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Report: Unfunded health care twice as much as unfunded pensions

October 4, 2016

(GRAND RAPIDS) — Michigan’s state and local unfunded liabilities is a problem that is only compounding with time, warned former U.S. Comptroller General David Walker in his report to West Michigan business leaders Monday.

Speaking at the West Michigan Policy Forum, Walker tackled the weighty topic of Michigan’s challenge to fund its retirement obligation in a report compiled by PricewaterhouseCoopers (PwC). 

The study looked at the unfunded liabilities of seven municipalities: Ann Arbor, Grand Rapids, Grand Traverse County, Kalamazoo, Lincoln Park, Port Huron and Saginaw. Failure to resolve unfunded obligations will “ultimately” result in higher taxes, less resources for priority government services such as education or infrastructure and lowered competitiveness as a state, Walker said. 

Walker is currently senior strategic advisor for the Global Public Sector Practice at PwC. He warned that retiree healthcare costs are “two or three times” larger than pension costs, which he estimated as being anywhere between three to five times larger than what is being reported. 

“The point is this is a real problem,” Walker said. “It’s growing with the passage of time. Doing nothing is not an option.” 

The first order of business Walker said is to restructure existing obligations — made up of two parts: retiree healthcare and pensions — and make holding state or municipal jobs competitive with fortune 500 companies. Going forward, negotiating cost-sharing benefit plans, Walker said could free up capital to offer more attractive salaries and benefit options to current or prospective employees. 

According to Walker’s report, Michigan currently ranks 42nd among the 50 states in terms of relative financial position and competitiveness. Walker pointed out Indiana as a potential model state in the Great Lakes region. The Hoosier State ranks 12th in the nation, making it the highest-ranked Great Lakes state.

This is a problem that only compounds and worsens with time Walker said, a point with which former state treasurer Doug Roberts agreed. “I was particularly impressed with the argument, if you look at the analysis, the dynamic of it [unfunded liabilities] is getting worse. I think that is a very important point.” 

Roberts pointed out that in 1974 Michigan State University, one of the largest employers in the Lansing area, began moving employees away from defined benefits. 

“Michigan State University once had defined benefits years ago . . . but then Michigan State University has 385 employers receiving a defined benefit,” Roberts said. “That’s all. The point being is — of course they adopted in 1974 — but it gives you the idea that sooner or later the problem goes away.” 

Roberts said he thinks the state is doing “pretty good” on the pension side, but covering the cost of health care is “a much bigger issue.” 

“Very candidly, there was not the pressure to prefund health as there was to prefund pensions,” Roberts said. 

James Freed, CEO for the city of Port Huron, said he’s seen the pressure rise as the problem moved beyond the concern of city administrators to current city employees who worry their benefits will not be funded in the future. Freed noted litigation going on in St. Clair County about whether or not current retirees’ union-negotiated healthcare benefit contracts can be restructured. 

One advantage Michigan has in mitigating unfunded liability obligations over other states is it’s emergency manager law, Walker said, citing Lincoln Park’s emergency manager’s decision to eliminate post-employment benefits. 

“You want to negotiate these union contracts before you’re on bankruptcy’s door and one of the things you have in this state that you don’t have in a lot of states is the emergency managers, which has already been done in Lincoln Park to take on these issues to try to avoid bankruptcy, because bankruptcy can have some negative effects on other municipalities,” Walker said. 

Grand Traverse County Administrator Tom Menzel said that he has been working with labor unions to make changes to healthcare, and that with non-union employees the city has already made “structural changes” to healthcare and defined benefit. One measure the city has taken is ending lifetime supplemental insurance. 

“We have to go through all the unions and negotiate that same thing,” Menzel said. “We’re starting that process. It’s not going to be easy, but it’s necessary for our survival.” 

Some of the other non-emergency management options for negotiating cost include entering healthcare plans into the Affordable Care Act exchange, requiring beneficiaries to be fully retired before tapping into the system or rolling retirees off to Medicare once they become eligible. 

“I think the Affordable Care Act [ACA] is both a curse — mostly a curse — and a blessing,” said John Kennedy with Autocam Medical, a West Michigan-based medical device company speaking on a panel about Walker’s report. “It’s a curse in this case because most plans offered by local government are considered ‘Cadillac plans’ that carry a 40 percent excise tax.” And that tax, Kennedy said, will either be paid by taxpayers through local governments or the plans will change. Kennedy said a “truly affordable” plan would be a stipend plus an ACA exchange that offered multiple care options. 

Nick Ciaramitaro with the AFSCME supported ACA-backed plans, saying that collectively bargaining with insurers or “shopping” around the state could help stretch dollars. 

“Once you spend it on employee healthcare, you can’t spend it on employee wages,” Ciaramitaro said. “Cost efficiency is more important to us than cost savings.” 

Ciaramitaro also noted that the ACA does need a “trailer act” to make adjustments to improve the 2009 law.

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