The New Jersey Pension and Health Benefit Study Commission released an initial report entitled, “Truth & Consequence: Status Report of the New Jersey Pension and Health Benefit Study Commission,” September 25 outlining the causes and magnitude of the New Jersey pension and health benefit fund problems. The 45-page report did hint at several ‘solutions’ that may be recommended in upcoming releases.
The report blames governors and state lawmakers from both parties for promising benefits that were too optimistic and then repeatedly deferring payments. It also says the liabilities proceeded to grow amid the economic recessions that hit the U.S. over the last decade. The panel noted in the 45-page report that “the failure of the State to make required pension contributions when they have been due has made a bad situation much worse.”
In fact, “the specific cause of the $3 billion gap in FY2014 (between the annual cost of benefits and the money allocated to pay for them) is that the State paid less than $700 million of the $3.7 billion it would have had to have paid to meet its statutory annual required contribution to the pension funds for that year” as a result of Christie’s cuts, the panel wrote.
"Both public employees and taxpayers have been poorly served by a long-standing and bipartisan tradition of increasing benefit levels without adequate funding," the report says.
The state faces $37 billion in unfunded pension liabilities — the fourth-worst gap of any state in the nation — and $53 billion in unfunded health benefit liabilities, according to the report.
"To put funding a $37 billion gap in perspective," the report says, "each of the state's 3.2 million households would have to write a check today for approximately $12,000 to close the gap."
The commission added that these costs are growing faster than the 4 percent projected growth of state revenue and that New Jersey would have to contribute $4 billion to $5 billion each year over the next 30 years to cover promised payments. The state would have to pay more if investments of those funds fall behind the projected 7.9 percent annual returns, but the costs would decrease if the returns are higher.
Experts say it may be difficult for the State to cut pension contributions because they are protected by the state constitution in some cases. But it may be easier to slash health benefits, which aren't as strongly protected.
The commission also warned that if changes aren't made, New Jersey may face more credit rating downgrades.
In addtion,the commission also wrote that the 2011 reforms "were not a complete answer" to the problem
The interim report was the first test of the independence of the commission — appointed entirely by the Governor. The group’s chair stressed that bipartisanship of the body in releasing the report. “We’ve got a group of people who are very smart,” Healey said. “We’re balanced. [The work of the committee] has been enormously apolitical. Which is the goal.”
The report included a chart showing that the Governor underfunded the ever-increasing actuarially required contribution to the pension system needed to cover future liabilities by $14.9 billion over his first five budgets — compared to underfunding of $6.4 billion during Democratic Gov. Jon Corzine’s four budgets.
That doesn’t mean that Democrats will be pleased with the report, however. “There is agreement, widespread and across party lines, of the need to reform public employee benefits and the State’s funding of them,” the panel wrote. “As former Governor Jon Corzine pointed out, ‘on pension and health care issues, our career employees, and the public, must recognize that current benefits are financially unsustainable. Without a dramatic increase in taxes or a draconian reduction in services, State and local government cannot meet the benefit obligations on the books.’”
Undervalued Liability
New Jersey's pension system has been underfunded since 1996, with governors regularly deferring legally required payments in order to plug gaps in the state budget.
The report did introduce a new concern, however, with its acknowledgement that the $37 billion unfunded pension liability may actually be underestimated. Based on the actual market value of the state’s pension assets at the end of 2013, the state’s unfunded pension liability would have been $42 billion.
The panel noted that poor returns on investment in the state’s pension portfolio in the economic downturn of 2000-2002 and the Great Recession of 2008-2009 fueled the growth of the state’s unfunded pension liability. The $37 billion figure assumes that the state Treasury Department will be able to hit an annual 7.9 percent rate of return on its pension investments — and that is not guaranteed.
Increasing Health Care Cost & Excise Tax
The report says health costs consume 8 percent of the state budget and will grow to 14 percent by 2024. Part of the problem, it says, is that 80 percent of public workers are enrolled in what would be considered a "platinum" plan under the Affordable Care Act. Unless health plan costs are cut, the panel warned, the cost of the tax for state government employees and retirees would be $58 million in 2018 and would rise to $284 million in 2022.
"The state health programs provide generous benefits with little pricing incentive for employees to select anything but plans with the most comprehensive coverage and highest cost the state," the report says.
In addition, the commission noted that beginning in 2018, the federal government will impose a 40 percent excise tax on such plans — and that would cost the state another $58 million that year and rise to $284 million in 2022.
The panel also focused on the cost of benefits for both current employees and retirees enrolled in the State Health Benefits Program.
“The State Health Programs provide generous benefits with little pricing incentive for employees to select anything but plans with the most comprehensive coverage and highest cost to the State,” the panel asserted, pointing out that “over 80% of participants in the State Health Programs are enrolled” in more expensive traditional health benefits plans.
Source: New Jersey Star Ledger, NJ Spotlight