Lansing Has Big Benefits Problem

December 31, 2003
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GRAND RAPIDS — The Business Journal editorial page recently criticized the governor and legislature for failing to shift more of the cost burden of state employee health coverage to the employees themselves.

The notion was that in trying to solve its big budget deficit, the administration and legislature are not demanding of civil servants the same sorts of sacrifices — higher deductibles and larger shares of health insurance premiums — that private sector employees have made for years now to preserve their own jobs and health care coverage.

A local attorney who formerly represented many area businesses read the editorial and approved of its sentiment.

But Carl VerBeek also suggested the editorial overlooked a sort of hundred-ton, health-care-cost gorilla lurking in Michigan state government’s budget — a large and growing cost about which he believes most legislators are blithely unaware.

Basically, he said, it’s as if for every eight state employees in its Tier 2 retirement plan, the state is paying for a ninth who isn’t present.

How so?

VerBeek, who is of counsel with Varnum, Riddering, Schmidt and Howlett, said he inadvertently sighted the gorilla in his capacity as chairman of the state’s Attorney Grievance Commission.

He said he learned the state of Michigan is currently paying a sum equaling 13.05 percent of its payroll for health care benefits for its Tier 2 retirees.

It’s a cost that he said was 5.5 percent in 1999 and currently stands at 13.05 percent.

VerBeek said he initially asked himself how such a sharp rise could be occurring.

“Until it dawned on me,” he said, “that the state’s answer to a budget crisis was that, ‘We’ll put a whole bunch of people on pension.’”

He called the move was penny-wise but pound-foolish.

“The point is, you end up with a lot of people in their 50s and 60s who are not producing anything for the state and have a lot of expensive health problems, and the state has to pay for their health care.

“They’re not Medicare-eligible because of their age,” he noted, “and they’re at a stage in life that is the most expensive of a typical employer’s health plan — they’re having heart attacks, hysterectomies, knee replacements, and so on and so forth.”

VerBeek said he believes the problem arose in a late-night legislative session about mid-way through the Engler administration.

At the governor’s behest, he said, the legislature did as many businesses have done in creating a defined contribution retirement program for state employees. Workers and retirees are in the state’s Tier 2 plans.

The statutes also grandfathered existing retirees and some long-service employees in Tier 1, the state’s original defined benefit pension program.

“The original bills did not include any Tier 2 retiree health benefits,” VerBeek explained. “They were trying to get rid of this albatross as most employers were — or still are.

“But in the wee hours of the night — the legislative mish-mash — the retiree health benefit plan idea crept back into the law,” he said.

He explained that the bill provided that the state would fund health care for Tier 2 retirees.

VerBeek said the measure — for which he believes the state employees’ union deserves credit — garnered little publicity.

“And I believe most legislators are clueless about it,” he added. “I talk to them — house members and senators — at Grand Rapids Chamber events and fund-raisers and so on, and I ask, ‘Did you know we’re paying X dollars for retiree health?’ and they all give me this blank stare.

VerBeek’s discovery of the bulge in the state’s health care costs, he explained, occurred only because he was reviewing his Attorney Grievance Commission budget a couple of years ago when the issue arose.

The 35 people who staff the commission and the Attorney Discipline Board technically are state employees but are paid solely by attorney dues through the Michigan Bar Association.

Commission and board retirees fall into either the Tier 1 defined benefit pension program or the new Tier 2 defined contribution retirement program.

Under the arrangement, the bar association handles personnel and administration functions for commission workers and retirees and the state bills the bar association for pension costs and the like.

Through an oversight, however, VerBeek said that the state failed for a few years to include billing for health insurance for Tier 2 retirees of the disciplinary staff.

“So the bar association thought that the payments it was making for the retirees’ system — X percent of payroll — was covering the retirees’ health as well,” VerBeek said.

Then the gorilla showed up.

“Well, somewhere along the way, somebody discovered the state bar hadn’t been billed for this and said, ‘Oh, by the way, you owe us about a million dollars.’”

That someone with the state, he added, also informed the bar association that it would have to pay what was then 5.5 percent of its workers’ payroll to cover the pay-as-you-go cost of health insurance for Tier 2 retirees.

“It was bad enough at 5.5 percent, VerBeek said. “But then it went up to 6 percent and then to 8.75 and then 9, then 12.5 percent and now 13.05 percent — all in this five-year period. So you can see the trend line.”

He said commission and board retirees are Medicare-eligible and therefore generate nothing like the 13.05 percent costs of state Tier 2 retirees. Thus, the financing arrangement, in effect, was a subsidy of early state retirees by the state’s lawyers. Hence, the bar is withdrawing its retirees from the state program.

What disturbs VerBeek, though, is that the state’s cost-cutting efforts seem to deal with peripheral costs and with shifting costs to businesses rather than addressing its health care costs.

“Here’s this huge liability in the middle of the process that’s going on and going up, and I don’t think most budget directors in the state are aware of it,” he added.

“Or, if they are, nobody’s talking about it.”      

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