Gov. Gretchen Whitmer likens the reason why Michigan can afford to divert $670 million annually from a retirement health care fund for 200,000 school employees to “paying off your mortgage early.”
If only it were that easy.
The mortgage — known in bureaucratic speak as other post-employment benefits or OPEB — is not actually paid off and technically won’t be until the last beneficiary dies.
Whitmer acknowledged as much last week, confirming her idea is a one-year proposal for the Democratic-led Legislature to consider in order to free up cash for other K-12 education programs. This proposed diversion of legacy costs may have to be reassessed in later years, depending on the funding level of the retiree health care fund, which can decline at the whims of the economy (caused by events such as a stock market plunge, a real estate tumble or an international crisis) like any other portfolio of investments.
“What we wanted to do is make sure we freed up resources that we’re able to put right back into the education system,” Whitmer said in a Thursday interview after a Detroit Economic Club event with U.S. Treasury Secretary Janet Yellen. “We will continue to always make sure that retirement is secure and that health benefits, etc., are taken care of.”
“This was an opportunity for us to move forward and free up $670 million that we can put right back into the education fund,” the Democratic governor added.
Michigan’s promise to public school teachers, support staff and administrators (full disclosure: My father is one of them) to provide lifetime medical, dental and vision coverage was practically not funded at all coming out of the Great Recession and the administration of Democratic Gov. Jennifer Granholm.
In 2011, this retiree health care trust fund had an astonishing $25.9 billion shortfall. It was 4.3% funded, according to an auditor’s report.
At the end of the 2022 fiscal year, the most recent data available, shows the shortfall is down to an astounding $88.5 million and the liability is 99.2% funded. It’s expected to be more than 100% funded for fiscal year 2023 in a forthcoming audit due out this spring.
“It went up like a hockey stick,” said Bill Glasgall, senior director of public finance at the Volcker Alliance, a New York-based group founded by the late Federal Reserve Chairman Paul Volcker that promotes truth in government finances.
This is a true cause for celebration for retired school employees and Michigan taxpayers alike. It does suggest that more money can be spent on classroom instruction instead of paying the medical bills of someone who retired from public service 20 years ago.
“It’s taken a lot of leadership and difficult decisions for a lot of years to stay the course with this,” Rachael Eubanks, Whitmer’s state treasurer, said in an interview. “But, of course, this governor has continued to prioritize that financial responsibility and make those investments and get us to where we are today.”
But it doesn’t mean the mortgage is paid off.
“It’s not as easy as saying the liability has gone away, but the plan is 100% funded,” Eubanks acknowledged.
The Snyder strategy
Even though Whitmer is claiming some credit for the funding level, the policy to pre-fund this health care trust fund was not a policy initiated by the Democratic governor. It started with Republican Gov. Rick Snyder, who in nerd-like fashion told residents that paying down these liabilities would make governing the state much easier in 2038 when the state of Michigan would effectively be debt-free.
In his 2014 reelection campaign, Snyder took some lumps from Democrats for dedicating hundreds of millions of dollars each year toward paying down these legacy costs, while direct aid to K-12 classrooms grew at a slower pace.
Snyder pursued the pre-funding strategy at a time when Detroit’s bankruptcy shone a light on a $5.7 billion unfunded city retiree health care liability, which was largely wiped out by a bankruptcy judge in 2014. This left city retirees with a meager $120 monthly stipend for health insurance after years of enjoying a generous Cadillac-like benefit.
“That did serve as a lot of motivation — we just can’t let the state get to that point,” said Brian Calley, who was Snyder’s lieutenant governor and is now CEO of the Small Business Association of Michigan. “Meeting retiree obligations requires a very long-term view and a discipline against the more immediate needs of the (state) budget changes that are happening.”
Whitmer inherited this policy of paying ahead instead of the Granholm-era approach of paying as you go. She also got stuck with a Republican-controlled Legislature for her first four-year term that enforced Snyder’s fiscal discipline. Before she took office, GOP lawmakers locked the payment into place in a 2018 state law that Whitmer is now proposing a Democratic-controlled Legislature significantly relax.
But under Whitmer’s one-time diversion, the mortgage payment eventually would go back up. This raises questions about how the state in future years will afford the new spending on preschool, free school meals for all students, mental health supports for kids and programs aimed at improving literacy. Those are among the new spending priorities that Whitmer wants to use the $670 million that is currently directed by law to be spent on school retiree health care.
Whitmer administration officials contended the proposed $670 million shift from retiree health care to classroom programs is sustainable. They also pointed to a $450 million balance in a new rainy day fund for the state’s checking account for public education that could be tapped in the event the retiree health care fund declines in value.
“We don’t have to make that payment anymore, so that money is in our bank account to invest in,” said Kyle Guerrant, Whitmer’s deputy state budget director. “… It’s as stable as anything else on an annual basis as we calculate our revenues every year.”
Some public school groups are lining up against the proposal, seeing it as a fund shift that doesn’t address chronic underfunding and doesn’t help relieve school districts of legacy pension costs that still add about 20% to their payroll costs.
“This will not be a panacea for fixing the long-term revenue shortfall that faces Michigan’s school system,” said Peter Spadafore, executive director of the Michigan Alliance for Student Opportunity, which represents high-poverty school districts.
Shifting goal posts
The health care benefit is part of a $10 billion pot of money within the Michigan Public Schools Employees Retirement System (MPSERS), the pension fund for more than 200,000 active and retired educators and support staff. The traditional pension plan for any teacher hired before 2011 was nearly $35 billion underfunded in 2022, which begs the question as to why the state wouldn’t shift the $670 million toward pensions after financing lifetime retiree health care benefits.
The pension and health care funds have benefited from both consistent annual payments by the Legislature for the past dozen years and a relatively stable annual return on investments managed by the Michigan Treasury Department.
Between the 2020 and 2022 fiscal years, the fund’s investment returns were 5%, 27.2% and 4.8%, respectively, annual financial reports show.
OPEB is different than a traditional pension, which is a calculated and largely predictable monthly defined cash benefit with inflationary controls in place. Medical inflation is less certain, meaning the liability can increase in the future and exceed available assets, the Volcker Alliance’s Glasgall said.
Again, the mortgage or the retiree health care liability is not actually paid off early. The goal posts can move with this legacy cost.
Glasgall, who tracks the fiscal health of pension and OPEB funds across the country, said Michigan’s pre-funding approach under Snyder should be a model for other states to emulate because most are still paying the medical bills of retired public servants as they come in.
He cautioned against the Michigan Legislature diverting money elsewhere without requiring a return to higher payments in the event the retiree health care trust fund’s value drastically declines or medical inflation makes the liability balloon.
Without restrictions in place, Glasgall said, “that’s sort of an invitation to return to 2011.”