Wisconsin state government, school districts and local governments have just begun to realize the savings from better benefit management.
The removal of collective bargaining over benefits has allowed them to raise the contributions from their employees for pensions and health care – generally 5.8% of payroll for pensions and 12.5% of costs for health care. That has meant about a ten-point, tough-to-absorb hit for public employees.
But those are just steps one and two on the road to containing benefit costs.
The school districts in Milwaukee and Kenosha did lay off teachers because they stuck themselves with mostly unchanged benefit packages. And other districts that dodged the bullet of layoffs this year are talking like they will be forced to do so next year.
Not true. If they follow the reforms that are sweeping through the private sector, they can still deliver full benefit packages, but at drastically lower costs.
For perspective sake, private companies think they are doing a good job with their retirement plans if they contribute 5% of payroll each year. Note that the 5.8% now being paid by some public employees is only half of what those public plans cost.
So public pension plans, which allow people to retire at 55 or even earlier, cost more than twice as much as average practice in the private sector. Where is it written that public employees, who are living longer like all the rest of us, should be carried by taxpayers for 20-plus years of retirement or more?
Further, why can’t governments make the switch to defined contribution plans instead of defined benefit plans, which have become the norm in the private sector?
Next, health costs: For openers, the national average for the split between employer and employee in private plans is 75%-25%. So, at 12.5%, public employees are still contributing only half as much as workers in private organizations.
And contributions are not the biggest part of the solution. Raising contributions, as the Republicans did in the last legislative session, does nothing to address the underlying problem of soaring health costs. Nothing. Those higher contributions just cost shift more of the burden from taxpayers to public employees.
The real savings come from innovative, aggressive management of costs. Best practice in the private sector is now about $7000 per employee. Companies like Burger Boat in Manitowoc, KI in Green Bay and QuadGraphics in Southeastern Wisconsin deliver full health care packages, actually better than those in the public sector, for that price.
State, school and local governments operate at two or three times that price tag.
To understand what that enormous differential means, consider a school district with 1000 employees and a typical $20,000 price tag per employee. The district spends $20 million per year on health care. Even with the 12.5% employee contribution, the district’s taxpayers are on the hook for $17.7 million.
If the Burger, KI or Quad plans were used instead, overall charges would be $7 million. Even if the school employees paid no premium at all, the savings would be more than $10 million per year. That’s more than enough to solve the deficits at most districts.
And the same can be said of other units of government.
It’s time, in that win, to put the head of the Employee Trust Fund, which manages benefits for state employees, into the governor’s cabinet, so the state’s CEO, the governor, can initiate change more directly.
In short, you have to know and do the numbers, and you have to manage, not just throw money around.
Private companies are in a stampede toward consumer drive plans with personal health accounts, toward on-site clinics for primary care, toward proactive management of chronic diseases and keeping people out of hospitals, and toward value based purchasing of health care where price and quality are more transparent.
A handful of public sector managers have taken notice and started managing benefit costs more innovatively. Some have moved away from sole sourcing with WEA Trust, the health plan owned by the teachers’ union.
Four counties have moved to consumer-drive options.
But they remain a handful, even though they have been unshackled from the bargaining morass and old plans where the costs double every five to eight years.