Part 7 in a series of Act 10 success stories

MILWAUKEE – Milwaukee Public Schools is the perfect example of a district that was brought to the brink of financial disaster by union collective bargaining.

Not long ago the district was staring down the barrel of multi-million dollar increases in retiree pensions and health care costs. And most of those costs were the result of policies from negotiated union contracts, meaning they would have been hard to get rid of.

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Luckily for the district, Act 10 became law in June of 2011. Gov. Scott Walker’s landmark legislation allowed school districts across Wisconsin to manage their benefit programs for current employees and retirees without negotiating with the teachers union or other bargaining units.

For the first time in decades, local school boards had full control of their budgets and were free to take any actions necessary to correct or avoid financial problems.

The Milwaukee Board of School Directors wisely invoked the collective bargaining reform law in 2011 to put the district back on course to some degree of fiscal sanity.

A recently released report from the Fordham Institute, authored by Robert Costrell and Larry Maloney, points out the huge difference that Act 10 made for MPS. Instead of being forced to slash the district budget or raise taxes through the roof to pay for retiree benefits, the district has a chance to regain its financial balance and move forward with its academic program largely intact.

Overall Act 10 will help the district save about $101 million in retiree benefit costs by 2020, according to the report, which is called “The Big Squeeze: Retirement Costs and School District Budgets.”

“Even without future action, Act 10 has allowed MPS to avoid considerable adverse impact,” the report said. “Without the authority to make the changes, Milwaukee would likely have faced intractable choices between raising taxes or cutting the rest of the K-12 budget.”

The irony is that the city of Milwaukee and its school district have never been a hotbed of support for Gov. Walker. District officials were recently coy about admitting to the media that Act 10 helped them avoid a pending budget disaster.

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For instance, in a Milwaukee Journal Sentinel story about the cost savings, district officials were quick to point out that some savings were negotiated in the last contract with the Milwaukee Teachers Education Association, before Act 10 became law.

Costrell, one of the authors of the report, took issue with the district’s response.

“Some relatively minor accommodations were negotiated before Act 10 became effective, as the crisis faced by MPS became impossible to ignore,” Costrell told EAGnews. “But the major changes were implemented under Act 10 once MPS was freed from collective bargaining over benefits. It seems clear that most of the changes would have been much more difficult – and probably impossible – without Act 10.”

School officials also pointed out to the newspaper that Act 10 didn’t force them to cancel their supplementary pension program for teachers, which resulted in major savings.

“Of course not, and we never said it (did),” Costrell said in response to the district. “MPS was empowered to do this by Act 10, without going through bargaining, but was not mandated to close it.”

The law simply gave the school district the opportunity to save money without union interference, and officials wisely took it.

The health insurance dilemma

Retiree health insurance was the major demon for MPS.

Costs for the program rose from $268 per pupil in 2004 to $831 in 2011, and were expected to increase to a whopping $2,135 per pupil by 2020.

Multiplied by an estimated student enrollment of 78,480 in 2011 and 63,695 in 2020, that means retiree health insurance costs were scheduled to jump from about $65 million per year in 2011 to about $135 million per year in 2020.

Why was retiree health insurance so expensive?

It’s because many teachers have been retiring in their 50s, well before they qualify for Medicare. Provisions in union contracts allowed them to continue to collect the same health coverage they had when they were working until they reached 65 and could sign up for Medicare. They simply had to reach the age of 55 with at least 15 years of service to qualify.

The insurance coverage was very generous, with premiums completely paid for by the district and low deductibles, co-insurance and co-pays, according to the Fordham report. Retirees only had to pay the cost of insurance premium increases over time, meaning they paid very little, according to the report.

“The program’s main expense is for those retirees younger than 65, who continue on the same health plan they had when they were employed,” the report said.

Luckily the district’s board of school directors had the good sense to utilize Act 10 in November of 2011 to address retiree health care costs. They voted to increase the minimum retirement age and time of service to qualify for retiree health care benefits, and significantly increase the amount charged for deductibles, co-insurance and co-pays, the report said.

Suddenly the future looked a bit brighter.

Instead of retiree health insurance costs rising from $831 per pupil to $2,135 in 2020, they are now only expected to increase to $1,079 per pupil, according to the report.

In terms of real dollars, that means costs will only increase from about $65 million in 2011 to about $68 million in 2020.

Pension problems

Retiree pensions were another major headache for MPS.

MPS employees participate in numerous pension programs, operated by the state, the city of Milwaukee and the district itself. In the past the district, under terms of labor contracts, paid the employee share of contributions to the state and city plans, costing millions of dollars per year.

Pension costs had already risen from $734 per pupil in 2002 to $1,029 per pupil in 2011, and were scheduled to increase to $1,378 per pupil by 2020, according to the Fordham report.

That means real dollar pension costs would have risen from about $80 million per year in 2011 to about $87 million in 2020.

But Act 10 addressed those costs, forcing school employees throughout the state to pay their own share of the state and city pension contributions. Then the school board voted to close and freeze its own supplemental pension program, beginning in 2014.

As a result, pension costs for the district are expected to decline by $184 per pupil by 2020, from $1,029 to $845, according to the report. In real dollars those costs are expected to drop from roughly $80 million per year to about $53 million.

Overall the district expects to save $67.2 million from retiree health and $33.9 million from the various pension plans by 2020, according to the report.

While the savings will come in handy, the financial future remains cloudy for the school district, according to the Fordham report. That’s because the district has been employing a “pay as you go” system for retiree health insurance costs, using current-year revenue to pay current-year retiree expenses.

The problem is that the number of retirees will continue to grow, while declining enrollment will leave fewer employees and less revenue to cover those costs year-to-year. Most organizations with employee pension plans pay forward, based on estimates of future costs, so they won’t be overwhelmed by rising expenses as the years go by, the report said.