Public-Sector Retiree Health Care Benefits are Unreasonable

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 abating.

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 well.

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 benefits.

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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.