A CRITICAL ELEMENT OF REFORM OF MILWAUKEE PUBLIC SCHOOLS
February 5, 2010
The cost of health insurance for retirees has become a heavy burden for the Milwaukee Public Schools (MPS) budget and will worsen significantly in the next few years, says the Wisconsin Policy Research Institute (WPRI).
- 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 percent of payroll costs, by 2016.
- These costs are a major contributor to MPS's fringe benefits rate of 68.7 percent, 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, says WPRI.
The most important consideration of potential decisions to address or continue to ignore the unfunded liability is the potential effect on the classroom, says WPRI:
- 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.
Source: Don Bezruki, "A Critical Element of Reform of Milwaukee Public Schools: The Escalating Cost of Retiree Health Insurance," The Wisconsin Policy Research Institute, December, 2009; and Report, "Toward a Stronger Milwaukee Public Schools," McKinsey & Co., April 2009.
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