The Michigan House of Representatives introduced a series of bills yesterday that will effectively cap the amount that a local government can pay for retiree health care at 80 percent of the cost and prohibit local governments from providing retiree health care for all new hires. The key bill in the package is House Bill 6074, which was offered by the Speaker of the House, Kevin Cotter.
HB 6074 limits any local government – being a city, village, township, county, road commission, or authority – from paying for more than 80 percent of the retiree’s health care benefit, which includes health, dental, and vision benefits, if the retiree health care reserve for that local government is less than 80 percent funded based on the latest actuarial report. There are very few local governments that can meet this threshold. The reason why few governments have significant reserves for retiree health care is that this benefit has been traditionally paid for on a cash basis. It has only been in the past decade that accounting standards have pushed the nation into “prefunding” these benefits.
The statute would have an immediate impact on current public retirees. The retiree copayment would need to be changed as soon as the potential law goes into effect unless there is a contract in place that that “clearly and expressly confers a fixed, unalterable right to a vested retirement health benefit for an unambiguous duration…” in which case the retiree cost would increase when the contract expires.
Since the legislation focuses on the cost of the health plan to the local government and sets the 80 percent cap based on the employer’s cost, it ignores the many other issues that go into the cost of a health care plan. The legislation ignores issues such as how much the retiree is already liable for in copayments and deductibles. It also ignores how comprehensive the insurance plan is. A local government that is already cutting costs by offering less generous coverage with higher copayments and deductibles is treated the same as a community that has more generous plans.
The legislation has an even larger impact on public retirees that are not required to participate in Medicare. The legislation specifies that the local government is only allowed to pay for 80 percent of the supplemental insurance costs for those eligible for Medicare. This would likely mean a very large increase for those retirees who are over 65 and not currently enrolled in Medicare.
Another provision deals with coordination of benefits. The legislation states that, “The local unit of government shall not provide a retirement health benefit to a past member who is eligible to participate in a medical benefit plan or retirement health benefit offered or provided by an employer other than the local unit of government.” In other words, the legislation forces retirees to use the benefits of other employers to cover retirement health care instead of Michigan local governments.
This provision is extremely problematic. If a city manager has accrued the rights to retiree health care from multiple communities, this provision could be interpreted to say that the manger could not claim the benefit from any former employer. Each community would be prohibited from providing the benefit because the former manager was eligible to receive the benefit from another community. The provision could also be interpreted to force a public retiree to use the health benefits from their spouse’s employer.
Benefits for Future Employees
HB 6074 is much more disconcerting for future employees. Local governments could no longer offer retiree health care, dental, or vision benefits to new employees. Instead, the local government would only be allowed to contribute not more than two percent of the new employee’s base pay into a tax deferred investment account to offset future health insurance costs.
Simple Scenario
A new local government employee is hired at a salary of $40,000 per year. That same employee works for 30 years seeing annual wage increases of two percent. After 30 years, the health insurance investment account would contain just under $65,000 if the account earned a modest five percent interest over the 30 years. The account would contain approximately $100,000 if the account were invested aggressively and earned eight percent over the 30 years. So how much insurance coverage will that provide in 30 years?
Currently, State of Michigan retiree medical, dental, and vision insurance plans cost $12,000 to $30,000 per year for retirees who are too young for Medicare with the variance based on the type of plan and how many people are in the family. Costs are reduced to $6,000 to $15,000 for retirees who are covered by Medicare. In 30 years, a $15,000 health insurance plan will cost over $35,000, if the cost of the plan increases at a very modest three percent per year.
The $65,000 to $100,000 generated by the House plan will not last long when paying $35,000 per year for insurance after the age of 65. It will last a much shorter period of time if someone retires prior to the age of 65 and is not eligible for Medicare.
Of course, the results would look different if the person was receiving a higher salary. If the person had a job that pays $80,000 per year instead of $40,000, the House plan would generate enough money to pay for insurance for twice as long a period of time.
From a policy perspective this begs the question: should health care coverage during retirement be based on salary earned while working? If this is the direction we are headed as a nation, what will our public welfare plans look like in the future if far fewer future retirees have employer-sponsored health care coverage?
Rising health care costs are a major issue. Simply shifting responsibility for the cost to someone else does not solve the true problem.
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