We often say liberating Pennsylvania’s workers is key to dealing with other important issues like pension reform, education reform, etc. Here’s how Act 10, which is a step WI took toward liberating its workers has helped with other issues they are dealing with…
Why was Act 10 so crucial for Wisconsin public schools?
Because before 2011, when the law was implemented, the financial stability of Wisconsin school districts was sometimes left largely to the whims of school employee unions.
Do unions care if schools have enough money to meet student needs?
Not always. Consider the troubling case of the overly generous retiree health insurance program in the Milwaukee school district.
It was clear for years that the program was costing the district far too much money, and was stealing financial resources that could have been used for improved instruction.
As one headline of a published story put it, “The trend is clear: More money for retired teachers, less money for the classroom. What can be done?”
For years no action was taken to address the problem, because major alterations would have required union approval.
It was only after the implementation of Act 10 – which gave new freedom for school officials to act without union consent – that the Milwaukee school board finally made an effort to make the program less expensive.
The retiree insurance program still has long-term solvency problems, but recent school board decisions have clearly made the problem less severe.
As a report from the Thomas B. Fordham Institute summed it up, “As daunting as (future costs will be), the situation would be far worse without the changes to future benefits enacted by MPS under Act 10.”
The insurance program was first established through union collective bargaining in the 1970s, and it was very generous indeed.
Retirees were guaranteed the same health coverage they had while they were working until the age of 65, when Medicare kicked in. The district was required to pay premiums equal to those that were paid for the most expensive plan the year each employee retired.
Some degree of coverage continued for retirees beyond the age of 65, for the rest of their lives.
Employees were allowed to retire and get coverage at the age of 55, with a minimum of only 15 years of service to the district. All retirees qualified for the same benefits, regardless of how long they worked for MPS.
Deductibles and co-pays for recipients were very low or non-existent. They paid almost nothing toward their own premiums. It was a “Cadillac” retiree insurance plan, if there ever was one.
Of course it was very expensive for the district, and became more so as the costs of health care and coverage skyrocketed over the decades. The program cost the district $70 million per year by 2009, and was projected to cost nearly twice that amount by 2016, according to the Wisconsin Policy Research Institute (WPRI).
The Milwaukee school board deserves its share of the blame.
It agreed to such a generous program in the first place, failing to envision the day when such a program might become cost prohibitive.
To make matters worse, the district traditionally funded the program on a pay-as-you-go basis, never putting aside money to cover future costs. As a result, the program’s unfunded liability (the projected amount owed to future retirees) increased from $202 million in 1989 to $2.6 billion in 2009, and was projected to reach an incredible $4.9 billion by 2016, according to WPRI.
At one point the board also approved early retirement bonuses, at a time when there were too many teachers and not enough teaching jobs. That resulted in a glut of early retirees who carry the insurance for longer periods of time.
The board also failed to respond to repeated warnings.
Several actuarial studies done by outside firms over the years warned the district that the program was headed for the financial rocks. School officials were told that the eventual cost could eat into the district budget, forcing massive spending cuts that would obviously shortchange students, or huge tax increases that would further burden taxpayers.
“(The board) doing nothing takes money out of the classroom even in the short-term. In the long term, doing nothing could profoundly limit the district’s resources available for the classroom,” a WPRI report said.
In 2009, school board President Michael Bonds told WPRI that action was not imminent, and seemed to suggest that the lack of response was related to likely objections from union officials.
That was not surprising. After all, when school employee unions (particularly teachers unions) are told that budgets are tight and cuts are needed, their general response is “raise taxes.”
“Bonds … indicated that any attempts to implement cost-control mechanisms on health care costs that would be considered benefit changes would be a matter of contract negotiations with MPS employee unions,” a WPRI report said. “Bonds said, to his knowledge, there were no plans by the board to address the unfunded (insurance) liability.”
A glimmer of hope only appeared with Act 10. Freed from the shackles of collective bargaining, the board took significant action.
Among other things, it raised the qualifying standards from age 55 with 15 years of experience to age 60 with 20 years of experience. It increased the percentage of accrued sick days necessary for retirees to qualify for the program. It cancelled a special insurance stipend program for employees that failed to meet the already generous sick day standard.
The board also greatly increased insurance deductibles and co-pays for retirees, and raised the percentage of premiums paid by retirees and current employees.
The latest change came in September, when the board unilaterally moved retirees who are 65 and older to a different health insurance plan – the Group Medicare PPO Plan – which officials say will cost retirees no more money, could cost them less, and in some instances will provide enhanced services.
The new plan will save the school district up to $6 million per year.
Some of the imposed changes have undoubtedly been a burden for MPS retirees. The sad fact is that, if moves had been made to curb the problem years before, the board may not have been forced to take such drastic action to avoid financial catastrophe.
In any case, the changes have improved the situation. The unfunded liability of the insurance program has dropped from $2.6 billion in 2009 to $1.4 billion in 2011. The liability projected for 2016 – originally $4.9 billion – has been lowered to $1.6 billion, according to a report from the Fordham Institute.
The program and the district are by no means out of the woods. Even with the cost-saving alterations, one WPRI reporter wrote that “the combination of soaring health insurance costs and the fiscal impact of shrinking enrollment leaves the district in a death spiral from which it is unlikely to recover.”
Such doom-and-gloom predictions may or may not prove to be accurate, but either way, one fact is indisputable – with Act 10, and the removal of union ability to obstruct positive action, the district’s ability to respond to the situation has greatly improved.