To: MEA Retired Board of Directors

From: Chuck Agerstrand, Retirement Consultant

Date: October 29, 2007

Regarding: Legislative Update and ORS News

MPSERS Setting UP Health Insurance Review Committee (HIRC)

The Retirement System will be considering a number of health initiatives over the next two years that include in part, updates to the prescription drug program, care management enhancements, expanded preferred provider organization network, comprehensive coinsurance with an individual $500 maximum, and updates to the prescription drug maximum that would increase the maximum to $34 and $85 for mail order for 2008 and $36 and $90 maximum on mail order for 2009, deductible of $300 for individual and $800 per family.

The HIRC committee will meet on November 9 and November 19 to consider these initiatives, and make their final recommendations to the MPSERS Board for their November 29 Board meeting.

Michigan Legislature Raises Employee Contribution Rates and Adopts a Graded Premium Subsidy Plan

Senate Bill 546, introduced by Sen. Kuipers, amended the Public School Employees Retirement Act to require MPSERS to pay the following for a member who joins the system after June 30, 2008:

*For a retirant who is at least 60 years old at the time of application for benefits and has 25 years of service credit under the Act, 90% of health insurance premiums.
*For a retirant who is less than 60 at the time of application for benefits, who has at least 25 years of service credit excluding purchased service credit, 90% of health insurance premiums.
*For a retirant who is at least 60 at the time of application for benefits, who has at least 10 but less than 25 years of service credit, a percentage of health insurance premiums equal to 30% for the first 10 years of service plus 4% for each additional year of service beyond 10 years.

The bill also does the following:

1. Provides that a member who purchases service credit after June 30, 2008, is not eligible for health premium payments until he or she would have been eligible to retire without purchasing service credit.
2. Prohibits MPSERS from paying retirement health benefits to a member unless he or she earned at least half a year of service credit (510 hours) during the two school fiscal years immediately preceding his or her retirement, or at least 1/10 of a year of service credit during each of the previous five school fiscal years. This part of the bill was given immediate effect, and will impact current deferred retirees.

Senate Bill 547, introduced by Sen. Kuipers, amended the Public School Employees Retirement Act to do the following:

-- Require a person who first becomes a member of MPSERS on or after July 1, 2008, to contribute to the Member Investment Plan 6.4% (rather than 4.3%) of income above $15,000. This 2.1% increase will serve to reduce the employer’s pension obligation.
-- Require a member, beginning July 1, 2008, to complete at least two years of service before purchasing service credit.

Also, a part-time member or member employed for a fraction of a year must receive service credit for full-time service on the basis of 60 or more hours per biweekly period and proportionate credit for less than 60 hours per biweekly period. Not more than one year's service may be counted for retirement purposes under this section in any fiscal year.

Other Pending Legislation

HB4107: Rep. Brian Palmer - (primary) Daniel Acciavatti, Craig DeRoche, John Garfield, Jacob Hoogendyk, Fran Amos, Arlan Meekhof, Paul Opsommer, John Pastor, David Agema, John Stahl: This bill would create a defined contribution pension plan and limit the purchase of service credit. A retire would not be eligible for health insurance until such time the retiree would have retired had they not purchased the service credit.

HB 4801: Rep. Chris Ward: This bill would eliminate the full subtraction of most public pension benefits from taxable income in Michigan.  Instead, public retirement and pension benefits exceeding $40,920 for a single filer or $81,840 for a married filer (2006 tax year amount) would be subject to the state income tax.  Federal and military pensions would remain fully exempt from the state income tax.  The bill amends the Income Tax Act.

HB 4799: Rep. Lorence Wenke: Proposes to amend the Public School Employees Retirement Act to freeze retirement allowance payments of a retired public school employee if the individual were re-employed in schools directly or indirectly (including through third-party contracts).  The retirement payments would remain suspended during the period of re-employment.  The pension suspension provision would begin on the effective date of the bill. 

This bill has been stripped of most of the enforcement provisions and has been called back by the Michigan Senate.

MPSERS Investment Report:

Bureau of Investments Acting Director, Joe Braeutgam, noted in his presentation to the MPSERS Board that the market value of retirement assets on September 30, 2006, stands at $43.6 billion and that the funded ration is 81.2%. On June 30, 2007, we have a $48.2 billion in assets.

Medicare Rate Increase Projections

Medicare Part B premiums – which cover doctors' visits, tests, and outpatient hospital care – are to increase by $2.40 in 2008, according to MPSERS. Rates would increase from the current $93.50 per month to $96.40 per month.

Growth in Health Care Costs Should Ease Over This Coming Year

Private health care costs (which indicate current trends) in 2008 are expected to continue growing but at a slower pace than in 2007, with a projected growth dipping into single digits, according to a study release June 27 by PriceWaterhouse Coopers. Predicted health care costs will rise 9.9% for HMO’s, and point of service plans, and PPO’s. Costs of consumer-direct health care plans are expected to rise 7.4%.

