Michigan’s Public-Sector Employment Costs

By several measures, Michigan labor law has not shortchanged government employees. Between 2000 and 2010, total private-sector wages in the state dropped by more than 20 percent when corrected for inflation, while total state and local government employee wages kept pace with inflation.[24] The real cost of state and local government employees’ benefits shot up by more than 25 percent during the same period.[25]

Government employee benefits are now a significant concern for Michigan taxpayers. Unfunded pension liabilities for most state and public school employees alone officially stood at $27.8 billion at the end of fiscal 2011, but even this number assumes a fairly high rate of return on the investment of pension assets — in nearly every case, 8.0 percent.[26] Lower, more prudent investment assumptions would necessarily show that Michigan’s underfunding of the two pension plans is higher.[*]

And in many cases, state and local government employees receive generous retiree health care benefits (in addition to Medicare). A 2010 survey of 24 major Michigan employers, in contrast, showed that just three offered subsidies of any kind for retiree health care.[27] More broadly, if all state and local government employee benefits — pension, insurance coverage, paid leave and others — were set at the state’s private-sector levels, taxpayers would save an estimated $5.7 billion per year.[28]

For decades, the Michigan Education Association, the state’s largest public school employee union, has pressured school districts into buying health insurance for school employees through the Michigan Education Special Services Association, the union’s affiliated health insurance administration program.[29] In 2011, about 80 percent of school districts purchased health insurance from MESSA. The average MESSA premiums for single, two-person and family plans were $7,210, $16,173 and $17,692 — 52 percent, 64 percent and 36 percent above private-sector averages for Michigan, respectively.[30] School employee health insurance costs in Michigan’s public schools have risen to about $1,300 per pupil — 31 percent higher than the per-pupil cost in 2004.[31] 

Some costs of unionizing personnel are harder to translate into dollar amounts, but they are nevertheless very real. For instance, unionized workplaces often have fairly strict job definitions. Depending on the size of the jurisdiction and the makeup of the bargaining unit, there can be dozens of these.[†] Job assignments are often done by seniority and layoffs are also made by a strict last-in-first-out basis, meaning that good workers are as likely to be laid off as poor ones.[32] Recent legislation has made these “last-in-first-out” layoffs less of a problem in public schools,[‡] but work rules remain a serious issue.

The current governor and Legislature have taken a number of steps to address the government-personnel cost and service quality issues described above. For example, Public Act 152 of 2011 places limits on government-employer contributions to government-employee health care, with government employees generally expected to pick up 20 percent of the cost of their own insurance.[33] The measure encourages employers and employees to economize, but does not prohibit generous health insurance, and some local governing bodies can vote to set the limits aside.[§] The bulk of the legislation that has affected collective bargaining over the past few years — limits on the use of seniority in contracts, blocking automatic pay increases in the absence of a current contract, bargaining over evaluations and merit pay for teachers — has been in this vein: designed to address recurring cost and quality problems, while leaving unions broad authority to bargain.[¶]

Consider even Public Act 4 of 2011, a controversial law now subject to a referendum on the November ballot.[34] The act addresses local governments “in a condition of financial stress or financial emergency.”[35]

The problem of insolvent local governments can be severe. As a co-author of this Policy Brief recently wrote:

California’s unsustainable labor obligations [have] caused cities like Vallejo and most recently Stockton to declare bankruptcy. Before entering Chapter 9 (the part of the federal bankruptcy code which applies to municipal bankruptcies), Stockton’s fiscal problems forced the city to cut 25 percent of its police force and 30 percent of its fire department. The city also had to reduce pay for all of its workers by 20 percent. In the end, the city could not even pay its vendors [and risked missing] payroll.[36] [Stockton] cut services by so much that officials said, “[P]ublic safety is at a crisis level.”[37]

Public Act 4 includes a provision allowing state-appointed emergency managers of municipalities in a state of financial emergency[38] to set aside (with approval of the state treasurer) local government-employee union contracts.[39] This power is a clear exception to the procedures established in PERA.

Yet whatever the merits of Public Act 4, the contract provision has a practical basis. Personnel costs typically represent a majority of a local government’s operating budget. Given this, and given the stated intent of the act to prevent “the insolvency of local governments” and “protect the credit of this state,”[40] the power to restructure personnel contracts furnishes emergency managers with direct control over an area of spending that may have the largest impact on their mission.

Notably, emergency managers have exercised the right to modify collective bargaining in only three local governments: Flint, Pontiac and the Detroit Public Schools. In fact, the state financial reviews in Public Act 4 have been utilized in only a small number of communities and school districts. Some elements of Public Act 4 have been invoked in the city of Detroit, but even Detroit, with its persistent and highly publicized financial problems, has yet to be placed under an emergency manager.[41]

Public Act 4, then, affects public-sector collective bargaining only in exceptional cases. In the vast majority of instances, Michigan’s legislature has yet to advance any legislation that would change the basic premises of PERA and government-sector collective bargaining.

[*] A recent report from the nonprofit organization State Budget Solutions suggests that Michigan’s reported unfunded liability of $11.5 billion for all state government pension systems in 2008 (when unfunded liabilities were much lower) ranged from $63.6 billion to $72.2 billion under alternative valuation methods and assumptions. James M. Hohman, “Commentary: Pension Liabilities Larger Than Reported,” (Mackinac Center for Public Policy, Aug. 2, 2012),  http://www.mackinac.org/17326 (accessed Sept. 28, 2012).

[†] For instance, a consultant found that the Detroit Water and Sewerage Department had 257 separate work classifications. John Wisely, “Detroit water department to cut 81% of workers under new proposal,” Detroit Free Press, Aug. 9, 2012, http://goo.gl/mvqwK (accessed Sept. 25, 2012).

[‡] Following the passage of Public Act 102 of 2011, state law now requires that teacher performance evaluations be considered before seniority in teacher layoff decisions. MCL §§ 380.1248-49.

[§] MCL § 15.568. Note that there is no reason MESSA cannot compete under the new rules.

[¶] For more information on the reforms that have been made to collective bargaining, and in other areas, see “25 Reforms in 2011,” (Mackinac Center for Public Policy, April 10, 2012),  http://www.mackinac.org/16753 (accessed Sept. 29, 2012). There were two union-related pieces of legislation that had less to do with cost: a prohibition on school districts’ collection of union dues and a general prohibition on government employers’ collection of union members’ financial contributions to union political action committees. Nevertheless, these revisions are not necessarily hostile to unionization per se; rather, they can involve legitimate questions about government’s proper role in facilitating the collection of political money for nongovernment parties.