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NJ Digs Deeper Hole By Paying Just $2.4B of $8.8B Retiree Costs

While Christie’s pension cuts make headlines, retiree health benefits make up lion’s share of state’s $90 billion unfunded liability

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Credit: Governor's Office/Tim Larsen

New Jersey will be paying just $2.4 billion of the $8.8 billion actuaries say the state should allocate for pensions and retiree health benefit costs in the revised budget Gov. Chris Christie has proposed for next year -- a policy decision that exacerbates the state’s long-term fiscal crisis and sticks future taxpayers with the bill.

While most of the focus in Christie’s first five years in office has been on the state’s pension crisis, paying for retiree health benefits poses a similarly difficult fiscal challenge. In fact, the state will be paying $1.7 billion next year to cover the healthcare benefits of retired teachers and state government workers -- who get free healthcare for life if they retire after 25 years -- compared to just $681 million toward pension costs in the wake of Christie's pension cuts.

“What people don’t realize is that retiree health benefits are a bigger long-term liability than pensions,” said David Rousseau, a former Democratic state treasurer. “The actuarial cost we should be putting away for retiree healthcare benefits is $4.7 billion, compared to only $3.9 billion for pensions,” in order to cover both current costs and amortization of the unfunded liability.

“And while we at least have a plan to phase up pension payments to the proper level (to pay down the unfunded liability), we’re not even starting to put a dent in the health benefits side because we pay for retiree health benefits on a pay-as-you-go basis,” said Rousseau, who currently serves as budget and tax analyst for New Jersey Policy Perspective.

In fact, the state government’s unfunded liability for retiree healthcare benefits stood at $51.5 billion as of last July 1, compared to $37 billion for teacher and state government pensions. And while Christie and the Democratic-controlled Legislature agreed in 2010 to a seven-year ramp-up to actuarially required funding of the pension system by FY18, there are no plans to pay down the unfunded liability for retiree healthcare benefits, which will continue to grow by several billion dollars a year.

Christie, who has been complaining since January about the soaring costs of pension and retiree health benefits, has promised to lay out a comprehensive plan to cut pension and retiree healthcare costs in mid-June, but prepaying the unfunded liability for retiree health benefits is not likely to be part of the plan -- especially not now, with prepayment of the state’s pension obligations once again put on hold.

The magnitude of the budget challenge now posed by retiree costs was underscored in April when Christie was forced to backtrack on the pension commitment that was the hallmark of his first term after a sudden drop in income tax payments by the wealthy created a $2.7 billion hole in the combined FY14/FY15 budgets.

Christie retroactively chopped the planned third-year FY14 pension payment from $1.58 billion to just $691 million and the scheduled FY15 fourth-year allocation from $2.24 billion to $681 million -- a pair of cuts that will push the state’s unfunded pension liability up over $40 billion by FY16. The New Jersey Education Association and the Communications Workers of American have vowed to challenge the cuts in court.

He also used $120 million in reserves in the State Health Benefits Plan to trim the retiree health benefit payment for FY14 to $1.44 billion, but he had no ability to cut the $1.7 billion budgeted for FY15 because New Jersey funds retiree health benefits entirely on a year-to-year, pay-as-you-go basis.

Over the past seven weeks, Standard and Poor’s, Fitch Ratings, Inc., and Moody’s Investors Service have all cited the long-term problems posed by New Jersey’s unfunded pension and retiree health benefit liabilities in downgrading New Jersey’s credit rating to single-A status – a bottom tier ranking shared by only Illinois and California.

But it is the growing cost of New Jersey’s retiree health benefit program -- not its pension system -- that makes the Garden State out-of-step with other states, according to national studies.

While New Jersey’ liability for retiree healthcare benefits is by far the largest among the 50 states, the state’s pension liability for state and local governments dropped to 11th in the nation as a percentage of its annual state budget -- far below Illinois and Connecticut -- after Christie and Senate President Stephen Sweeney (D-Gloucester) teamed up to pass the 2011 pension and health benefits overhaul.

The 2011 law saved $122 billion in pension costs over 30 years by eliminating cost-of-living increases for retirees for decades, by requiring current employees to pay 1.5 percent to 2 percent more of their salaries toward their pensions, by raising the retirement age for nonpublic safety personnel from 62 to 65, and by reducing pension payments by 3 percent per year for those who took early retirement. However, while a change in the prescription drug program for retirees cut the unfunded liability for retiree healthcare by $9.4 billion, the 2011 law’s increase in the retirement age and its requirement that current employees with less than 20 years of service contribute to their healthcare costs after retirement cut the unfunded liability just $2.5 billion more in FY12 -- and that $2.5 billion cut was eclipsed by a $3.8 billion liability increase the following year, according to a recent S&P analysis.

The $4.7 billion that the state’s audit said New Jersey should have put into paying retiree healthcare benefits and covering a portion of its unfunded liability in FY12 would have ranked first in the nation -- ahead of Indiana’s $ 4.5 billion, New York’s $3.1 billion, and North Carolina’s $2.9 billion, according to statistics compiled by Joshua H. Franzen, vice president for research of the Center for State and Local Government Excellence, and Alex Brown, research director for the National Association of State Retirement Administrators.

“It’s the benefit itself that is the biggest cost driver,” Brown said, noting that New Jersey’s law providing free healthcare to retirees with 25 years of service was “going in the opposite direction from most states.”

Overall, while 96 percent of state government entities had offered healthcare coverage to retirees under age 65 in 2005 -- before the Great Recession of 2007 to 2009 devastated state government finances nationwide -- only 69 percent continued to do so by 2011. Similarly, while 88 percent offered healthcare benefits to retirees 65 and older in 2005 -- usually supplemental Medicare Part B payments -- that percentage dropped to 61 percent by 2011.

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