Michigan recently took a big
step toward bringing government employee benefits into balance when Gov. Rick Snyder signed Senate Bill 7, which restricts local governments and
school districts from offering health insurance benefits that are more generous
than those provided to most private-sector employees.
This represents an important
shift. Typically, residents of financially strapped communities are told they
have just two options: accept higher taxes or fewer services. The new law makes
it clear that a third way exists, which is lowering the cost of existing
government services — in this case, by up to $1 billion annually if the new law
is implemented appropriately.
While these savings won’t go directly into taxpayers’ pockets, residents are likely to see fewer of those false choices to “raise taxes or cut services” in the future.
Specifically, the new law limits
the amount a school or local government can pay for employee health insurance,
although the caps are still well above private-sector averages. For example, a
new $15,000 cap on the amount a public employer can pay for a “family plan” is
still 46 percent above the typical private-sector level. (The cap for a single
person is $5,500 and $11,000 for a couple.) The caps will be allowed to
increase with health care inflation, which increased around 4 percent per year
in the past decade — greater than regular inflation.
Alternatively, the law allows
public employers to require employees to pay at least 20 percent toward the
cost of their health insurance premiums, which is closer to what’s typical in
the private sector. Not applying the hard caps when there are high premiums
dips into potential savings.
A loophole will allow a local
government (but not a school district) to ignore the caps if two-thirds of its governing
board so chooses.
Despite these generous limits and
the loophole, six Republican legislators and all but one Democrat still voted
against the measure. The Democrat was Rep. Tim Melton, D-Auburn Hills, who has
since chosen to leave the Legislature to accept a position in the education
reform organization StudentsFirst. Melton also was the only Democrat to vote
for recently adopted reforms to the state’s teacher tenure law.
Mackinac Center research has
shown that the state could save $5.7 billion annually by bringing government
benefits in line with private-sector averages. The cost of those benefits has
risen 25 percent since 2000, after adjusting for inflation, even as average
incomes for Michigan taxpayers fell by 20 percent. In short, while households
and small businesses struggled, those employed by government were protected.
Some $2.2 billion of that $5.7
billion in potential savings would come from reducing government and public
school employee health insurance benefits, with the rest coming from retirement
benefits, paid-leave programs and other perks. Since the new law does not apply
to all government employers (including the state itself and public
universities), and because of its loophole and overly generous caps, the
savings are likely to amount to around $1 billion when fully implemented.
Still, even in Lansing — let
alone your town and local school district — that’s real money. The savings
won’t be spread evenly, however. Schools and local governments that currently
have the most expensive benefits will realize the greatest savings. And while these savings won’t go
directly into taxpayers’ pockets, residents are likely to see fewer of those
false choices to “raise taxes or cut services” in the future.
The new law will fix a portion of Michigan’s government and
school overspending crisis, but clearly there’s more work to be done,
especially in the area of generous public-sector retirement benefits.
Nevertheless, this is a solid step toward bringing benefits into balance, and
given the intense opposition of politically powerful government and school
employee unions, lawmakers should be congratulated for taking it.
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 part is hereby granted, provided that the author and
the Center are properly cited.