The cost of health insurance for retirees has become a heavy burden for the Milwaukee Public Schools (MPS) budget and will most likely be significantly worse in the next few years. MPS currently has a pay-as-you-go policy of funding retiree health insurance benefits, which will cost approximately $70 million in 2009 and grow to over $130.8 million, or 20% of payroll costs, by 2016. These costs are a major contributor to MPS’s fringe benefits rate of 68.7%, the highest among 33 peer institutions in the midwest.
The unfunded liability for these health care costs, i.e., the estimated costs of future health care insurance benefits for retirees that MPS has promised to pay but has not set aside money for, now stands at $2.6 billion, more than double the district’s entire annual operating budget. These costs will ultimately be borne by Milwaukee taxpayers, and, because of the state school funding formula, taxpayers statewide.
Part of the reason for the size of the liability is that retiring MPS staff who qualify for the program are ensured a lifetime subsidy to pay for health insurance. In 2008, the subsidy was up to $1,882 monthly for family coverage or $851 monthly for single coverage. Unlike pensions, which typically link benefit levels to time on the job, MPS provides the same monthly health insurance benefits to all retirees who meet the criteria, even those who retire as early as age 55 and work for MPS for as few as 15 years. The average age of a retiring MPS teacher is 57 years old. In fact, workers who retire early receive more in total health insurance benefits than those who retire closer to age 65 because the younger retirees collect the maximum benefits for more years before they qualify for Medicare.
The most important consideration of potential decisions to address or continue to ignore the unfunded liability is the potential effect on the classroom. MPS finds itself in a catch-22 situation. Pre-funding of retiree health insurance benefits would add $125 million to the annual budget. This equates to the estimated costs of 1,625 teachers and is more than double the 2009 budgeted costs, for instance, of all MPS middle schools combined. Therefore, in the short term, not pre-funding retiree health insurance costs may appear to be a prudent decision. However, from a long-term perspective, continuing the current pay-as-you-go approach will result in retiree health insurance costs growing from $70 million in 2009 to $130.8 million in 2016, and the total unfunded liability growing from the current $2.6 billion to over $4.9 billion. Consequently, doing nothing takes money out of the classroom even in the short term. In the long term, doing nothing could profoundly limit the district’s resources available for the classroom.