Will ACA Bail Out Unfunded Municipal Retiree Health Benefits?

Detroit and Chicago have announced plans to offload their unfunded retiree health plans onto the Affordable Care Act exchanges. The Detroit announcement predated the July 18th filing for bankruptcy protection. These cities believe they will save tens if not hundreds of millions in expenditures annually if they are successful in their intentions.

 

 

For the 61 largest cities in the nation, Pew Research has found that retiree health obligations under current contract or policies are only 6 percent funded.  In Detroit that number is close to zero.

 

While the Affordable Care Act requires employers with 50 or more employees to offer health insurance to employees or pay a fine (presumably municipalities are covered, but it does not matter, they almost all provide insurance anyway), the Act does not cover retirees. So cities-and perhaps states-might look at what Detroit is planning and decide to follow suit. Many private companies and some governments stopped paying for retiree health care years ago.

 

There are two levels of the issue.  Retirees and employees who have worked under contracts promising the health benefits in their retirement presumably cannot willy-nilly be deprived of those benefits by a unilateral cancelation by the employer. Folks already retired would have little incentive to make large concessions since they cannot lose their jobs if they refuse.  Eliminating future retiree health benefits for current employees would require contract renegotiation.  Therefore, for these groups, it would appear bankruptcy of the city might be the only way to have the promised benefits nullified.  Health benefits for retirees and current employees who have no protection of a contract might be offloaded with or without filing bankruptcy.

 

For new employees who will be on labor contracts, the city could negotiate to eliminate retiree health benefits. And for non-contract employees it could simply adopt a no retiree health benefit policy. There are local Pennsylvania examples.  In the City of Pittsburgh, police and fire personnel hired after 2005 do not get retiree health care the way employees working in those departments and employed prior to 2005 do.  The Port Authority’s largest union (its 2008 contract called for the union and the Authority to “jointly issue a statement with regard to their support for national health care”) has language in its 2012 contract stating that employees hired on or after July 1, 2012 would be eligible for three years of retiree medical coverage, as opposed to previous stipulations that allowed coverage until Medicare eligibility if the employee had 25 years of service or had reached age 55 and had ten years of service.

 

Government employee pension benefits are sacrosanct in many states to the point of being constitutionally protected.  That is certainly the case in Pennsylvania and Michigan.  Whether Federal bankruptcy judges will use Federal law to set aside state constitutions in the pension issue remains to be seen. At the same time, health benefits for retirees could be more easily dealt with in bankruptcy.  But, for cities looking to dump retiree health benefits for employees and retirees working under contracts containing such provisions, get ready for lawsuits and labor unrest. Bankruptcy or threats of massive layoffs will almost certainly be needed to get meaningful results.

While the offloading of retiree health care onto the exchanges might be appealing to many hard pressed cities and towns, it might be more complicated than they think. On the other hand, if they have a strong enough case to file bankruptcy, retiree health costs might be the trigger to file.

 

In the larger picture, if cities are able to offload their retiree health promises to the Affordable Care Act, then US taxpayers will get a big share of the tab.  Watching 58 year olds enjoy retirement from Detroit or Chicago city jobs and get Federally-subsidized health care until they reach 65 might not sit well with 60 year olds in the private sector who have no retiree health care until eligible for Medicare and have to keep working and keep paying taxes to subsidize the Detroit retiree’s health benefits. Further, if this strategy turns into a flood of unexpected exchange participants, what happens to the projected expenditures?  Undoubtedly, they will be off. And what if a bunch of private sector companies follow suit?

 

If a few large municipalities such as Detroit and Chicago are successful in reducing their expenses substantially by pushing retirees into the exchanges, there will undoubtedly be a flood of other municipalities around the country rushing to do the same. Moreover, there could be a number of school districts that could benefit from dumping retiree health benefits.  In short, taxpayers might find themselves on the hook for funding much more health care than Affordable Care Act drafters imagined. 

