state Senate bill ends the incentives as well as Michigan’s film office. The bills need to be reconciled before being put up for a final vote in both chambers and then the governor.

Film subsidies are widely seen by economists across the spectrum as one of the worst ways to spend tax dollars. Michigan’s “economic development” agency, the MEDC, could continue selectively funding films, however. But while all areas of government “economic development” spending is controversial, film production is one of the most transient industries — reflected in the abysmal return on investment for taxpayers from subsidizing this industry. If the bill passes, it is likely that the state will finally be out of the film subsidy game.

Some lawmakers are considering state-based health exchanges (SBE) as “insurance protection.” An upcoming U.S. Supreme Court ruling in King vs. Burwell could strike down the ACA insurance subsidies in states that have not established a state exchange (including Michigan). State lawmakers should be cautious as this “solution” has a well-established track record of costly failure.

Furthermore, taking action now could not only subject state taxpayers to many future costs, it could also slam the door shut on a congressional fix. The three most-important considerations for state lawmakers are:

  1. A state is responsible for all future spending on its state-based exchange.
    While the lure of federal money to establish a SBE has been tempting to leaders in some states, the reality is that state taxpayers will be on the hook for most of these costs going forward.
    A SBE would necessitate a new state government bureaucracy. State taxpayers would be responsible for all future exchange costs, such as salaries, pensions, IT systems and technology upgrades in perpetuity — without a single dime going to patient care.
  2. State-based exchanges are failing.
    Sixteen states and the District of Columbia established state-based exchanges. But more than half of these exchanges are already inoperable or are facing budget shortfalls. See map.
    Even after spending $4 billion in federal grants, the track records of state-based exchanges have been nothing short of calamitous. In fact, at least three state-based exchange efforts — Maryland, Oregon and Massachusetts — are now the subjects of federal investigations.
  3. A state-based exchange opens the door to IRS penalties.
    If the Supreme Court rules that the Internal Revenue Service (IRS) should not have authorized subsidies, then the IRS will no longer be able to impose penalties on individuals who don't have “qualified” and “affordable” coverage and on employers that don't offer it.

If state lawmakers want to further entrench Obamacare in their state by setting up a SBE, they should first answer the question: Are you willing to forgo your taxpayer-subsidized health-insurance coverage and enroll in the exchange?

State lawmakers who would impose more of the costs and rules of the ACA on their own taxpayers should be willing to live under the same set of rules as everyone else.

Given the costs of operating a SBE in future years, the calamitous experience of half the states that have already established one, and that establishing a SBE could limit a state's options for meaningful health care reform, the vast majority of states have, wisely, not embraced this approach. It is the wrong move at the wrong time.

State lawmakers should not double-down on ACA failure. It is up to the federal lawmakers to remedy the situation.

Republished with permission of author and Foundation for Government Accountability. Original article is available here.

June 12, 2015 MichiganVotes Weekly Roll Call

“Tax-lite” road funding, same-sex adoptions, local employer mandates

House Bill 4605, House GOP road package: Passed 62 to 47 in the House

To earmark a portion of state income tax revenue to road funding, starting with $192 million in 2016 and increasing to $717 million in 2019.
According to the House Fiscal Agency, this and other bills in the House package would generate an additional $1.163 billion in annual road repair funding by 2019 with just modest tax increases (see House Bill 4615 below). Given projected increases in income tax revenue over that period, with the road funding package the amount of general fund dollars available for other (non-road) spending would increase by $355 million in 2019, versus an increase of $1.137 billion without the package.

Who Voted “Yes” and Who Voted “No”


House Bill 4609, House GOP road package (EITC repeal): Passed 57 to 52 in the House

To eliminate the state earned income tax credit, which grants recipients an amount equal to 6 percent of the federal EITC. The EITC is a "refundable" tax credit that sends checks to low income workers totaling around $115 million annually, which would be reallocated to road funding (see previous bill).

Who Voted “Yes” and Who Voted “No”


House Bill 4607, House GOP road package (corporate subsidies repeal): Passed 60 to 49 in the House

To no longer spend $75 million annually on various direct and indirect subsidies granted to corporations and developers under the “21st Century Jobs Fund” rubric, and instead use this money on road repairs. House Bill 4608 defunds other subsidies, but both bills require spending to continue for government tourism industry promotion ("Pure Michigan" ads).