MPSERS Member Information

Currently, the Office of Retirement Services reports that there are 157,163 retirees and beneficiaries receiving benefits. This represents an increase of 5457 over the September 30, 2006 date. Average age of the actives is 44.1 years and average service is 9.9 years. Total active members in MPSERS are 308,233 (decrease from the prior year of 316,151 members). Members in the MIP plan are 258,378 and 49,855 are Basic members.

MPSERS Cost Cutting

Phil Stoddard, Executive Secretary to the Retirement Board that are managed by ORS, announced that because of the financial crisis Michigan is facing, and to comply with the Governor’s Executive Directives to find effective means of savings, effective August 1, ORS will no longer mail out retirement Board agenda and packets to interested parties. Instead, these materials will be available at www.michigan.gov/ors. In addition, ORS closed the Southeast office in Holland Michigan and currently has no staffing for the Detroit office. ORS offices in Lansing are open only from Monday to Thursday in order to reduce expenditures.

Democratic leaders turn their backs on MEA and MEA-Retired

As the State was poised to shut down on all but essential governmental services the Governor, along with the Michigan Legislature passed new taxes totaling $1.35 billion, however falling short of the almost $1.8 billion that was needed to correct the structural deficit the state faced.

The vote to increase the state income tax, and to go a services tax, was tied to various reforms, such as Michigan school employee’s health care, and pensions. The bitter pill in these votes is that the politicians have blamed the state’s budget shortfalls on the backs of school employees. Such claims are unjustified, and it is not supported by evidence.

Bills that were passed by the Michigan Legislature that impact the school community:

SB’s 418 – 421 - Requires MESSA to release claims data for groups

over 100 persons.

SB 546 - Creates a graded premium subsidy

requirement for retirement health benefits for

future employees thereby shifting the cost for health care to future retirees.

For a retirant who was at least 60 years of age and had at least 10 years but less than 30 years, the system would pay 3 percent times the first ten years of service (e.g., 30 percent of the monthly premium for ten years), and 4 percent for each year after the after the first 10 years. Maximum subsidy is 90 percent.

SB 547 - Raises the MIP contribution by 2.1% for future

employees hired after June 30, 2008. This increase lowers the employer’s pension contribution. In addition, this law bars an employee from buying service credit until the employee works two full years.

Prohibit the crediting of purchased service years toward vesting of health insurance premium payments.

Prohibit the public school retirement system from paying health benefits to an individual unless he or she had been employed and had received a minimum total of one-half of a year of service credit during the two school fiscal years or a minimum of one-tenth of a year of service credit during each of the five school fiscal years immediately preceding the effective date of the retirement allowance.

If you believe the politicians rhetoric, supposedly these adopted bills were to save the State vast sums of money, but no politician from the Michigan Legislature or the Granholm administration has yet to articulate any immediate savings to public schools….the fact is there are none in the immediate future.

One can make a case that the citizens of MICHIGAN have suffered due to the absence of Leadership in all three branches of government throughout this fiscal crisis. However some individuals may be more noted as losing than others. The hall of shame may look something like this:

Senator Wayne Kuipers had to vote in favor of increasing taxes on services in order to secure votes to pass the MESSA bill. He also authored the pension bills, SB 546/547. He now faces a recall threat.

Lieutenant Governor John Cherry tried desperately to avoid having to fulfill his duty as President of the Senate for breaking tie votes in the Senate. He ended up having to vote for the income tax increase, although he voted against SB546 and 547. The income tax vote will likely haunt him in his bid for Governor in 2010.

Senate Minority Leader Mark Schauer, to protect the Lieutenant Governor from having to vote for controversial items cast several votes with majority party on reforms as well as voting for tax increases which may hurt his bid for the Seventh Congressional race. Senator Schauer voted for SB 546 and 547.

Speaker of the House Andy Dillion, who besides allowing the Governor, Lieutenant Governor, Senator Kuipers, and others to lobby his caucus members on the floor of the House looked as a leader not in control of his caucus. Furthermore he turned his back on MEA and MEA Retired when he worked with the Administration on securing the midnight deal, and voting for SB 546/547, and SB 418.

House minority floor leader Chris Ward who traded his vote for increased taxes in return for assurances that the budget would include equity money for k-12 schools has lost his position as floor leader, and faces potential recall. The equity money will end up being inadequate to really close the gap on foundation allowances significantly, and no revenue source was earmarked for future equity payments. Ward also had cast his vote for SB 546/547, and SB 418.

Many news articles read the Governor threw the MEA under the bus as well as other aspersions that MEA was the target of choice by all participants. All of that may be true, but the wheels of the bus missed us. The MESSA bill, now PA 106 may cause delays at the bargaining table, some risk of invasion of privacy in small districts and MESSA may have to tinker with its pooling model, but if there is an impact, it will be determined at the bargaining table. The retirement bills, while they don’t, for the most part, impact current active members or retirees, may be irrelevant when the Retirement Health Insurance committee puts forth its recommendations later this year for changes to all of the State funded retirement systems.

Sadly, while this circus continues, there are few legislators, and certainly no one in the administration that is willing to tackle the bigger problem of prefunding retiree health benefits. If the state wants to avoid a real disaster, the legislature needs to address the $17 billion unfunded liability, and begin to prefund future retiree health obligations. Is anyone out there listening? Time will tell.