To a limited extent, state policymakers have already begun using incentive-based programs to encourage local government entities to reduce the cost of their employment benefits. Both the Economic Vitality Incentive Program for municipalities and other local governments and the Best Practices Incentive for K-12 public schools are examples of these.

The EVIP provides extra revenue-sharing payments to local municipalities that meet the state’s requirements for accountability and transparency, consolidation of services and employee compensation.[77] The terms pertaining to employee compensation include the following:

  • Capping retirement contributions (for both defined-benefit and defined-contribution plans) for new hires to 10 percent of base salary.[*]

  • Using a pension formula that includes at least a three-year average salary, not more than 240 hours of paid leave and a multiplier that does not exceed 1.5 percent (or 2.25 percent if the employee is not offered other post-employment benefits, such as retiree health insurance coverage).[†]

  • Requiring new employees to contribute at least 20 percent to the costs of their health insurance premiums, or that insurance costs are “competitive” with the main insurance plan offered to state government employees.[‡]

The Best Practices Incentive for K-12 public schools was used for the 2011-2012 school year to encourage local government officials to reduce the cost of the health insurance coverage they provide employees. School districts and charter public schools could earn an addition $100 per pupil if they met four out of five “financial best practices,” one of which required employees to pay at least 10 percent of their health insurance premiums.[78]

The Legislature could do more, however. Below are some ideas for lawmakers to consider along these lines:

  • Create a “financial best practice” program that includes reducing employment benefit costs for community colleges, state universities and other subsidiary government units that do not participate in EVIP.

  • Survey local government units for paid leave and supplemental pay policies to see whether incentive programs could work to reduce the cost of these benefits as well.

[*]  If the employee is one of the employees in the state that do not participate in Social Security, then retirement contributions are capped at 16.2 percent. PA 200 of 2012 § 952(3)(c)(i)(A)

[†]  An extra 0.75 percentage points are added to the multiplier if the employee is not part of social security or offered retiree health insurance benefits. PA 200 of 2012 § 952(3)(c)(i)(B)

[‡]  PA 200 of 2012 § 952(3)(c)(i)(D). The state’s current employer annual premium costs of its PPO plan range from $5,060 to $15,847, depending on the type of plan, bargaining unit and hiring date of the employee. Calculation based on rates listed in "Employee Benefits: Insurance Rates - Rates for 2012-2013," (Michigan Civil Service Commission, 2013), (accessed Sept. 18, 2013). The local governments can also receive this portion of the EVIP if it certifies that it does not offer its employees any health insurance. PA 200 of 2012 § 952(3)(c)(ii)(B).