News Story

MEA Wounds Governor’s School Pension Reform

This year, Gov. Jennifer Granholm proposed requiring that school and state employees contribute an additional 3 percent of their pay into their traditional "defined benefits" pension fund, in return for a 6.6 percent early retirement pension benefit "sweetener." Last week, the House of Representatives passed its version of the school pension measure, Senate Bill 1227, which was loaded down with "poison pills" and costly giveaways to unionized school employees, presumably extracted by the politically powerful Michigan Education Association union.

Described here in a previous story was one of those poison pills - a provision that would financially cripple many charter schools by forcing them to pay regular assessments into the underfunded traditional pension system of the regular schools, and to enroll their employees into that system. The House also doubled the early retirement incentive from a 6.6 to a 13.3 percent pension increase, allowed some "retired" teachers to double-dip by collecting a pension while still working, and stripped out a modest reduction of future benefits for new hires proposed by the governor.

Without that last provision, and given the automatic salary increases that most school district contracts grant, the "reform" passed by the House may actually increase school expenses over time, even with the increased employee contributions to the system.

Another curve ball the House added was to use the revenue stream from those extra employee contributions not to bolster the pension fund, but instead to create a new fund to pay health care costs incurred by retirees. This was a clever move by the MEA, and here's why:

Practically no money has been set aside for those retiree health benefits. That portion of the retirement package - called "Other Post Employment Benefits," or "OPEBs" - is essentially a "pay as you go" health care system. The "you" in that phrase is school districts (and ultimately taxpayers), which are assessed a percentage of their total payroll to cover both the pension obligations and the OPEBs. Most of the assessment money goes into long-term investments held in the state-run pension fund that provides current and future retirees' monthly pension checks. The rest, however, goes right back out the door to pay the medical bills of current retirees. This year, the assessments on schools are 16.94 percent of payroll; they may rise as high as 19 percent next year.

Here's the intriguing part: Under a Michigan Supreme Court ruling a few years ago, those retiree health care benefits aren't considered an actual "enforceable obligation." That means the state could legally trim them - limiting coverage, requiring co-pays or theoretically even wiping out the benefits altogether.

This is less radical than it sounds. After all, these individuals all get Medicare at age 65 just like the rest of us. As for those age 50-something government and school retirees, the Lansing State Journal opined recently that people of working age should not be collecting full health benefits unless they are working. Michigan State University just ended such benefits for new hires - reportedly the last Big 10 school to do so.

In contrast, unlike the OPEBs, under the Michigan Constitution and federal law the actual cash pension benefits probably are an enforceable obligation. This means that if at some time in the future there is not enough money in the pension fund to cover the benefits, taxpayers will on the hook to pay the difference. And there isn't enough in the fund: It currently contains 84 percent of the assets needed to meet these future obligations - not as bad as some states, but still a serious shortfall.

What the House did in their version of SB 1227 was to ensure that the new employee payroll contribution revenue will not be deposited into the underfunded pension fund. If they had, this would reduce the chances that future taxpayers will be on the hook for the real enforceable obligation - those cash pension benefits. Instead, the House version earmarks the new money to pay for the non-obligation - the health care OPEBs.

(In the Senate and governor's version, the new employee contributions could be used to either bolster the pension fund, or to reduce the amount that school districts must pay into the system.)

Here's the bottom line: Taxpayers are (probably) on the hook for the cash pension payments no matter what, but may be able to get out of the OPEBs. So, the union demanded and got a bill that keeps the new money out of the pension funds that pay the real obligations - the cash pension benefits. After all, why pre-fund those pension checks when extra dollars can always be extracted from future taxpayers once the bills come due? Instead, the new revenue stream will be reserved for health benefits that taxpayers may be able to escape.

Is it fair to blame the MEA for all the above? In a MIRS news report Senate Majority Leader Mike Bishop, R-Rochester, characterized the House bill as a "boondoggle for special interests." When asked if this referred to the teachers unions he said, "The House has their marching orders."


Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.