Legislature Reforms Retiree Health Benefits

Last week the Michigan Legislature completed work on legislation to reform the unfunded post-retirement health benefits provided to current and future state government employees. The two-bill package passed 23-13 in the Senate, with three Republicans joining all Democrats in opposing the reform. The House had previously approved the reforms, and quickly concurred with some of the Senate’s amendments, sending the bills along to Gov. Rick Snyder for his signature, which is expected.

Currently, all state employees upon retirement receive health insurance under a “defined benefit” system. Unlike regular pension benefits, virtually no pre-funding has been set aside to pay for these benefits. It’s a “pay as you go” system, with current and future taxpayers shouldering the burden.

The reforms now awaiting the governor’s signature would no longer provide these unfunded retirement health benefits for state employees hired after 2011. Instead, the state would increase matching contributions to a tax-deferred Health Reimbursement Account owned by each employee, plus another lump sum contribution each year.

On the pension side, the most important change affects state employees hired before 1997, who are still provided conventional “defined-benefit” pensions (state workers hired after that time are in a 401(k)-type defined-contribution system). These older employees would have a choice to either start contributing 4 percent of their salary toward the cost of their pension benefits, or else have those benefits “locked” at the amount the person would collect if he or she retired now. Going forward the state would open 401(k)-type accounts for the individuals and make contributions to it, just as it does for those hired starting in 1997.

That 4 percent employee pension contribution replaces a controversial 3 percent one required by a 2010 law.

House Republicans all voted for the reforms, but three Senate Republicans broke ranks and voted with Democrats against them: Sen. Tom Casperson, R-Escanaba, Sen. Rick Jones, R-Grand Ledge, and Sen. Mike Nofs, R-Battle Creek.

Sen. Jones said he believes the 4 percent contribution could be found to be unconstitutional.

"I don't believe enough effort was made to solve the legal questions," he said.

If a decision from the Michigan Supreme Court were to find the contribution legal, Sen. Jones said that could change his vote.

"If this had been answered ahead of time, without having to possibly vote for something unconstitutional, I would certainly take that into consideration."

Although 23 Senators did approve these reforms, the body stripped out a House-passed reform that would have prohibited “pension spiking,” whereby a government employee racks up lot of overtime in his or her final year on the job, which inflates the value of their pension that they receive for the rest of his or her life. Instead, the Senate adopted a watered-down reform that includes the average overtime paid over an employee’s last six years on the job.

According to James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, although more reform work needs to be done (the legislation does not affect school employees, for example, who outnumber state workers by 3-to-1), the bills that passed will nevertheless save taxpayers a lot of money.

“The post-retirement health benefits have already become an excessive cost burden,” said Hohman. “This year taxpayers will pay $387 million to provide health insurance to thousands of former government workers. That’s more than double the $166 million paid out annually a decade ago, and the increases show no signs of abating.”