Michigan faces ‘spooky’ retiree health care costs

By   /   October 5, 2010  /   1 Comment

By Jonathan Miltimore — Michigan faces more than $41 billion in unfunded health care liabilities larger than most state pension systems. A battle is brewing to see who picks up the tab.

Michigan retirement systems remain severely under funded despite recent law changes, state officials say, a problem faced by every state and most municipalities.
 
According to government actuarial documents, the state’s unfunded liabilities for health care and other post employment benefits (OPEB) is more than $41.5 billion, a figure larger than the total assets in most state pension funds.
 
“When you look at that OPEB liability, it’s a spooky figure no matter how you look at,” said Phil Stoddard, Executive Director of the Michigan Office of Retirement Services.
 
Last week the state passed legislation curtailing employee multiplier increases and imposing a 3 percent payroll tax on state workers who fail to retire by year’s end, similar to legislation passed earlier this year affecting employees in the state education system.
 
State employee unions, who opposed the legislation, say the state violated worker contracts and collective bargaining agreement rights.
 
“We are anticipating filing joined-effort litigation,” said Ken Moore, President of Michigan Service Employees Association. “Right now papers are being drafted.”
 
Particularly aggravating for state employees, Moore said, was a provision that exempted legislative staffers and other capitol employees from the multiplier reduction and health care tax.
 
Unlike pension plans, which are usually pre-funded to some extent, health care costs of retirees are usually not prepaid by states, but funded annually by current employee and state contributions, both coming from taxpayers.
 
Michigan is one of sixteen states to overhaul pension laws this year.
 
The trend, experts say, was precipitated by spiraling obligations due to poor funding and the stock market crash, which wiped out more than 20 percent of assets in many retirement systems, requiring a 46 percent increase this year just for them to get even.
 
Current estimates place total unfunded liabilities of at least $1 trillion and as high as $4.4 trillion.
 
Critics of the current pension funding system say the scheme is flawed because future taxpayers are left on the hook to fund promises that governments are making but not funding.
 
“State budgets have not been truly balanced because you have not contributed what (employees) have a right to receive.” said Sheila Weinberg, a CPA and founder of Truth in Accounting. “Those are benefits employees have earned the right to receive, but the funding is left to future taxpayers.”
 
In Michigan, state documents show total state retirement liabilities at $112.7 billion, less than $60 billion of which is funded, about 53 percent, based on assumptions of risk-free high earnings every year forever.
 
According to the Employee Retirement Income Security Act, a plan is "endangered" when its asset-to-liability level falls below 80 percent and "critical" when it drops below 65 percent.
 
“For every dollar they have promised they have only put away 53 cents, according to their own estimates,” said Weinberg.
 
That figure would be significantly lower if actual market values of assets were used, Stoddard admitted, or if state investments fail to meet the anticipated rate of return of 8 percent.

A growing chorus of economists and lawmakers, including Michael Bloomberg, most recently, has questioned the likelihood of states reaching a rate of return of 8 percent.  
 
Stoddard said he wouldn’t recommend a rate above 8 percent, but indicated he believes the figure is reasonable. He added, however, the state’s hybrid plan for future hires assumes a more conservative rate of 7 percent.
 
While the recent law changes would not come close to covering future OPEB obligations,
Stoddard said the 3 percent tax would cover about $300 million of next year’s $850 million obligation.
 
A 2007 law that tied health plan premiums to length of service has also reduced the state’s future obligations somewhat, he said, but future liabilities remain a concern.  
 
“We have a lot of people retiring in the next decade,” Stoddard said. “We are on a cash basis and health care has been beating inflation for a number of years now.”
 
While the Michigan Supreme Court has indicated health care benefits may not be “absolute, Weinberg said it would be foolish not to account for them.
 
“Under current law employees do have a right to those benefits,” Weinberg said. “Until they change the law you have to assume the liability.”
 
A battle is brewing to see who will bear the brunt of that liability.
 
Moore, whose phone has been “ringing off the hook” from union members, said lawmakers are unfairly targeting public employees, who have already been hurt by mandatory furloughs and salary concessions in 2007.
 
“They are trying to balance the budget on the backs’ of state employees,” Moore said. “I call it stealing.”
 
Moore indicated MSEA would oppose extending the health care payroll tax, which is scheduled to sunset in 2013.
 
“The loudest complaint from my members is that they are paying 3 percent for someone else’s health care,” he said.
 

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  • Tough Love

    Quoting …”State employee unions, who opposed the legislation, say the state violated worker contracts and collective bargaining agreement rights.”

    SCREW the Unions………..

    Taxpayers should renege on ANY further funding of Civil Servant Pensions & retiree healthcare …. until and unless THEY get EQUAL pensions & benefits.

    Civil Servants are NOT “special” !