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Analysis: Retiree Health Benefits Easier To Cut Than Pensions

christie
Credit: Governor's Office/Tim Larsen
Gov. Chris Christie

While Gov. Chris Christie cut $2.4 billion in pension payments as a short-term fix for his latest budget shortfall, the GOP governor is more likely to propose deep cuts in retiree healthcare costs than accrued pension benefits when he unveils his long-term plan to deal with the state’s $90 billion in unfunded retiree liabilities.

Even though no state has succeeded in cutting the actual monthly pension benefits earned by retirees, courts across the country have upheld the authority of state and city governments to cut retiree healthcare benefits, notably including an Illinois law that ended free lifetime healthcare coverage for retirees with more than 20 years of service.

For Treasurer Andrew Sidamon-Eristoff, who told legislative budget committees that New Jersey is looking to other states for examples of how to cut soaring retiree costs, the Illinois law provides a legal precedent to end New Jersey’s guarantee of free lifetime healthcare coverage for teachers, police, firefighters, and state and local government employees with 25 years of service.

The May 2012 law requiring Illinois’ 80,000 state government employees to begin paying part of their annual healthcare premiums was pushed through by Democratic Gov. Pat Quinn and championed by Democratic House Speaker Michael Madden. It is just one of a series of initiatives that have cut retiree healthcare benefits in more than 30 states since 2011.

Whether Senate President Stephen Sweeney (D-Gloucester) and the Democratic-controlled Legislature would work with Christie to cut retiree health benefits or make over the state’s pension system -- perhaps by transitioning to the hybrid defined-benefit/defined-contribution model implemented by Rhode Island that Sidamon-Eristoff praised -- is another question.

While Sweeney and Democratic leaders discuss whether to fight Christie’s $2.4 billion pension cuts by developing an alternative budget, the New Jersey Education Association will urge the Teachers Pension and Annuity Fund Board of Trustees today to join their lawsuit challenging Christie’s decision to cut the pension contribution in defiance of the 2010 law he signed requiring a seven-year ramp-up to full actuarially required funding by 2018.

“The law could not be more clear. It imposes higher contributions and lower benefits on our members, but it also requires the state to pay its share,” NJEA President Wendell Steinhauer said. “NJEA has already announced that it will sue the governor, in conjunction with other unions. But the law also allows the Boards of Trustees of the various pension funds to sue in order to protect the integrity of the funds. We will watch carefully to see if the trustees will represent the members of the funds, or just defer to Gov. Christie’s illegal plan.”

NJEA’s request to the TPAF Board of Trustees today is just the latest action in what promises to be a long battle over the future of New Jersey pension and retiree health benefits.

While efforts to rein in pension costs draw most of the headlines, the unfunded liability for retiree healthcare costs is actually larger than the pension liability in New Jersey and most states with heavily unionized public employee workforces. Both state and city governments have been quietly chipping away at retiree health benefits for years.

In fact, Gerald McEntee, then national president of the American Federation of State, County and Municipalities, noted three years ago that AFSCME chapters have “been fighting threats to retiree healthcare all across the country -- in Maryland, New York, Hawaii, Illinois, Ohio, and California.

“In these and other states and localities, employers have tried -- and often succeeded -- in shifting costs to retirees,” McEntee noted. “They’ve done it by increasing retirees’ premiums and other copayments; reducing benefits; raising the age of eligibility for retiree healthcare; and increasing the years of service needed to qualify.”

When Christie and Sweeney teamed up to pass their controversial pension and health benefits legislation in 2011, they included a provision that requires current employees with less than 20 years of service to contribute toward their health benefits after they retire.

But the on-again, off-again political allies stopped short of requiring hundreds of thousands of retired teachers, police, and state and local government workers -- and those nearing retirement -- to contribute to their post-retirement medical benefits, as Illinois did the following year.

National experts say that governors and legislatures are increasingly looking at retiree health benefits, rather than pensions, for savings.

“Our research shows that states and cities are finding it easier to modify retiree healthcare benefits than accrued pension benefits, because the legal barriers to modifying retiree healthcare benefits are so much lower. It’s happening nationwide,” said Josh Brown, research manager for the National Association of Retirement Administrators.

