States Press Workers on Health Care

August 27, 2010 - Wall Street Journal

States Press Workers on Health Care

By JEANNETTE NEUMANN

As state and local governments push to get employees to pick up more health care costs, some employees are pushing back.

On Thursday, a Michigan judge heard arguments in two of three lawsuits filed by public-school unions and retirees who opposed a new law that for the first time required them to contribute toward their health-care benefits.

Michigan is among several states struggling with record budget deficits that want employees to take on a greater share of the burden of ballooning health-benefits costs.

The states' search for financial options come amid a growing awareness of the gap in benefit contributions between public and private employees. A handful of states have made changes this year, including Kentucky, Connecticut and Texas, and they join a growing number of governments that have cut health benefits in recent years without major challenges.

But in Michigan, the trend has met firm resistance. At issue is whether state workers will now pay 3% of their monthly salary toward a trust that would fund retiree health-care benefits. Previously, they had paid nothing. The change will mean that the workers pay $300 million of the more than $920 million in health-care costs projected for the next fiscal year.

Lawsuits also have been filed by several unions in New Jersey following a recent increase in health-insurance contributions. Suits in both places are being closely watched by other states struggling to make good on promises of future benefits.

Retiree health care and other non-pension benefits represent a $587 billion long-term liability for state governments, with less than 6% of that amount funded as of fiscal year 2008, according to a recent report by the Pew Center on the States. Four states—Alaska, Arizona, Maine and North Dakota—contributed the needed contribution for non-pension benefits in 2008, Pew says.

States on average have a 7.1% funding rate of their non-pension benefits. Pew considers states above that average as solid performers. Nine states fit that category, with only two having set aside at least 50% of the needed assets.

States generally continue to fund retiree health care on a pay-as-you-go-basis, unlike pensions, the Pew report says. But as more workers retire and medical costs grow, that approach often bring shortfalls.

Some critics say the changes in Michigan and elsewhere won't be enough to put them on firm financial footing.

"The bow is pointing in a slightly different direction," said E.J. McMahon, a senior fellow at the fiscally conservative Manhattan Institute, but the contribution increases are "not game changing."

And critics argue that public-school employees still are paying far less than employees in the private sector, some of whom pay their health-care costs without any employer assistance.

"It's unrealistic to think that employees in the public sector shouldn't have to pay anything toward their health-care costs," said Wendy Block, a health-policy lobbyist at the Michigan Chamber of Commerce, which supported the contribution increase because it brings the cost of retiree health care more in line with the private sector. But the discrepancy is still too great, she said. "Long term, the state cannot maintain these obligations without busting the state budget."

Still, Michigan public-school employees consider the new benefits policy an unlawful violation of the terms of their employment. "It's the equivalent of a legislative bait and switch," said Mark H. Cousens, general counsel for the American Federation of Teachers Michigan, which has filed a lawsuit on behalf of approximately 25,000 members.

In court documents defending the state, Michigan Attorney General Michael Cox points to a 2005 state Supreme Court decision distinguishing between pension benefits, which are guaranteed, and retiree health-care benefits, which can be changed. Other states have similar language on the books.

The new contributions have been collected by the teachers' retirement fund since July 1, but they are being held pending a court decision. If the state loses the lawsuit, the contributions would likely be returned to employees.

State officials are "balancing the state's budget on the backs of the public-school employees" said James A. White, a Michigan attorney representing five school employees in one of three lawsuits in the state over the issue.

This year's cuts in employee and retiree health care in states such as Michigan are often part of a broader package of legislative changes to retirement systems meant to ease record budget deficits.Because of legal protections, most states this year have trimmed pension benefits only for future hires. But those cost savings trickle in over decades. Some states seeking a more immediate financial impact have also turned to cuts in health care, which often involve current workers paying more.

Retiree health care is "a necessary benefit but it's also costly," said Phil Stoddard, director of Michigan's Office of Retirement Services. "It was inevitable that there would be more shared responsibility."

In Kentucky, many public-school employees and retirees also began paying more for retiree health care on July 1. No lawsuits have been filed. Gary Harbin, executive secretary of the Kentucky Teachers' Retirement System, attributes that to 18 months of discussions with school employee and retiree groups, preparing them for an eventual contribution increase. "We were just at the tipping point that if something wasn't done, the benefit was going to go away," Mr. Harbin said.

The previous retiree health-care system was so depleted that for several years money was redirected from the pension fund. Kentucky lawmakers recently voted to make many public-school workers contribute more toward retiree health care over the next six years—raising the contribution to 3.75% of workers' salaries from 1%. State employers will also contribute more.

Corrections & Amplifications
States on average have a 7.1% funding rate of their non-pension benefits. Pew considers states above that average as solid performers. Nine states fit that category, with only two having set aside at least 50% of the needed assets. An earlier version of this article incorrectly said nine states set aside at least 50% of the needed assets.