Who Voted “Yes” and Who Voted “No”


House Bill 4615, House GOP road package (diesel tax increase): Passed 58 to 51 in the House

To increase the current 15 cents per gallon diesel fuel tax to 19 cents per gallon, and index future diesel and gasoline tax rates to inflation. Also, to tax natural gas and other “alternative fuels” burned by vehicles at an equivalent rate. This is part of a House package that by 2019 generates $1.163 billion more for road repairs by reprioritizing current spending, except for this bill's $78 million tax increase.

Who Voted “Yes” and Who Voted “No”


Senate Bill 351, Ban divorce lawyer “ambulance chasing”: Passed 36 to 2 in the Senate

To prohibit a lawyer from soliciting business from a party to a divorce action within 21 days after proof of service in the action was filed with the court, punishable by fines of $1,000, and $5,000 for subsequent violations.

Who Voted “Yes” and Who Voted “No”


Senate Bill 336, Authorize "Amber Alert" type system for at-large cop killer: Passed 38 to 0 in the Senate

To establish procedures for rapidly disseminating useful information to radio and television stations when a person suspected of killing or seriously injuring a police officer is on the loose and dangerous. This would be called a “blue alert.”

Who Voted “Yes” and Who Voted “No”


Senate Bill 211, Authorize uncensored public school American heritage instruction: Passed 30 to 8 in the Senate

To require public school boards to “permit” instruction and reading of “America's founding documents” including those related to the country’s “representative form of limited government, the Bill of Rights, our free-market economic system, and patriotism.” School districts would be prohibited from censoring or restraining reading that includes “religious references in original source documents, writings, speeches, proclamations, or records.”

Who Voted “Yes” and Who Voted “No”


House Bill 4101, Try to "buy-back" state venture capital investment guarantees: Passed 38 to 0 in the Senate

To appropriate $45 million for an effort to buy-back at a discount some $50 million worth of investor return guarantees the state gave out under an "early stage venture capital investment" scheme authorized by a 2003 law.

Who Voted “Yes” and Who Voted “No”


House Bill 4189, Let adoption agencies refuse adoptions that violate moral convictions: Passed 26 to 12 in the Senate

to establish that a private adoption or foster care agency is not required to assist or participate in an adoption or placement that violates its written religious or moral convictions, including adoptions of a child by a homosexual. State agencies would be prohibited from discriminating or taking an “adverse action” against an agency for this reason.

Who Voted “Yes” and Who Voted “No”


House Bill 4052, Preempt local employer wage, benefit or labor law mandates: Passed 22 to 16 in the Senate

To preempt local governments, public schools, state colleges and universities, and other governmental authorities from imposing mandatory wage, benefit, leave time and other requirements on employers that exceed those required by state or federal law.

Who Voted “Yes” and Who Voted “No”


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.

Imagine a couple new startups begin offering a brand new service in Michigan. These companies innovatively use new technologies to meet consumers’ needs in real-time and transform ordinary workers into entrepreneurs. Pretty soon, however, some raise concerns about customer safety regarding this new service. Now imagine the Michigan Legislature quickly jumps into action (a stretch, I know) and proposes new regulations aimed at protecting consumers.

These regulations are impressively demanding — more so than those that govern most Michigan industries. They require these startups to register with a state department, pay an annual permit of $5,000, subject themselves to state-sanctioned audits and keep specific records on employee performance. They must also carry a mandated level of insurance and enforce a zero-tolerance drug and alcohol policy. They may only hire employees would are at least 19 years old, licensed, and who register and insure their own equipment. All equipment must be inspected annually by a licensed professional.

In this imaginary scenario, you would think these thorough regulations would address all concerns about customer safety. But, in reality, you’d be wrong.

The situation outlined above is real and being debated in Lansing right now, regarding “transportation network companies,” better known as ride-sharing. A bipartisan group in the Michigan House, led by Rep. Tim Kelly (R-Saginaw Township), has introduced legislation that would create the very regulations described above for ride-sharing companies such as Uber and Lyft.

But Sen. Rick Jones (R-Grand Ledge) and Sen. Dale Zorn (R-Ida) don’t think these tough regulations are tough enough. They’ve introduced competing bills in the Senate that would institute similar regulations to those in the House bills, but also force ride-sharing companies to operate under the 25-year-old Limousine Transportation Act, create Detroit-specific restrictions and enable local governments to pile on their own rules and regulations.

The House regulations seem sensible, rigorous but not overbearing — just the balance policymakers should aim for when regulating a brand new industry. And it’s not obvious how the additional regulations proposed in the Senate would benefit consumers of ride-sharing services. Rather, they seem to be aimed at force-fitting a new innovation into an old business model. That’s not a good strategy for reinventing Michigan.

