How did we get into this situation of run away pension and employee health care costs? Public employee benefits over time were modified to match the best benefits offered in private industry. The collapse of the companies offering these benefits was the self correcting mechanism for the auto companies. Do we want to wait until our cities and schools collapse to correct for excessive benefits?
What happens if a city like Detroit cannot pay the pension benefits it has promised? The State of Michigan is then on the hook to fulfill the cities pension promises. Since the State is the one that ultimately must fulfill these promises it makes sense for the state to regulate what it allows governmental entities in the state to promise to employees.
Can pension plans borrow money and invest it to get out of the problems they are in? Some states like New Jersey have allowed this. If returns on investments exceed the cost of borrowing it can resolve the problem over time. If, however, investments perform poorly, the whole system risks collapse. Leverage is a dangerous solution. Look at what excessive leverage has done to housing!
Can employers simply freeze employee benefits at the current level? Private employers like Masco have successfully done this. They simply said that employees will no longer accrue additional pension benefits, that they will be paid the benefits they have earned to date. This is a potential solution that at least keeps the obligations from growing further.
How are public pension benefits determined? They are typically negotiated between unions and management employees. Since management employees typically also get the benefits negotiated for the union employees they often have an inherent conflict of interest. If they are tough bargainers then they also will reduce their own pensions. (See also Pension Basics)
How did health care become a retirement benefit? It was won as a benefit in the auto industry and over time came into the public sector as well. The auto companies have mitigated retiree health cost by giving the unions a one time lump sum amount to manage all future retiree health costs. For salaried employees the auto companies have gradually reduced benefits and increased co-pays to significantly reduce their retiree health care costs.
Why are the members of the PEBRC pursuing this? We are interested in the long term viability of our state as a great place to live and work. Excessive costs for public services reduce our competitiveness, driving away both employees and employers who we seek. We also want all of our children to have opportunities for jobs in the state. Tragically the result of the auto workers getting great benefits is to eliminate job opportunities in that industry for their children.
Isn't the deal that public servants get better benefits and job security in exchange for lower pay? This might have been the case at one time, but in many cases it is now a myth. Across the nation, the average state and local employee earns about $7/hour more than the average private sector employee. If you include benefits, it's a $13 difference (see The $2 Trillion Hole on the News page). If we look at Michigan's teachers, the average salary is $58,482, while the average salary for a worker with a bachelor's degree is $52,110. Public employees get better benefits and are better compensated.
Are public pensions protected by law? According to Article IX Section 24 of the Michigan Constitution, any accrued benefits of a public retirement system are contractual obligations and thus cannot be changed or taken away.