Michigan's municipal pensions targeted for relief

Michigan municipalities could seek $1.15 billion in state grant help to pay down their unfunded pension liabilities under legislation being promoted by state House Republicans.

House Bill 5054 would make $900 million in grants available to municipalities with pension plans less than 60% funded and $250 million for those that are at or above the 60% mark if the governmental units agree to a series of conditions. The bill also directs another $350 million to the state police retirement system.

Local government groups praised the proposal that is part of a larger debate over how the state should spend $7 billion of surplus revenues.

The grants would “significantly improve the capacity of all Michigan communities moving forward,” Michigan Municipal League Executive Director Dan Gilmartin said in a statement. “Thriving cities lead to strong regional economies and regional prosperity contributes to a healthy state economy.”

Bloomberg News

The plan, sponsored by Rep. Thomas Albert, R-Lowell, and Rep. Matt Hall, R-Marshall, passed the House Appropriations Committee last week and could receive a floor vote this week.

The grants would come with conditions.

Municipalities at less than 60% funded that seek a grant must make all actuarially determined contributions and hold the discounted rate and assumed rate of return at current levels or lower them, according to a summary posted by John LaMacchia, MML’s director of state and federal affairs.

The system must adopt the most recent mortality tables recommended by the Society of Actuaries and they must abide by a prohibition on contractual pension benefit enhancements for 10 years after accepting the grant or the local unit must repay the full value of the grant.

Future benefit increases can only be adopted if the system is 80% funded and the value of the benefit is 100% funded. Grants are capped at $100 million.

For better funded systems, many of the same rules apply or the grants must be repaid. If retiree healthcare benefits are offered, they must be prefunded and annual actuarially determined contributions must be made. Grants are capped at 5% of the $250 million pool of funds.

House backers laid out the pension plan along with a tax cut package that joins the various proposals vying for adoption from the Senate’s Republican majority and Gov. Gretchen Whitmer, a Democrat.

The House Republican plan cuts the individual income tax rate to 3.9% from 4.25% and raises the amount of retirement income not subject to taxes with a combined impact of $1.8 billion on state coffers, according to the House Fiscal Agency.

The Senate’s Republican majority recently approved its own plan that also reduces the individual income tax rate to 3.9%. It also lowers the corporate income tax rate and creates a child tax credit for a total price tag of $2.5 billion, according to the Senate Fiscal Agency.

Whitmer has offered a leaner tax relief plan that would phase out the income tax on pension income and would raise the earned income tax credit for lower income filers, which combined carries about a $860 million price tag, according to the administration.

With each plan now public, the stage is set for negotiations.

Whitmer has warned against the size of Senate and House income tax cuts because of their long-term fiscal impact and, while she did not comment directly on the pension plan, leaves the door open for compromise.

“Gov. Whitmer has always said that she will work with anyone who wants to work together to solve problems and get things done,” her office said in a statement. “As we look toward this upcoming budget, we have an opportunity to make even greater investments in the things that matter most to Michiganders … we look forward to meeting with legislative leaders to get it done.”

Whitmer has proposed a record $74.1 billion budget that would boost reserves, raise education and infrastructure spending, and fund tax relief. The budget provides a $51.8 million deposit into reserves that would bring the balance to nearly $1.5 billion hitting a 5% target of general and school fund spending. It also raises local revenue sharing by $49.8 million, or 5%.

The new spending draws from $7 billion in surplus revenues from higher-than-expected tax collections in fiscal 2021 and 2022 and revenues expected through 2023 along with remaining American Rescue Plan Act relief and federal infrastructure aid. The state would also spend some of the surplus in the current fiscal year through budget revisions.

While spending would balloon, the administration stressed much of it would go toward one-time funding measures allowing the state to maintain structural balance in 2023 and in future years as tax growth is projected to level out.

Michigan’s revenue estimating conference earlier this year lifted projections for the current fiscal year that runs through Sept. 30 by $1.72 billion to $28.53 billion compared to the previous estimating conference in May. The group raised fiscal 2023 estimates by $1.4 billion to $29.14 billion, adding to surpluses being carried over.

The state’s brighter economic prospects drew two rating outlook boosts in June when Fitch Ratings lifted the outlook on its AA rating to positive from stable and S&P Global Ratings raised the outlook on its AA rating to stable from negative. Moody’s Investors Service rates Michigan Aa1 with a stable outlook.