LANSING — Republican lawmakers are trying to force public employees to pay more for health care and convert their pensions into 401(k)-style plans, confronting the same union forces they targeted in a push four years ago to make Michigan a right-to-work state.
The bills working their way through a GOP-controlled Legislature would bring government workers in line with what has become the norm in the private sector. One of the last bastions of union power in America — public employees — promises to fight to protect their dwindling clout in a state long considered the ancestral home of organized labor.
That December 2012 battle over legislation to prohibit unions from collecting dues as a condition of employment also was fast-tracked during the lame-duck legislative session. It drew more than 10,000 protesters at the Capitol.
House and Senate committees' decision last week to take up bills intended to control costs of pensions and retiree health care is just as acrimonious.
The bills are contentious for more reasons than simply timing. Any change to retirement benefits would directly affect public employees, including teachers, police officers and firefighters — who will make for telegenic protesters.
Legislation in the House would ban unions from bargaining retiree health care terms with their municipal employers after Jan. 1, while the Senate is considering moving newly hired teachers into a 401(k)-style retirement savings account.
Proponents, including GOP legislators and some municipalities, say generous benefits were promised decades ago in different economic times and are now unsustainable. Researchers estimate municipalities across Michigan collectively are on the hook for an estimated $11 billion just in unfunded health care obligations. The scale of the problem has many cities, townships and counties struggling to set aside enough money without cutting services.
Local finance experts and some local leaders are warning that compounding retirement obligations could lead to insolvency, if nothing is done to control costs.
Union leaders argue the changes would amount to reduced benefits and a weakened position to attract quality teachers, firefighters and police. Some opponents say the ability to pay into retirement plans also has been hurt due to state revenue sharing cuts and the effects of Proposal A of 1994, which restricts annual property tax growth — both of which would take legislative action to fix.
It's broadly acknowledged that Michigan municipalities are underwater in funding their retirement benefits. Pensions are a constitutionally protected benefit and local governments are required to contribute annually toward their obligations; retiree health care benefits have no such requirements.
But that's where the agreement ends.
"The good news is we've identified a problem," said Mark Diaz, president of the Detroit Police Officers Association who also sits on the city's police and firefighters' retirement board and sees the legislation as chipping away at public unions. "Every local municipality should have the ability to negotiate their own benefits within their own community with their employers.
"Trying to correct — and I'm using air quotes when I say that — trying to correct a problem by employing a scorched-earth policy is not the solution. In fact, it becomes more of a hindrance."
Right-to-work laws sprang partly as a backlash against a union-backed attempt to enshrine collective bargaining rights in the state Constitution that voters ultimately rejected.
Like right-to-work before it, reforming public retirement benefits is a priority of conservative lawmakers and influencers, including the West Michigan Policy Forum, whose attendees in September ranked reforming benefits its top issue. The group invited public union leaders in a memo sent last week to discuss the problem together, adding that they want legislators to take action to preserve benefits from being eroded and to recruit younger workers who desire more flexible benefits.
Americans for Prosperity and the Reason Foundation, both of which have ties to the conservative billionaire Koch family, testified last week in the Senate in support of moving teachers into defined-contribution retirement plans.
Some of the biggest advocates for legislative action are municipal leaders themselves, who have to make spending decisions about retirement benefits while balancing the need to pay for city services. The Michigan Municipal League supports the House bills in concept, but is polling its member cities on possible revisions.
Employee legacy costs have reached a tipping point that, if ignored, will be dangerous to city budgets, said James Freed, Port Huron's city manager, who convened a group of about 100 local leaders this fall to discuss the issue.
"We recognize the problem. We have defined the problem. Inaction is immoral," Freed said. "We have an ethical obligation to address this challenge."
Other post-employment benefits, which include health care for retirees, have surpassed pensions as local governments' biggest unfunded liability, said Eric Scorsone, deputy state treasurer and a Michigan State University faculty member who has written recent reports on the issue.
Just 14 percent of local retiree health care plans across the state were funded in 2014, up from 9.5 percent in 2011, according to Scorsone's updated research, which was published this year. In comparison, local pension systems overall are about 78 percent funded, he said.
Cities, counties, villages and townships are paying $480 million annually toward retiree health care obligations, mostly for premiums, he said. He estimated it would take an estimated $800 million per year to also prefund the benefits.
Dave Walker, a former U.S. comptroller general and senior strategic adviser for auditing and consulting firm PricewaterhouseCoopers, studied pension and health care benefits in several municipalities — Ann Arbor, Grand Rapids, Kalamazoo, Lincoln Park, Port Huron, Saginaw and Grand Traverse County — in a presentation to the West Michigan forum this fall.
Walker reviewed their reported retirement obligations in their annual year-end audit documents, and then adjusted them based on lower, or "normalized," estimated investment rates of return — about 5.5 percent, compared with at least 7.5 percent as used by some municipalities, he said. Lowering the rate indicated that underfunded retirement obligations were roughly three times greater than what municipalities reported, he added.
Combined, municipalities included in the study disclosed unfunded pension and healthcare obligations of $321 million and $855 million, respectively, according to Walker's report. Those figures swelled as high as $1.7 billion and $1.1 billion, respectively, when adjusted for lower investment returns.
The bottom line, he said, is that using rosier expectations could mask the true problem. And since Americans are living longer and health care costs continue to rise, Walker added, "it's going to end up being a bigger problem if left unaddressed."
