Special Report: Public worker benefits under scrutiny

By John Foren

In the old days, the post-World War II years, there was a covenant between businesses and their workers, says Wayne Cass, who heads a coalition of employee unions at Michigan State University.

A lid would be kept on wages but workers could count on being taken care of in their retirement, with regular checks in the mail and their medical bills paid.

Like much of the economy, all of that is changing now, Cass says. Health care for retirees is being threatened like it never has before. The trouble is few – and that means pension administrators, politicians and grandpa who needs a wellness exam – were prepared with an alternative.

“It was an inevitibility, we’ve seen this coming for 70 years. The problem is we don’t have an exit strategy to get out,” he says.

Getting out of the retiree health care business is exactly what major institutions — from MSU to state government – are starting to do.

Senate Bill 1227, signed by Jennifer Granholm, isn’t just designed to push up to 56,000 state public school employees to take early retirement. The measure also forces all members of the Michigan Public School Employees’ Retirement System to contribute 3 percent of their salary into a health care trust for post-retirement health expenses.

The provision takes effect July 1, a significant day in MSU’s health care funding world, too.

The university announced in April that it would no longer offer retiree health benefits to any new faculty and staff hired as of that date.

“Clearly, when you look at the overall institutional pie the slice that keeps getting bigger is health care,” said MSU spokesman Terry Denbow.

MSU has been talking for years about cutting health benefits to retirees, even though Denbow concedes it puts more pressure on the university to lure talent with other forms of compensation.

Its fellow Big Ten school, Purdue University, already doesn’t offer health care to pensioners. The University of Michigan has its own committee studying exploding retiree health care expenses, though no changes are expected before 2012.

What the moves by the state and MSU show is that retiree health care is now fair game for public institutions who can’t afford the hundreds of millions of dollars in medical bills.

“It’s the tip of the iceberg,” says Paul Fronstin, of the Washington D.C.-based Employee Benefit Research Institute, a private, nonpartisan group that researches benefit issues.

Expect MSU’s decision to target new employees to be especially popular.

“The easiest thing to do is to take a benefit away from someone you haven’t met yet,” Fronstin says.

Still, many — especially in labor-rich Michigan — view talk of cutting any retirement benefits as anathema.

“Retiree health care is the most important benefit an employee can get,” said state Rep. Mark Meadows, D-East Lansing, who voted against SB 1227 after it came out of conference committee.

Pensions can lose value over time, Meadows says, but “you can never outlive your retiree health care.”

Why the clamor over health benefits for people once they’re no longer in the workforce?

Money. And lots of it.

The cost of pension benefits is astronomical for both the private and public sectors. But public pensions are constitutionally protected, Michigan courts have ruled. Not so for health care.

Health (including dental and vision) benefits cost the Michigan Public School Employees Retirement System $795 million in fiscal year 2009, a 70 percent increase since the start of the decade.

At that rate, longtime Michigan education leader Tom White isn’t far off when he says anticipated retiree health care costs for school employees could total $15 billion in the next 20 years.

And that’s just for retirees. That doesn’t cover medical expenses for current staffers, let alone pensions.

Total retiree expenses (including health care and pensions) is expected to comprise nearly 20 percent of school districts’ payrolls next year, White says.

That’s one reason he says of SB 1227, “It’s got to help.”

Even if it means kudos for a much-maligned state Legislature accused of being wrapped up in inertia.

“It’s like the kid who consistently gets F’s and they come home with C work,” White says with a laugh.

The measure will actually mean an extra $295 million in school retiree health care costs in its first year and about $1 billion over four years, according to a summary by the House and Senate fiscal agencies. That’s expected to come from increases in the number of retirees as teachers and others take the early retirement incentive. But worker contributions for retiree health care will total $3.5 billion over 10 years, a huge help for school districts. (Editor’s Note: For a full analysis of the reform package, click here.)

“I think it goes a long way toward controlling employer costs,” says Craig Thiel of the Citizens Research Council of Michigan. “This attempts to control some of the costs in the future but it attempts to shift some of the funding from the employer to the employee.”

Private sector employers have been targeting retiree health care since at least the mid-1990s, according to benefits experts, in part because of changes in accounting rules that required such expenses to be regarded as future liabilities.

It was inevitable that government would follow suit. A 2009 survey by USA Today showed state governments with $445 billion in unfunded medical costs for retirees.

A 2008 survey showed 4 percent of local governments sampled already were increasing retirees’ share of health costs. Another 15 percent were likely to do so in the next five years, according to Joshua Franzel, vice president of research for the Center for State and Local Government Excellence in Washington.

Just as tellingly, 3 percent had decided to terminate health care for future retirees and another 8 percent said they were likely to, Franzel said.

He firmly believes the nuclear option of eliminating benefits can be avoided with a little planning and creativity, such as governments selling bonds to fund health care.

“If steps are taken now, local governments and state governments can put themselves in a position to provide these retiree health care benefits,” Franzel says.

The best example of that in Michigan is Oakland County, which has been cited by Franzel’s organization for its foresight in the late 1980s in starting to pre-fund retiree health care liabilities.

The set-aside money was put into a Voluntary Employee Beneficiary Association (VEBA), which protected the assets from being used for anything other than retiree health care.

That wasn’t enough, though. The county also sold bonds to raise $550 million in unfunded retiree health care liabilities.

Employees hired after Jan. 1, 2006, also cover their own retiree health care through a defined contribution plan, contributing a set amount they receive from the county in every paycheck.

Oakland County officials say the various measures will eventually save their taxpayers up to $150 million.

So why didn’t more governments start saving for a rainy health benefits future when they saw the writing on the wall years ago?

“Because they took the easy route,” says Robert J. Daddow, deputy county executive. “They kicked it down the road. ‘It’s going to be someone else’s problem.’ Twenty years later, health care is exploding.”

MSU and its unions agreed to their own innovative approach in 2005 when employee pay raises were tied to the size of health care cost increases. The university had wanted to tackle retiree health expenses, too, but the unions didn’t want to mix the two issues, says Cass of the Coalition of Labor Organizations at MSU.

He doesn’t think the university’s elimination of retiree benefits will necessarily hurt it from getting top faculty talent, since so many other schools are doing the same thing.

Cass understands MSU’s budget plight. He doesn’t blame the university so much as society as a whole for not dealing with this sooner.

“This isn’t a new story. … If you go back and look at the debates we were having as a society in the ’40s and ’50s … people understood then that this was not a sustainable model,” he says.
“We are being irresponsible as a society and not doing something to replace or to provide an alternative to what individual employers can’t afford to do anymore.”

Unless the issue is dealt with, there will be a new group of people in America who worked their whole lives but don’t have access to health care other than Medicare or Medicaid, he says.

Federal health care reform will help but won’t fill all the gaps, he predicts.

“We’re creating a crisis for the next generation,” Cass says.

Or the current one.

“At some point in this country we’ve got to decide how we’re going to handle health care,” says Doug Drake, a senior policy consultant at Lansing’s Public Policy Associates.

“Basically, since World War II health care has primarily been a combination of employer-provided benefits and government-provided benefits.”

If that system changes – as seems evident – then many workers will be left out in the cold because they weren’t prepared for it, Drake says.