Pensions and health care in the spotlight

12 March -- Uncertainty continues to surround budget talks at the Capitol, but there are hints in news reports that some legislators may be inching towards attacking health care costs by making teachers state employees. [Update: press reports indicate that the bipartisan working group on the budget has unraveled, leaving the leaders of the two chambers to hammer out potential solutions.]

The history of this issue goes back a ways, and was most recently on the legislative agenda in 2005, when the bills that would become proposal 5 were introduced. On the one hand, school boards and school administrators consistently point to rapid increases in health care and pension costs as one of the main factors forcing school district budgets into deficit. School officials argue that health care costs have increased far faster than state funding for education, and that pension contribution rates - mandated by the state administrators of the Michigan public employee pension system - have been also been rising quickly. School officials argue that these matters are largely out of their control and cannot be changed in annual budget votes: pension contributions are set at the state level, and health care costs are normally the consequence of collective bargaining agreements with teachers' unions.

At the same time, lawmakers suspicious of the Michigan Education Association (MEA), the state's primary teachers' union, have found significant traction with this issue. High-cost health benefits, locked in by union contracts, are a convenient way for politicians who are so inclined to blame the unions for school budget problems. The fact that the majority of district health plans are handled by MESSA, a non-profit spin-off of the MEA that handles group health plans, gives critical lawmakers more ammunition. Their calls to break the "union monopoly" parallel the calls of school business officials who want to be able to shop around for cheaper health plans. Similarly, the pension system covering teachers is more generous than average, with full retirement benefits that vest after only five years. One of the ideas being floated is changing from a defined benefit system to a defined contribution system (in which contributions to a retirement account, similar to a 401(k), are specified, but no guarantees are made about future benefit levels).

The last time changes in pensions and health care were contemplated by the legislature, Republican lawmakers considered tying funding guarantees for education to changes in teacher's benefits - the hope was to lay the failure of the education funding measures at the feet of the MEA. While that strategy never took off because of opposition to the funding guarantees, pensions and health care may be part of the current budget debate. Making teachers state employees, with benefits in line with the less-generous state plans, might in one stroke achieve two goals of the GOP caucus: finding budget savings to close the deficit, and striking a blow against the MEA.

[Update: While there appears to be agreement on some of the one-time accounting moves that will help close the General Fund and School Aid Fund deficits - including the revaluation of the assets of the state pension system - a compromise on cuts or new revenue to close the rest of the gap has eluded lawmakers so far. Into this gap have stepped some business groups that are calling for a 6% tax on both goods and services to replace the Single Business Tax. The higher tax on services would bring in more revenue than would be lost from the business tax, but it's impact would depend on whether those funds would be invested in schools or be used for tax relief elsewhere.]