The Price of PERA

As we demonstrated in our prior Policy Brief on this subject, it is manifestly clear that PERA in its current form has done considerable harm to the state of Michigan. Under PERA, school employee unions have become powerful enough to successfully lobby the state Legislature for costly retirement benefits that may now exceed taxpayers’ ability to pay. At the end of fiscal 2009, the state’s school employee pension plan carried an unfunded liability of $12.0 billion, and the projected unfunded cost of providing retiree medical benefits if they are not modified totaled a whopping $16.8 billion to $27.6 billion, depending on the actuarial assumptions.[3] Conservatively, these unfunded retirement benefits amount to more than $2,870 for every Michigan resident. This sum will have to be made up in taxes or in reduced government services if the state maintains its current agreements.[*] While much of the unfunded pension liability is due to poor market returns in recent years, the fundamental problem lies in the state’s agreement to provide defined retirement benefits of a kind that the private sector has increasingly abandoned precisely because of the risk and cost involved.[4]

The Michigan Education Association, the state’s largest public school employee union, has also used its powers under PERA to manipulate a majority of school districts in the state into buying extremely expensive health care insurance plans through the Michigan Education Special Services Association, a single institution favored by the union.[†] By moving public school employees away from these and similar plans and into health savings accounts and catastrophic care insurance plans,[‡] state taxpayers could have saved an estimated $451 million in 2009 and $26 billion between then and 2021.[5] The MEA has further used PERA to prevent the institution of teacher merit pay that research suggests could do much to improve the quality of public schools.[6]

Because working conditions and disciplinary policies are subject to bargaining and grievances, collective bargaining agreements required by PERA complicate the essential government task of directing and disciplining law enforcement officers.[7] PERA has also largely insulated government employees from the compensation reductions and layoffs suffered by many private-sector workers, serving to further increase the burden on families and employers in the midst of a recession.[8] Agency-fee clauses allowed by PERA have turned government employee unions into a disproportionately powerful political force in the state.[9]

The public interest lies in a government that provides essential services in a fair and efficient manner. PERA has created a union movement that has both the muscle and the motive to fashion a government that too often provides services poorly and presents an oversized burden on families and businesses.[10] Moreover, it has tilted the political process to protect government employees above all other interest groups. At a minimum, PERA is in desperate need of revisions that will bring collective bargaining in line with the public interest. Failing that, it is collective bargaining, not the public interest, that must go by the wayside.

[*] The accrued pension benefits are guaranteed under the Michigan Constitution. Hence, the pension liabilities must be paid unless the constitution is amended. The retiree medical benefits, in contrast, are not protected by the state constitution and can be reduced (or increased) by an act of the Michigan Legislature. See Richard Dreyfuss, “Michigan’s Public-Employee Retirement Benefits: Benchmarking and Managing Benefits and Costs” (Mackinac Center for Public Policy, 2010), 13862 (accessed Feb. 10, 2011).

[†] The Legislature has attempted to address this problem by prohibiting collective bargaining over the policy holder of school employee health care benefits. See MCL 423.215(3)(a). This reform was meant to free school districts to choose among more health care insurance providers, but for a variety of reasons, the reform has not proved particularly effective.

[‡] A health savings account, commonly known as an HSA, is a tax-advantaged account in which employees and their employers can place money to save for routine health expenses. The accounts are usually set up in tandem with a lower-cost, high-deductible “catastrophic care” health insurance plan to cover large, unpredictable health care expenses.