The funding gap for retiree health care didn't fully become known until 2008, when the governmental accounting standards organization that sets rules for local governments first required accounting for other post-employment benefits on municipal balance sheets, Scorsone told Crain's.
House Speaker Kevin Cotter testified last week that the proposed healthcare reforms were necessary to prevent costs from bankrupting cities.
Scorsone said he doesn't think bankruptcy is an inevitable option, because local governments would have to choose that path. Still, he added: "I definitely see a lot of fiscal distress. We see that today. It's not something that's going to happen. It is happening."
The Legislature is moving forward with two separate sets of bills affecting two groups of public employees.
In the Senate, bills would move newly hired teachers into a defined-contribution plan, rather than the hybrid defined-contribution and pension plan they receive now. New teachers were moved to the hybrid in 2010 and its pension component is fully funded today, according to the Senate Fiscal Agency.
Sen. Dave Hildenbrand, R-Lowell and chairman of the Senate's appropriations committee, said during a hearing that the proposal would modernize the teachers' retirement system and offer long-term benefits.
But the Senate's fiscal analysis showed that shifting to a 401(k)-style plan would cost at least $28 billion, including $3.8 billion over five years, due to the costs of operating a defined-contribution system and accelerating funding into the old pension system, which has a $26.7 billion unfunded liability. The state's School Aid Fund and individual districts could be on the hook for added costs, according to the analysis.
The legislation narrowly passed a Senate committee, and Senate Majority Leader Arlan Meekhof hasn't set a date for a floor vote, a spokeswoman said. It's opposed by Gov. Rick Snyder, who favors the hybrid plan, spokeswoman Anna Heaton said.
"He believes moving to close that system right now would not be financially prudent due in large part to the transition costs," Heaton said. "He hasn't seen any numbers yet to change his mind on that, but as always he remains open to working with the Senate and the House."
A spokesman for the state's Office of Retirement Services, which administers the Michigan Public School Employees Retirement System, said closing the hybrid plan would do nothing to pay down state pension liabilities that already exist.
Doug Pratt, a spokesman for the Michigan Education Association, the state's largest teachers union, said teachers already are paying more toward their retirement. Educators are concerned that fewer teacher candidates would consider applying for jobs in Michigan.
The bills would "take yet another step to make the education profession even less attractive by continuing to erode retirement benefits," Pratt said. "Nobody gets into education to get rich, but you should be able to lead a comfortable, middle-class existence."
The House last week introduced a 13-bill package meant to control cities' costs toward retiree health care. Overtime pay, sick or vacation leave, bonuses or other compensation "paid for the sole purpose of increasing final average compensation" would be excluded from determining an employee's base pay. Municipalities would be limited to paying 80 percent of annual retiree health care costs starting May 1, 2017, and 2 percent of an employee's base pay into a tax-deferred retirement health account for new employees hired after April 30, 2017.
The requirements would only apply to municipalities whose retiree health care costs are less than 80 percent funded, or municipalities that fall below the 80 percent threshold for two straight years.
All but one of the sponsors of the House bills is term-limited after this month. Rep. Earl Poleski, R-Jackson and a bill sponsor, said term limits are a significant reason the bills are being introduced now.
"The object is to try and make sure that those benefits are available for employees in the future," Poleski said. "To provide health care to pre-Medicare retirees is incredibly expensive and, frankly, has to decline very steadily or end. Most folks in the private sector are working until they are Medicare-eligible, and that is going to have to become more of the model in government, as well."
In September, Freed, Port Huron's city manager, gathered municipal leaders in Lansing to talk about their funding scenarios and set the stage for possible legislative action. Freed said he would like the Legislature to lower the bond rating required by state law for cities to issue pension bonds.
"It's welcome news to hear the Legislature is finally talking about this issue," he said of the House bills.
Port Huron has a larger pension shortfall than health care — $103 million in unfunded liabilities, compared to $37 million for retiree health care, Freed said, though both gaps are issues. The city last year paid $3.9 million toward its pension obligations and $3 million toward its other post-employment benefits, he said. The city expects combined payments for both to rise north of $12 million within five years. That is with more than 200 employees contributing 10-12 percent toward their pensions, he added. The city has 333 retirees.
"Was it just a Port Huron issue or was this a universal issue? And it turns out this is a statewide issue," Freed said. "To be frank, I was taken aback at the size and scope of this challenge."
Auburn Hills' retiree health care obligations are 49.2 percent funded, according to data from Auburn Hills City Council member Bob Kittle. Its pension liabilities are in better shape, at 87.1 percent funded, he said.
Kittle, who also is president of Munetrix LLC, which performs financial analyses for local governments, said simply lowering assumptions on investment returns by a quarter of a percentage point led the city to roughly double its annual contribution, from $1.6 million to about $3.2 million.
The legislation doesn't address the underlying problem, which is revenue-sharing cuts and limited property tax growth that affect cities' ability to prefund the benefits, Kittle said. Auburn Hills closed its defined-benefit pension plan to new hires in 1999 and has offered a defined-contribution plan since, he said.
"You don't find a lot of people coming out of college with their arm in the air saying, 'I want to be a municipal government employee,'" he said. "The retiree plans that they had in place was a big lure for some people."
Yet, he said, the outcome of past lucrative benefits is that some retirees are drawing a pension longer than they're drawing a salary, some still with cost-of-living multipliers — and taxpayers are footing the bill.
"You got people who are retiring for 40 years after working for 25," Kittle said. "That's unsustainable."