News Story

GOP-Led House Passes New ‘Tax’ On Private Contract Workers To Pay For Retirement System Liabilities

Schools will pay 12 percent tax on all operating expenditures, not just public employees

A Republican-sponsored pension bill that passed the Michigan House adds a significant cost onto employees who work for private companies that contract with school districts while excluding those workers from ever receiving benefits.

"The House version penalizes schools that cut costs by outsourcing with an 11.9 percent penalty for doing so," said Kristi Flietstra, general counsel for the Professional Educational Services Group.

"[This] is a penalty imposed on one class of operation (3rd party) to fund an unrelated activity of another party (teacher pensions)."

Senate Bill 1040 was changed by the House to strip out the portion that would close the defined benefit plan to new employees. At the same time, the bill looks to raise more revenue from school contractors — even though they do not take part in the current system.

By assessing a portion of pension contributions on a district's "current operating expenses," the bill translates into a “tax” on contractors who work for the schools, like substitute teachers, bus drivers, lunchroom workers, janitors and other employees, according to one fiscal analyst. Those employees do not receive the same type of pension as public school employees because they are private workers hired by contracting companies.

"Under the House pension reform, private contractors are forced to pay more in order to catch up on the unfunded liabilities in the system," said James Hohman, a policy analyst with the Mackinac Center for Public Policy.

"Effectively, support service contracts will be slapped with a new 11.9 percent tax to pay for a system that excludes them."

Currently, pension contributions for public school workers are three separate contributions enacted as a percentage of overall payroll: to prefund benefits earned in a year, for retiree health care and to catch up on the unfunded liabilities. In practice, this means that for every dollar districts pay to an employee, they have to write Lansing a percentage of that salary to go to the three payments.

The House bill changes this. Instead of contributing a percent of the payroll, the state would start charging districts on their overall operating expenses — what they pay all their employees, including contractors and private companies.  

Flietstra said that even with the penalty, the Professional Educational Services Group will continue providing testing, training, background checks and other services to the districts that contract with them. But the new tax will definitely have an effect financially.

"While we understand the need to address the problem of unfunded accrued liabilities, we are concerned that the solution proposed under the House bill would not be sustainable for many of the districts that we partner with," she said.

The Michigan House and Senate have competing pension bills. The Senate bill moves new employees into a 401(k) defined contribution plan, which eliminates the state’s ability to underfund benefits and places school employees into a system similar to what other state workers and the majority of the private-sector get.

The House bill offers a “hybrid” option and adds more prefunding to optional health care benefits for retired employees. The current teacher retirement system is underfunded by $22.4 billion and many fiscal and economic experts have called for the system to be closed.

The House bill was passed with the leadership of Rep. Chuck Moss, R-Birmingham, and Rep. Rick Olson, R-Saline. The Senate is currently debating whether to pass the House bill, stick with their 401(k) plan or come up with a third option.


Here is how the Michigan House voted on revising the school pension system:



Schmidt, R. (D)


Agema (R) Bolger (R) Bumstead (R) Callton (R) Cotter (R)
Crawford (R) Daley (R) Damrow (R) Denby (R) Farrington (R)
Forlini (R) Foster (R) Franz (R) Gilbert (R) Glardon (R)
Goike (R) Graves (R) Haines (R) Haveman (R) Heise (R)
Hooker (R) Horn (R) Hughes (R) Huuki (R) Jacobsen (R)
Jenkins (R) Knollenberg (R) Kowall (R) Kurtz (R) LaFontaine (R)
Lori (R) Lund (R) Lyons (R) MacGregor (R) MacMaster (R)
Moss (R) Muxlow (R) O'Brien (R) Olson (R) Opsommer (R)
Ouimet (R) Outman (R) Pettalia (R) Poleski (R) Potvin (R)
Price (R) Pscholka (R) Rogers (R) Schmidt, W. (R) Shaughnessy (R)
Shirkey (R) Somerville (R) Stamas (R) Tyler (R) Walsh (R)
Yonker (R)        



Barnett (D) Bauer (D) Bledsoe (D) Brown (D) Byrum (D)
Cavanagh (D) Clemente (D) Constan (D) Darany (D) Dillon (D)
Durhal (D) Geiss (D) Greimel (D) Hammel (D) Haugh (D)
Hobbs (D) Howze (D) Irwin (D) Kandrevas (D) Lane (D)
LeBlanc (D) Lipton (D) Liss (D) McCann (D) Meadows (D)
Oakes (D) Olumba (D) Rutledge (D) Santana (D) Segal (D)
Slavens (D) Smiley (D) Stallworth (D) Stanley (D) Stapleton (D)
Switalski (D) Talabi (D) Tlaib (D) Townsend (D) Womack (D)


Genetski (R) Johnson (R) McBroom (R) McMillin (R) Nesbitt (R)
Rendon (R) Zorn (R)      


Ananich (D) Brunner (D) Hovey-Wright (D) Jackson (D) Lindberg (D)

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.