By Robert D. Klausner
In a decision that will shape the future for tens of thousands of Michigan retirees and perhaps have ramifications beyond, the Supreme Court of Michigan held that health insurance benefits are not “accrued financial benefits” protected by the State and Federal Constitutions.
A divided Michigan Supreme Court in Studier v. Michigan Public Schools Retirement Board, 698 N.W.2d 350 (Mich. June 28, 2005), determined that the term “accrued financial benefits” refers only to benefits that increase over time, such as retirement benefits. The lawsuit was brought by a class of retired school employees challenging increases in the prescription drug co-payments and deductibles.
The Michigan Public School Retirement System has been offering retiree health care for more than 30 years. The increases which were the subject of the lawsuit were levied in 2000 and 2001. Prior to this time, there had been other increases in deductibles and co-payments as rates changed due to increased cost and changing medical technology. Following these changes, the retirees filed a suit claiming that the benefits were a contractual obligation which could not be altered after the employee retired. The contract, the retirees argued, was protected against impairment by the U.S. Constitution and the provisions of the Michigan Constitution related to retirement benefits. The Michigan State Constitution provides:
“The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof and shall not be diminished or impaired thereby.”
The key questions decided by the Court were whether health insurance is “an accrued financial benefit” and whether the health care premium was a “contractual obligation.” The majority of the Court found it was neither.
On the question of the “accrued financial benefit,” the Court held that in order to be an accrued benefit, it must increase from year to year as does the retirement benefit. The Court also held that health insurance benefits were not “financial benefits” as they did not involve the payment of a monetary sum.
As to the question of contract, the Court found that the benefits were not contractual as there was no evidence of legislative intent to surrender the prerogative to alter the plan in the future. The Court also noted that non-salary based fringe benefits have always been excluded from the definition of compensation under the retirement plan and therefore do not form part of the contractually guaranteed benefit.
The two dissenting judges noted that in reaching the conclusion it did in this case, it was retreating from two earlier decisions which found that insurance was indeed a financial benefit. The dissenting judges also argued that the term “accrued” referred to the fact that an employee had worked all of the years necessary to qualify for the benefit, not the fact that the benefit might increase incrementally each year.
The Michigan case points out the continued divergence of opinions by the state courts. In 2003, Alaska’s Supreme Court reached precisely the opposite conclusion. The Michigan decision puts it in accord with earlier decisions in Colorado, Georgia, and Tennessee. States holding in accord with Alaska are New York, New Jersey, Oklahoma, California, and West Virginia. Given the current pressure on public employee benefits, the recent Michigan decision may encourage other efforts to reduce post-retirement health care benefits. The enactment of specific legislation refining health care as a “contractual benefit” or “accrued retirement benefit” would act to eliminate confusion in any particular jurisdiction.
The pending effective date of GASB Statement No. 45, relating to post-retirement benefits other than pension will add further pressure to the process. For the first time, governments will be required to carry the actuarial, long-term cost of post-retirement health care and long-term care benefits as a reported liability. This will result in a negative effect on most governmental balance sheets. This is viewed as a negative factor by Wall Street in rating governmental agencies for bond valuation purposes.
It is hoped that rather than lead to the curtailing or even elimination of employer- sponsored retiree insurance benefits, there will be an increased focus on pre-funding to allow the same market forces that fund more than 65% of most defined benefit retirement costs to work for health care as well.