By Zachary Gorchow
President of Michigan Operations
Posted: February 16, 2024 1:18 PM

Governor Gretchen Whitmer's proposal to redirect $670 million in payments that had gone toward prefunding retiree health care for public school employees into the overall K-12 budget is starting to draw questions and opposition from groups representing traditional public school organizations.

Whitmer, when she initially announced the idea a week ago, explained that with the unfunded liability for retiree health care, also known as other post-employment benefits, set to be paid off this fiscal year, it no longer was required to continue putting the same amount of money into that component of the Michigan Public School Employees Retirement System. Instead, Whitmer saw an opportunity to redirect that money into a K-12 School Aid budget that has been well-funded in recent years but won't have those same excess revenues for the upcoming fiscal year.

Among the groups voicing support a week ago for the idea were the Michigan Education Association and the Michigan Alliance for Student Opportunity, an association of urban school districts.

Now the alliance has decided to oppose the proposal as more details became clear.

One of those elements that the Whitmer administration did not initially discuss is that it will take a statutory change.

That raises the specter of a statutory change not taking effect until March 2025, or halfway into the next fiscal year, because of Republican opposition. Unlike 2023, it is highly unlikely Democrats would try to adjourn the Legislature earlier than usual to speed up the effective date of bills without immediate effect because it would mean forfeiting any opportunity for a lame-duck session in a year that's already off to a slow start.

Further, there are concerns about the reaction of those public school employees who still have 3 percent of their pay deducted for retiree health care when they have to continue to pay but the state has cut way back.

Republicans have called for redirecting the payments on retiree health care into the pension portion of MPSERS whose unfunded liability continues to rise and now surpasses $35 billion. Despite that trend, it remains on schedule to be paid off by 2038. Transferring the retiree health care payments to pensions would speed up the elimination of that unfunded liability but the benefits of that move, as far as freeing up money for other uses in the budget, would still not be felt until the 2030s.

"As we look at the details, it feels like there are different ways we could be spending those dollars," said Peter Spadafore, executive director of the Michigan Alliance for Student Opportunity, saying his members would prefer to see proposals to add revenue to the system to fund the foundation allowance, special education, opportunity index and English language learners. "Our concerns really center in on making sure those dollars really are going to classroom spending, and we continue to see school aid dollars go out the door and fund community colleges and higher education. … Until we see new revenue sources, that trend is not likely to be reversed."

Jennifer Smith, director of government relations for the Michigan Association of School Boards, said her association has not taken a position on the proposal other than it wants a closer examination of it.

"There is some concern," she said. "We don't want to harm the system in the long run."

Lauren Leeds, spokesperson for the State Budget Office, said one of the key purposes of paying down debt is to free up resources for other priorities, and that's why Whitmer has made this proposal.

"Governor Whitmer knows that a good-quality education is the foundation every Michigander needs to build a successful and rewarding life," she said. "Directing this additional $670 million into classrooms will help ensure that every Michigan child is guaranteed the education they need to put them on the path to a bright future. The administration can direct these funds to our classroom while also ensuring that public school employees can retire knowing that the retirement benefits they've earned are protected for the long-term. The state of Michigan has been aggressively paying down unfunded liabilities in both the MPSERS and OPEB systems to ensure they remain solvent for current and future retirees – and we will continue to do so."

The state began a concerted effort to pay down the unfunded liability in the pension and retiree health care portions of MPSERS after Governor Rick Snyder took office in 2011. The unfunded liability in retiree health care at the time well exceeded $20 billion.

Craig Thiel of the Citizens Research Council of Michigan said a variety of factors resulted in driving down the retiree health care unfunded liability. Beginning prefunding of the liability shaved a huge portion of it. But then several laws led by then-Rep. Thomas Albert (R-Lowell) in the 2017-18 term also sped up the reductions.

The state could not reduce its payments from year to year regardless of the amount of unfunded liability was one change. Another was to require MPSERS to pay more into the system after a good year on the stock market.

But what especially accelerated the paydown in the last few years was the COVID-19 pandemic.

Further, Thiel said COVID led to far fewer people using the health care system than projected, shaving billions in unfunded liability.

Caleb Buhs, chief deputy director of the Department of Technology, Management and Budget, which oversees the Office of Retirement Services, said it was the combination of "claims experience," revenue from the Centers for Medicare and Medicaid Services and the funding floor that caused the retiree health care unfunded liability to drop so quickly, unlike the pension system.

Republicans have called Whitmer's proposal a "raid" on teacher pensions. Thiel said he wouldn't use that word, noting the pension portion remains on schedule for payoff in 2038, but said there is a risk that if health care usage exceeded expectations or the stock market underperforms, the unfunded liability would reappear.

"Then the state will have to increase its contribution and find some portion of the money somewhere," he said.

The advantage to Whitmer is as governor she can keep spending on K-12 schools at a high level.

"Big picture, the state has been funneling, shoveling money into K-12 schools year because tax receipts have been very healthy," he said. "School districts kind of got used to healthy state aid payments coming through."