Analysis: Senate GOP Fumbles, May Approve $25.9 Billion Taxpayer Liability to Satisfy MEA

Negotiations are continuing between the Republican majority in the Michigan Senate and House Democrats on a modest school pension reform proposal recommended by Gov. Jennifer Granholm to help balance next year's budget. Late reports suggest that GOP Senators may be ready to surrender on one particular demand from the Michigan Education Association that could load a new $25.9 billion liability onto taxpayers.

That's the amount the state would have to set aside to cover future school employee health care benefits under a union-supported provision. Unlike pensions, these benefits can be altered at will by the state and so under current law are not considered enforceable obligations. The MEA is demanding the law be amended in a way that, in effect, would convert them into real liabilities on the state.

Senate Republicans dealt themselves a weak hand for these negotiations beginning in March, when they took up their own version of Gov. Granholm's proposal. As described in Capitol Confidential at the time, several GOP Senators who have been recipients of MEA campaign cash and endorsements caused the removal of several reforms recommended by the Governor but opposed by the union.

This was unfortunate, because the measure cannot become law unless it is also approved by the MEA-friendly Democrats who control the House. Anticipating tough bargaining to come, rather than "negotiate with themselves" the Senate majority should have been staking out the strongest possible bargaining position. By doing just the opposite, GOP Senators ensured that the ultimate price for any reform would be much higher. Perhaps so high that the final bill is not worth adopting.

That's what appears to be happening now. In the words of Senate Majority Leader Mike Bishop, House Democrats have received their "marching orders" from the experienced teacher's union negotiators. Predictably, they not only tossed out all but one of the proposed reforms, but also loaded up the measure with "poison pill" anti-reforms. (See sidebar below for a full list of each side's provisions.)

Some of these House additions were "throw-aways," bargaining chips the MEA didn't really expect to get but could nevertheless use to cancel out something the other side wanted. A provision to force charter schools to enroll their employees in the underfunded defined-benefits pension system probably was one of these.

Other items appear to be real demands that carry huge long-term price tags, especially the one converting the non-obligation of retiree health benefits into an enforceable obligation and genuine taxpayer liability. As the process has unfolded it has become apparent that this is the real "pound of flesh" the MEA is demanding as the price of a modest 3 percent increase in employee pension contributions, which was the centerpiece of Gov. Granholm's original proposal.

The MEA is probably the most politically powerful special interest in this state. It all but "owns" the Democratic majority in the state House, and has a partial stake in the Republican-controlled Senate majority caucus as well. The union is also a world-class bargaining-table champ, for decades having rolled-over the amateur school boards of Michigan's 551 school districts, securing fringe benefits that far exceed private sector norms, and salaries that now make our teachers the highest paid in the nation relative to the income of the state taxpayers who support their salaries.

Compared to the MEA's bargaining savvy, the political careerists who comprise the Senate Republican caucus are relative amateurs at this game. That would explain late reports suggesting that they may now be negotiating the terms of a surrender of the state's flexibility in altering retiree health benefits — a provision that was not part of Gov. Granholm's original proposal.

GOP Senators will probably challenge this characterization, but statements suggesting that the measure will probably get more votes from Senate Democrats than Republicans undercuts their denials.

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Sidebar: Blow-By-Blow of Pension Reform Negotiations

January 29: Gov. Jennifer Granholm proposes a modest pension reform package for school employees that includes:

• Increase of 3 percent in employee pension contributions
• Boost by 6.6 percent the cash pension benefits of eligible employees who retire this summer (which saves money [in the short term] by replacing high-salary veterans with [initially] lower-paid new hires)
• Prohibit employees from accumulating more than 30 years of service credit toward the calculation of their pension allowance, starting on Oct. 1, 2010
• Eliminate post-retirement vision and dental coverage for school employees who retire after Oct. 1, 2010
• Increase the retirement age for newly-hired school employees (but not replace the traditional "defined benefits" system with a defined-contribution 401[k] one)

March/Early April: Senate Republicans initially favor a substitute that contained all the governor's provisions except for the 6.6 percent early retirement "sweetener." However, as described in the April 2 Capitol Confidential, several GOP senators who have been the beneficiaries of MEA campaign cash and endorsements balked (see "School Pension Reform Stalls in Senate"). After weeks of "negotiating with itself," Senate Republicans finally agreed to, and the Senate passed, a bill that contained the following (bold print indicates rejected items or new demands):

• Increase of 3 percent in employee pension contributions
• NO 6.6 percent boost in cash pension benefits for eligible employees who retire this summer
• NO cap on the number of years employees can accumulate pension-boosting service credits
• NO elimination of post-retirement vision and dental coverage
• Increase the retirement age for newly-hired school employees

April 27: House Democrats reject the Senate version, and with just one Republican vote, pass one with the following:

• Increase of 3 percent in employee pension contributions
• 13.3 percent boost the cash pension benefits of eligible employees who retire this summer
• NO cap on the number of years employees can accumulate pension-boosting service credits
• NO elimination of post-retirement vision and dental coverage
• NO increase the retirement age for newly-hired school employees
• Reduce the eligibility standard for the early retirement pension enhancement
• Force all charter school employees into the regular schools' defined benefit pension system, requiring charter operators to pay assessments that could force many to close their doors
• Also force outside contractors who provide non-instructional services such as transportation, custodial and food services into the defined benefit pension system
• Allow some of the teachers who retire early to "double dip," collecting both a monthly pension and a paycheck for part-time work in the schools
• Deposit the increased employee pension fund contributions into a segregated "irrevocable" trust fund to be used exclusively to pay retiree health benefits (rather than use the money to reduce school district contributions or bolster the underfunded pension fund), and declare these benefits to be contractual obligations

April 27 to Present: The Senate promptly rejected the House-passed version, and both sides appointed members to a conference committee to work out the differences. The current state of play is a moving target, but the latest reports indicate that the House has dropped the charter school provision, and is willing to dicker on the size and scope of the early retirement pension enhancement, but is fighting for health care prefunding and forcing third party school service contract employees into the pension system.

The Senate is also willing to dicker on the early-out pension enhancement, and may surrender on the health care trust fund in return for language stating that "in the aggregate" school retirees do have a contractual right to health care benefits, but not as individuals. What effect the distinction would make is unknown, besides assuring that lawsuits would be class action ones rather than individual cases in the event of any benefits "haircuts." Either way, taxpayers would be on the hook for a new $25.9 billion liability.