CAPPS Report Lays Out Some Solid Criminal Justice Reforms

Michigan can shift prison policies without endangering the public

A new report from the Citizens Alliance on Prisons and Public Spending lays out some quality reforms that would help pare down Michigan’s vast criminal system. Many of the ideas would save taxpayer money and are commonsense reforms that will not endanger the public. In total, the report estimates that Michigan could reduce its prison population by around 10,000 and save $250 million annually.

CAPPS notes that Michigan spends about $2 billion on its Department of Corrections — skyrocketing from 1.6 percent of the General Fund budget in 1973 to 20 percent today. Much of this spending is warranted — nobody wants violent criminals out on the street — but a significant chunk could be better allocated with a few reforms.

The report recommends reducing the intake of prisoners, changing minimum sentencing guidelines, increasing some paroles and shifting mentally and/or physically disabled prisoners to other, specialized facilities, along with other ideas.

CAPPS argues that the state can reduce the intake of prisoners by imposing different penalties for low-level offenders, such as retail fraud, parole violators, etc. Michigan can also better standardize its criminal code with other states, which spend less money for fewer prisoners with no higher crime rates.

A 2012 Pew Center on the States study found that Michigan has one of the longest average lengths of stay for prisoners and longer criminal sentences in general. In a detailed analysis of Michigan nonviolent criminals released in 2004, the study estimated that 24 percent of these prisoners could have served shorter sentences without compromising public safety. This is consistent with other research evidence, according to the new CAPPS study: “Researchers can make no connection between increased length of stay and recidivism.” Michigan may be spending more money to lock people up for longer periods for no observable benefit to the public.

The Mackinac Center is a proud partner in the overall Right on Crime movement, calling for commonsense criminal justice reforms that will reduce the cost of this vital government service and protect the legal rights of Michigan residents. Center experts have urged the Legislature to consider other changes to the criminal justice system in Michigan. In particular, the state should re-examine its overwhelmingly complex penal code and establish more robust legal protections for innocent citizens by eliminating civil asset forfeiture.

As the Michigan Legislature has a real discussion about how much money in special tax credits and subsidies it should be handing out, supporters of the Michigan Economic Development Corporation are defending its existence.

The entity has agreed to deals that return little to the state, though it argues that things have changed.

It’s true that the MEDC is better than in years past. The state has eliminated the MEGA tax credit program, which created an uncertain budget situation (though Michigan will be on the hook for past deals for decades). The amount of incentives handed out is less, particularly when it comes to film incentives.

But the real problem with state “economic development” agencies is that trying to pick winners in a free enterprise system is inefficient and transforms business decisions into political deals.

The Wall Street Journal notes in a recent editorial how the state of Connecticut has once again raised taxes, on personal income as well as on businesses. General Electric is upset about this retroactive tax increase (the fifth in the past 4 years) and the uncertainty of the state going forward. The company has formed an exploratory team to consider moving the corporate headquarters.

The WSJ writes:

Democrat Dannel Malloy, the nation’s worst Governor since Pat Quinn lost in Illinois, quickly replied that he’s open to tweaking the latest tax punishment. And perhaps he is—for big companies like GE or Aetna. These are high-profile outfits that can do him a lot of political harm if they flee.

But what about the small and medium-sized companies that can’t get headlines from a press release? These unheralded employers are the lifeblood of any state’s economy, and they haven’t been investing or hiring as Connecticut’s economy has stagnated under the tax and regulatory assault from Mr. Malloy and his public-union allies.

When Illinois increased business and income taxes a few years ago, it too was forced to give special deals to some companies to prevent them from leaving.

But that’s not good fiscal policy, chiefly because it’s unfair to businesses and taxpayers who aren’t politically powerful enough to strike special deals with politicians. And as long as Michigan has an entity that can hand out select subsidies, it will always be in the game of making business decisions based on politics — not what is good for consumers and the state as a whole, which is open and fair competition in a free market.

Vernuccio Joins New York Times 'Room for Debate'

Discussing the role of unions in the modern workplace

Staff at Gawker Media recently announced plans to unionize, launching speculation on the role of unions in today's economy.

F. Vincent Vernuccio contributed to the New York Times June 9 “Room for Debate” on the subject, arguing that the union will be most successful if it abandons traditional union practices and acts in a way that will reward creativity and individuality.