In addition to biweekly paychecks, Michigan state
employees receive something few others in the workforce enjoy: a claim on
future taxpayers for even more. Specifically, the cost of taxpayer-funded health
care benefits after retirement. This should stop and could now that House Bill 4701
has passed the House.
The claim is on future taxpayers because legislators and
governors have refused to pre-fund retiree health care benefits in advance, as
they do for regular pension benefits. So every payday, the state digs a little
deeper hole for taxpayers, piling up these politicians’ promises to pay post-retirement
benefits, regardless of how much those future health benefits will eventually cost.
Yet these remain mere “politicians’ promises” because the
state has no legal obligation to actually pay — policymakers can adjust
benefits any way they’d like.
State employees apparently believe that they and all future
employees are entitled to these costly benefits. In testimony before the House
Appropriations committees, they and their representatives argued that benefits
as they exist now are part of a contract of employment guaranteed to them for
life and for all future workers. They believe this despite Supreme Court
rulings to the contrary and despite having no contract document or even verbal
promise guaranteeing this benefit. The only “contract” is a state statute that
is amended frequently, including last year.
The cost of this benefit has already become an excessive
burden. This year taxpayers will pay $387 million to provide health coverage to
thousands of former government workers. That’s more than double the $166
million paid out annually a decade ago. The cost increases show no signs of
Few if any current workers in the private sector get similar
benefits. A Center analysis of these retirement benefits offered by 24
major private-sector employers in Michigan found that only three offered any
sort of employer-subsidized retiree health coverage.
With the reform now under discussion, taxpayers would
continue to pay for retiree health care costs of current employees and retirees,
but in a way that caps future taxpayer costs. It accomplishes this by providing
new employees a bump in their retirement matching plans and offering small health
retirement accounts to be paid upon retirement. Under the reform, the state
would remain one of the rare employers in Michigan that offer employees some
subsidization of their retiree health care costs.
The bills also call for massive cash transfusions from
current taxpayers to begin funding the unfunded benefits being paid to retirees.
Prefunding benefits at current rates will cost more than $700 million a year —
roughly $400 million than the pay-as-you-go amount last year. The state would
be responsible for paying this for the next 26 years and those payments are
dependent on the volatile health insurance market.
Employees could choose to either remain in the old system or
switch over to a new defined-contribution retiree health benefit system. Those
who switch would be paid a lump sum amount of cash based on a current estimate of
what their future benefits are worth. Afterwards, they would have to contribute
4 percent to remain in the state’s pension plan.
Current participants in the state’s defined-contribution
plan — around half of the state’s workforce — have the option to trade their
retiree health care benefits for cash based on the benefit’s expected value as
Overall, the bill calls for major cash contributions from
taxpayers, while current employees are largely protected from concessions.
Indeed, current employees and retirees are too protected.
Even with 4 percent contributions, taxpayers would pick up the rest of their
costs — the other 47 percent. There
is a small change that will prevent employees from using overtime pay to
calculate their final average compensation — an appropriate improvement to keep
pensions more predictable and directly-related to salary — but other
concessions should be explored, too.
This can be lowered with caps on contributions and payments,
especially for members who retired prior to Medicare eligibility. Requiring
greater contributions from employees for catching up on the benefits of other
state employees should be explored as well. The reforms to benefits will lower
the cash needed to prefund the benefits, making the bill fairer to taxpayers
being required to support this prefunding.
Still, the proposed bill would eventually eliminate an
open-ended and expensive claim against future taxpayers. It’s an important step
to bringing benefits in balance
and cutting down Lansing’s ability to make claims on future taxpayers. Right
now, the cost is largely left to current taxpayers to bridge the funding gap and
legislators should consider sharing that burden with the people receiving
James Hohman is assistant director of fiscal policy at the
Mackinac Center for Public Policy, a research and educational institute
headquartered in Midland, Mich. Permission to reprint in whole or in pat is
hereby granted, provided that the author and the center are properly cited.