State Budget Deal Kicks Can Down the Road to New Guys

The Detroit Free Press reports that a pending state budget deal for the fiscal year that begins on  Oct. 1 will match expected revenue to desired spending by means of across-the-board cuts in department administration, a tax amnesty program, and an early retirement pension-sweetener for state employees. It contains no systemic reforms or program reductions. Meanwhile, with the end of federal stimulus subsidies, revenue projections for the following fiscal year fall off a cliff.

The early retirement pension boost — similar to one already adopted for public school employees earlier this year — is essentially a one-time gimmick that at least in part steals from future taxpayers so that current legislators can spend more today.

State employees hired before 1997 have a traditional defined-benefit pension plan and post-retirement health benefits that together consume an amount equivalent to 37.4 percent of total payroll costs. That cost is roughly half as much, 19.4 percent, for employees hired after 1997 who are in a defined-contribution, or 401(k), plan.

The post-retirement health care portions currently cost taxpayers more than $350 million annually, an amount that will rise next year if a large cohort of new retirees start consuming them with no other reforms. Such reforms begin with eliminating the retiree health care benefits for new hires, and trimming those of existing employees.

Other governmental entities in Michigan, most recently Michigan State University, have already done the first, and Gov. Jennifer Granholm actually recommended doing the second earlier this year. Specifically, ending the vision and dental benefits for current retirees. The Republican-controlled Senate stripped that out of the school employee portion of the proposal that eventually became law, and it's not part of the current budget deal either.

By finding ways to bring public-sector benefits in line with the private sector, including pension benefits, the state can save $5.7 billion annually. If anything, the proposed budget deal will add to these costs by increasing the post-retirement payments for some state retirees.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.