Oh, To Be a Teacher in Wisconsin -the facts

In my last email, I included a WSJ op ed by Prof. Bob Costrell entitled "Oh, To Be a Teacher in Wisconsin" (http://professional.wsj.com/article/SB20001424052748703408604576164290717724956.html), which documented the fact that fringe benefits account for 74.2 cents of every dollar of compensation to WI teachers vs. 24.3 cents in the private sector.  Well, it turns out that it's even WORSE – it's actually 104 cents!  With his permission, I'm including his email to me below.  Here's an excerpt:

 

Things are even worse than I described above, and the difficulties posed by collective bargaining (CB) on benefits are even greater than I realized, at least for Milwaukee Public Schools (MPS).  It's not just the current health insurance plan (MPS has very low co-insurance, as well as absurdly low deductibles), which can't be touched w/o collective bargaining.  

 

Collective bargaining also governs the retiree health insurance (RHI) situation MPS faces, which is a looming catastrophe.   Their unfunded liability is $2.4 B, projected to rise to $4.9 B by 2018.   If they were to actually pay their actuarially required contribution, that would be a contribution rate of another 42% (projected to rise to 53.9% by 2018).  Yes, this means they should actually be paying a bit more for RHI than for current employees.  The fact that they are only paying 12% for RHI means that the fringe rate of 74% is understated -- it should be 104%. 

---------------------

-----------------------

Thanks, Whitney.   The piece has received an enormous response.  

 

But I now realize that I did not adequately address one response:  "well, they gave in on contributions, so why press further?"  

 

See below for my reply on this point, to the one (!) negative (but mostly thoughtful) e-mail I received.   

 

I am now prepared to respond to this point, the next time it comes up.  I was supposed to be on Fox Business News this morning, but got bumped by Pres. Obama's live speech.  It's been rescheduled for tomorrow, 11:30 EST.

 

Regards,

 

Bob Costrell
 
From: Robert M. Costrell 
Sent: Monday, February 28, 2011 11:35 AM
Subject: Benefits & Collective Bargaining
 
Dear Professor,
 
Thank you for your thoughtful reply to my WSJ article, on the extraordinary fringe benefit rate at Milwaukee Public Schools, and the role of collective bargaining.  Let my briefly reply:
 
The 74.2% fringe rate – about 3 times the national average – is driven by 2 factors:  (1) some very expensive benefits, especially health insurance (as you correctly note), and (2) very low (or zero) employee contribution rates toward defraying those costs.
 
The unions' proposed concession on employee contributions is a good start, but unfortunately does not go very far toward keeping costs under control.   The estimates in the papers are that these would amount to about 7-8% of wages.  So the net fringe rate would still be over 65% at MPS, which is enormous.
 
The problem in getting expenses under control does include the role of collective bargaining, not just the general problem in health care (otherwise these costs would be this high everywhere – they are not).  As long as benefits are subject to collective bargaining, the local authorities will have little or no control over plan design.   This is clearly the problem at MPS.   The contract requires MPS to pay for union-sponsored insurance plans.  These are very extravagant.   
 
For example, consider the deductible.   There are 2 plans, one of which has a $100 deductible per person per year, and the other has no deductible at all.  These are well below industry standard.   The union website puts these deductibles in boldface, apparently to emphasize to its members how good a deal they got.
 
It will be very difficult to get costs under control with little or no deductible, and it will be very difficult for MPS to impose a more standard deductible if benefits are subject to collective bargaining.
 
Even with the concession on employee contributions, reportedly about 12% of premiums, the employer would still have to pay 88% of a very expensive plan.   At 12% cost to its members, the union would have very little incentive to rein in the costs.
 
Bargaining over wages is very different from bargaining over benefits.   Wages are fixed in dollar terms.   Everyone knows what the cost is, including the public.   Benefits are different.   Lots of hidden costs & plan design is crucial.  If the locals are unable to gain control over plan design, it will be extremely difficult for districts such as MPS to bring its fringe benefit rate back to earth.
 
Thank you for sharing your thoughts.
 
Regards,
 
Robert M. Costrell

 

Postscript: Things are even worse than I described above, and the difficulties posed by collective bargaining (CB) on benefits are even greater than I realized, at least for Milwaukee Public Schools (MPS).  It's not just the current health insurance plan (MPS has very low co-insurance, as well as absurdly low deductibles), which can't be touched w/o collective bargaining.  

 

Collective bargaining also governs the retiree health insurance (RHI) situation MPS faces, which is a looming catastrophe.   Their unfunded liability is $2.4 B, projected to rise to $4.9 B by 2018.   If they were to actually pay their actuarially required contribution, that would be a contribution rate of another 42% (projected to rise to 53.9% by 2018).  Yes, this means they should actually be paying a bit more for RHI than for current employees.  The fact that they are only paying 12% for RHI means that the fringe rate of 74% is understated -- it should be 104%. 

 

This disastrous RHI situation began innocuously enough with a collective bargaining agreement in 1973-74, but then deteriorated as eligibility conditions were relaxed & bad financial management prevailed (refusal to pre-fund at all, until GASB 43/45 at least forced disclosure).  Yes, plenty of blame to go around, but the fact is, to fix this will require changes in collective bargaining, to at least allow MPS to pick RHI plans with higher deductibles, etc.  Hard to see how this happens w/o removing benefits from CB.

 

Finally, although the main pension plan (run by the state) is not an issue in CB (aside from the employer pick-up of employee share), there is a supplemental pension plan that was created by CB for MPS in 1982.  This plan is actually designed to encourage early retirement, by "supplementing" the reduced benefits one would receive from the state plan upon early retirement.  It has been underfunded in the past, although nowhere near the extent of the RHI plan.  The bigger problem is that by incentivizing early retirement, this supplemental pension plan exacerbates the RHI problem -- the biggest costs for RHI are due to retirement in one's 50s, prior to Medicare at 65.    Hard to see how MPS can stop doing this as long as this benefit is included in collective bargaining.

 

In short, the unions' offer to contribute to the state pension plan and to contribute a small portion to employee health insurance, will do relatively little.   Major changes are needed in (1) plan design of health insurance;  (2) retiree health insurance; and (3) MPS' supplemental pension that incentivizes early retirement.   These will all be nearly impossible to accomplish without changes in the CB environment for MPS.

 

Regards,

 

Bob

 

Professor of Education Reform and Economics
Endowed Chair in Education Accountability
Department of Education Reform
College of Education and Health Professions
201 Graduate Education Building
University of Arkansas
Fayetteville, AR 72701