 

This is another unforeseen consequence of a health care law with seemingly unlimited ramifications and complications.

Chicago Teachers’ Strike: Union Power Run Amok

In a scenario remarkably similar to those played out all too frequently in Pennsylvania schools and transit agencies, strikes and threat of strikes are being used in Chicago to boost public employee pay, benefits and working conditions. Teachers walked off the job this morning making good their threat of two weeks ago.

Like a bad relationship, this is a gift that keeps on giving. The right of teachers to strike in Illinois, one of the three leading states for teacher strikes and one only a handful that still permit strikes, should be a wakeup call for taxpayers around the country. Demands of public sector unions are the primary force in the rapidly growing number of state and local governments facing financial chaos.

Chicago teachers already earn far more than the average Chicago household, $71,000 to $47,000, and receive substantially more benefits. Yet they are demanding a 30 percent pay increase over the next four years in addition to job security guarantees. All this against a backdrop of a school district facing nearly a billion dollar deficit by the need of the school year. Where will the money come from? State taxpayers that just recently saw a huge increase in their income tax rate? Local property taxes? This in a state with horrendous financial problems of its own.

What’s even more deplorable is the abominable academic performance in the public schools in Chicago where only 15 percent of fourth graders are reading at fourth grade level and only 56 percent of students ever graduate. It is little wonder that 50,000 of the City’s 400,000 students are enrolled in charter schools-where there is no strike and students are going to school.

The taxpayers are almost certain losers in this episode, the way they always are in Pennsylvania public sector work stoppages. The shame is that people with the power to shut down vital public services have learned that enough is never enough. And experience tells them the taxpayers, the students and the parents of students can just shut up and take it. And they will take it until they grow a backbone strong enough to vote out the legislators who insist on protecting public sector unions.

Given the Mayor’s strained relationship with the union and his opposition to the demands of the teachers, it will be interesting to see how the President reacts and which side he will support. Will it be loyalty to his former chief of staff or go where the votes are-the teachers unions as representative of his most formidable voting bloc?

Chicago Teachers Give Strike Notice: Pennsylvanians Take Note

Taking a page from Pennsylvania’s normal role as the nation’s leading teacher strike state, Chicago teachers have just issued a 10 day notice of intent to strike. Not happy with the District’s offer of 2 percent raises, the 26,000 member union threatens to send 400,000 students home for a longer holiday.

The head of the school district pledges to meet with the union every day to avoid a strike if at all possible. Teachers are upset with Mayor Emanuel’s rescinding last year’s pay raise-something that cannot happen in Pennsylvania. They are also unhappy with the new, longer 7 hour school day. Just wait until negotiations over how to determine pay raises other than automatic increases based on seniority begin. Seniority is among labor unions’ most sacred cows. This could get ugly.

And the irony is that this happening in Illinois which has one of the worst financial situations of any state in the country with bond downgrades already announced and more could be coming. After the dark of night, last minute 67 percent increase in personal income taxes a couple of years ago, there is little for Illinois taxpayers to be happy about. Now comes the threat of a strike that could be prolonged and the possibility that, in the end, teachers will get their hoped for raises and no change in evaluation procedures. Such an eventuality will almost certainly mean Chicagoans and Illinois taxpayers are going to digging even deeper.

All this is by way of pointing out the absolute absurdity of allowing teachers to strike in the first place. Historically, Illinois along with Ohio and Pennsylvania, have accounted for virtually all teacher strikes in the U.S. Ohio tried to stop them but lost a referendum vote that repealed the elimination statute. Pennsylvania, the nation’s foremost victim of teacher strikes, has not seriously taken up the elimination of strikes. And one can rest assured that as soon as the economy shows any signs of sustained improvement, the Commonwealth will see its status of national leader return. Wisconsin has outlawed teacher strikes shrinking the list where strikes are allowed even further. And it is important to note that all of Pennsylvania’s neighboring states do not permit strikes.