Legislative Report as of May 2019
The House and Senate have nearly completed their work on their first drafts of the 2020 state budget. They have both decided to scrap Governor Whitmer’s call to increase the gas tax by $.45 per gallon. Instead, they have attempted to reduce General Fund spending across most departments in order to free up more funds to dedicate to road and bridge repair and maintenance. Governor Whitmer has pledged to veto any budget that fails to provide at least $2 billion in new transportation funding, and it is looking more and more like she will be forced to either make good on that threat or back down.
Also this month, the Legislature passed legislation making sweeping changes to Michigan’s Auto No-Fault Insurance laws, and the House is reviewing changes to state and school employee retirement benefits. More on these issues below.
Budget Showdown Looms
The House and Senate are steadily working completion of their version of the 2020 budget. It will be markedly different from the Governor’s recommendation, which included hundreds of millions in new revenues. The House and Senate budget will for the most part be a “continuation” budget, meaning that it will be very similar to the current-year budget with a few tweaks. Governor Whitmer’s budget proposal called for over $2 billion in new funding for transportation, and an over $500 million increase for School Aid, with the bulk of new moneys coming from a $.45 per gallon gas tax increase. The Michigan House and Senate are both working on budgets that at this point in time look like they will add approximately $150 million for transportation needs (mostly gleaned by making cuts to other departments), and a $400 million increase for K-12 schools. We expect them to continue working toward an agreement between the two chambers that will likely go to the Governor’s desk in June.
What happens after that, however, is anyone’s guess. Governor Whitmer has indicated that she will veto any budget that does not contain $2.5 billion in new revenues for transportation funding. If she carries out that threat, the Legislature would be forced to go back to the drawing board and develop another budget proposal over the summer. Or, they could simply pass the same budget a second time and dare her to veto it again. This could conceivably happen multiple times right up until the end of the fiscal year. Eventually, we would reach a moment in late September when a veto would result in a government shut-down.
No-Fault Auto Reform Focus of House and Senate
The Michigan Legislature has passed two bills that seek to make major changes to Michigan’s No-Fault Auto Insurance laws. Senate Bill 1, passed by the Senate on May 7, seeks to lower insurance premiums by allowing drivers to choose plans that cap their medical coverage. The bill also would place limits on how much medical
providers could charge an auto insurer for services, and reduces the amount of time accident victims could receive care from family members and have that care reimbursed. The House passed its own version of reform in House Bill 4397 that includes most of the same reforms passed by the Senate, but added in guaranteed rate reductions as well as a few other minor changes.
Governor Whitmer has threatened to veto the bills in their current form, and even the insurance industry that is the major proponent of the legislation has expressed unhappiness over the amendments put on in the House that would mandate rate reductions. Opponents to the House and Senate versions of reform have expressed concerns that the changes would make it difficult if not impossible for seriously injured victims of auto accidents to receive necessary treatment, and that the changes would merely shift those burdens of care onto private health insurance or Medicaid. At this point, it is unlikely that either the Senate or House version of the bill will become law. However, discussions are still taking place that could lead to a compromise before the summer recess.
Annuity Bills Possibly Moving in House
A pair of bills designed to give state and public school employees a greater range of options for their retirement planning are being reviewed by the House Financial Services Committee. House Bill 4274, sponsored by Rep.
Steve Marino (R-Harrison Twp.), and House Bill 4275, sponsored by Rep. Thomas Albert (R-Lowell), would amend MPSERS and SERS, respectively. The bills would require the Office of Retirement Services to allow state and public school employees to purchase a fixed-rate annuity from an approved provider. The bills would also allow the ORS to permit employees to purchase a variable-rate annuity, but it would not require ORS to do so.
Currently, public school employees are already allowed – due to changes in the Michigan Public School Employees Retirement Act in 2017 – to purchase a fixed-rate annuity from a single provider selected by the Office of Retirement Services. These bills would require ORS to possibly allow additional annuity providers to sell annuities to state and public school employees as long as those annuity providers meet certain requirements as specified in the legislation.
Organizations representing state and school employees have had a mixed reaction to the bills. AFSCME has expressed concern that the bill could potentially water down protections for employees who choose to purchase an annuity through the state or public school retirement plan. However, SEIU Local 517 indicated support for the bills seeing that they offer more options for state workers to choose from.
There is no obligation in the bills for employees to purchase annuities, the bills merely require that annuities be an option for employees. Similar legislation passed the Legislature last session, but it was vetoed by Governor Snyder. In his veto message, Governor Snyder explained his rationale by saying that because the Treasurer has fiduciary responsibility to plan participants, it would be inappropriate for the Legislature to decide what options are offered to employees.
The Michigan Department of Treasury, in their testimony to the House Financial Services Committee, indicated opposition to the bills, and expressed concern that annuities are often a poor choice for investors.
AFSCME and the Coalition for Secure Retirement-MI have had meetings with members of the committee to discuss possible amendments that would strengthen the standards annuity companies must meet in order to sell retirement products to state and public school employees.
We expect the bills to be taken up by the House Financial Services Committee later in May or June.
Legislation Introduced to Create Retirement System Auditor, Make Actuarial Changes
House Bill 4534, sponsored by Rep. Lower (R-Cedar Lake) was introduced in late April and seeks to create the Office of the Retirement System Auditor under the auspices of the Legislative Council. This bill would require the Office of Retirement Services to make available all information, materials, and accounting to the auditor who would then conduct performance audits and make recommendations to the Legislature. It would essentially place the executive branch Office of Retirement Services more directly under the watch of the Legislature.
This bill may have been introduced in response to unhappiness expressed by Representative Albert (R-Lowell), a co-sponsor of the bill, over how the Office of Retirement Services is implementing actuarial changes contained in PA 92 of 2017. Recently, Representative Albert asked Attorney General Dana Nessel for an opinion as to whether or not the Office of Retirement Services was properly following assumptions on payroll growth as outlined in the statute. Representative Albert maintains that the payroll growth assumption should have been lowered to 2.75% this year. However, the ORS believes that the payroll growth assumption does not have to be lowered until it is statutorily required in 2022.
In addition to HB 4534, a series of other bills making amendments to actuarial assumptions for the State Employee Retirement System, the Michigan Public School Employees Retirement System, the State Police Retirement System and the Judges Retirement System. House Bills 4530 to 4533 would cap the annual assumed rate of return on investments for each system at 6% beginning in Fiscal Year 2021. This would have the impact of increasing costs on the employers (i.e. the state, since school employers have their contributions capped). It would also generate greater funding for the systems, making them more stable in the future.
Other changes in the bills would require that mortality tables be updated annually, and that the retirement systems use “layered amortization.” The latter is defined as “a fixed and closed period that separately layers the different components to be amortized over a period not to exceed ten years.” These changes would all increase costs to the system, but would hopefully have the impact of reducing unfunded accrued liabilities over time, thereby making the systems more stable into the future.