July – August 2014 Commentary

benefits illustration
Illustration by James Yang

Municipal Benefits – Drowning in Debt

In recent years, Michigan has done an admirable job of bringing state workers in line with private employees as it relates to health care and pension costs, but school districts have yet to follow suit. That’s a recipe for a financial disaster, given public employees working for school districts still receive defined benefit plans that are billions of dollars underfunded.

July August 2014 commentary statsAt every turn, it seems, unions representing public workers are advocating for raises, defined pensions, and premium health care plans. Yet in the private sector, employers have largely moved to less expensive health care plans, raises have been modest, and pensions have long since been replaced with 401(k)-type plans where the workers — not politicians  — control their investments.

Overall, the work of bringing public health care and legacy costs in line with the private sector, a goal of the Snyder administration, has come a long way. Earlier this year, the Michigan Civil Service Commission approved a more affordable health care plan for state workers, which has already reduced insurance costs by 9 percent. Millions of dollars have been saved, as well, by moving new state employees to a defined contribution 401(k)-type plan.

Still, more work needs to be done. According to a recent report from the Mackinac Center for Public Policy in Midland, taxpayers are paying nearly $220 million more for state workers than they did in 2000, even as there are 22 percent fewer employees. Right now, there are approximately 47,800 state workers, down from 61,500 in 2000. During the same period, private-sector household income in Michigan dropped 16 percent in real dollars, according to data from the federal government.

During that time, the average salary of full-time state workers went from $59,963 in 2000 to $61,101 today (adjusted for inflation). That’s roughly in line with private sector salaries. But on the health care and pension front, during the same time frame, the state has gone from contributing $21,809 to $48,889 per employee. If the level of contributions continues at that level, the state won’t be able to sustain the payments without raising taxes.

This court has previously held the city is service-delivery insolvent.

— Detroit Bankruptcy Judge Steven W. Rhodes

While public unions will continue to call for wage and benefit hikes, it’s clear that private sector principles such as competition should be embraced. Offering public teachers and engineers more in wages and benefits than the private sector may be popular in the short term, but over the long term, as we’ve witnessed, such hikes are unsustainable. 

Financial Review – Independent Oversight

Following the projected conclusion of Detroit’s bankruptcy proceedings — the largest such filing in U.S. history — later this year, some city leaders have called for financial control to return to the Duggan administration and the city council. Given the city’s history of fiscal mismanagement, however, an independent financial oversight commission must be put in place to review and approve city contracts, budgets, and collective bargaining agreements.

Such financial review commissions are common following municipal bankruptcy proceedings and public fiscal failures. The New York Legislature, for example, in September 1975 established a financial control board following a long period of financial mismanagement in New York City. The board was set up for 11 years, and dissolved in June 1986, although it was stipulated that the board could be re-formed if the city failed to meet one of several financial measures.

A similar review board should be established in Detroit. The Snyder administration, which declared a financial emergency in Detroit prior to the city’s bankruptcy last year, must work with the state Legislature to establish a long-term financial oversight board, lest city workers return to their old ways of political patronship, graft, union handouts, no-bid contracts, and numerous other financial shenanigans.

At some point, the board should sunset, but measures should be put in place to reimpose financial oversight if the city fails to meet various requirements — such as failing to pay debt service on any of its obligations, incurring a deficit of more than $50 million during a fiscal year, or failing to adopt a balanced budget. In addition, the city must submit a rolling four-year budget outlook for review every quarter, regardless of whether the board is in session or has been terminated.

Health Care – Savings Yet to Materialize

As the Affordable Care Act, or Obamacare, rolls out in fits and spurts — the Obama administration has delayed provisions that would impact private employers beyond the congressional elections in November — a promised drop in emergency room visits has yet to materialize. In fact, more people are visiting emergency rooms, and that’s a much more costly prospect than seeing a primary care doctor, according to a recent survey from the American College of Emergency Physicians. 

The survey found that since the beginning of the year, 46 percent of emergency doctors reported a hike in patients and 27 percent said visits were about the same, while the remaining physicians reported a decrease. One main reason hospitals agreed to support Obamacare was the promised drop in emergency room visits — but that hasn’t been the case.

While more people have been able to sign up for coverage under Obamacare, the problem lies in the fact that many primary care physicians do not accept Medicaid patients due to lower reimbursements compared to other insurance offerings. Compounding the issue is that the Association of American Medical Colleges reports that in 2015 there will be a shortage of some 30,000 primary care physicians, which will make it nearly impossible to keep up with patient demand.

To reduce emergency room visits, government agencies, hospitals, and medical professionals must do a better job of educating patients about the importance of regular health care visits. Too often, people wait until a medical crisis occurs before visiting a hospital — and that visit is typically to an emergency room, where costs can escalate to the tune of thousands of dollars. 

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