“Sixty-five percent of states modified their retiree health insurance coverage in 2011, mostly by increasing premiums, co-payments or deductibles,” said Brown, whose “Spotlight on Retiree Healthcare Benefits for State Employees in 2013", coauthored with Josh Franzen, vice president for research at the Center for State and Local Government Excellence, is the most complete national survey.

Union challenges to the wave of state laws and city ordinances cutting retiree healthcare benefits in 2011 have been working their way through various state courts, and the cuts have generally been upheld. This spring, courts in California essentially upheld cuts in retiree health benefits in San Diego and in Orange and Sonoma counties. Illinois’ law has been upheld at the trial court level and is awaiting a ruling by the Illinois Supreme Court.

In a similar vein to the Illinois law, President Obama recently laid out a plan to require military retirees to pay more for their healthcare coverage, some for the first time.

Most recently, Chicago Mayor Rahm Emanuel and Detroit’s bankruptcy manager both announced plans to end their retiree healthcare coverage and push their pensioners into the healthcare exchanges set up under President Barack Obama’s Affordable Care Act.

Requiring retirees with 25 years of service who currently receive free healthcare coverage to pay part of their premiums is one of the few options Christie can propose that would significantly cut into the state’s $51.5 billion unfunded liability for future retiree health benefits. And it would be an easier legal lift than trying to cut pension payments to current retirees.

Christie has already taken the easiest pension savings by eliminating cost-of-living adjustments (COLAs) for retirees in the 2011 law. Eliminating that benefit is projected to save $74 billion over 30 years, unless a group of retired prosecutors and the state’s public employee unions win their legal challenge.

Courts in various states have already upheld cuts in COLAs, ruling that they do not enjoy the same contractual protections as accrued pension benefits. The exceptions are Arizona, where pension rights are expressly protected in the state constitution, and Colorado, whose ruling in the unions’ favor is on appeal.

No state, however, has cut accrued pension benefits already earned by retirees, which are regarded as a contractual property right.

“Whatever we don’t pay into the pension system this year is going to cost us more in future years, because those pension obligations are not going to go away,” Assemblyman Declan O’Scanlon (R-Monmouth), the ranking Republican on the Assembly Budget Committee, said last month. He spoke after listening to Sidamon-Eristoff explain the reasons for Christie’s $900 million cut in this year’s pension payment and $1.5 billion cut next year.

Christie began complaining in January that soaring pension and retiree healthcare costs -- along with rising debt service -- were eating up 94 percent of the increases in state revenues and crowding out other priorities, like increasing aid to K-12 education and state colleges or enacting the income tax cut he has been pushing for two years.

A sudden drop in expected income tax payments by wealthy taxpayers in April was largely responsible for a combined $2.7 billion gap in the current Fiscal Year 2014 and next year’s FY15 budgets. That shortfall forced Christie to scrap $2.4 billion in pension payments that were to be part of a seven-year phase-in to put the state’s pension plan on the road to fiscal solvency -- because of the cuts, the unfunded pension liability will exceed $40 billion by FY16.

The state, however, is funding retiree health benefits on a pay-as-you-go basis and has no plan to begin to prepay its unfunded liability, which stood at $51.5 billion as of last July 1 and will keep growing.

Promising “to stop the insanity of a defined-benefit pension system that we cannot afford and of a healthcare system that Obamacare called a Cadillac plan,” Christie has promised to unveil a comprehensive plan to cut the cost of the state’s pension and retiree health benefit programs by mid-June -- before the June 30 deadline for the Democratic-controlled Legislature to send Christie a balanced budget, as required by the state Constitution.

Retiree benefits pose a bigger problem for New Jersey than for other states because New Jersey funds not only pension and healthcare for 60,000 state government retirees, but also for more than 91,000 retired teachers.

The state pays the supplemental Medicare Part B premiums for retirees over age 65 who are eligible for Medicare, but the biggest cost is for retirees under age 65 whose family health insurance plans can cost $25,000 or more. While the 2011 law imposed a 3 percent early-withdrawal penalty per year on pension payments for those retiring before the new retirement age of 65, police and other uniformed personnel can retire in their late 40s under the “20 and out” law with no reduction in their pensions -- putting municipal, county and state governments on the hook for more than 15 years of full healthcare coverage.

Just how ambitious Christie’s pension and retiree health benefit plan is likely to be -- and its chances of enactment into law -- have as much to do with politics as with policy or budgetary considerations, noted David Rousseau, budget and tax analyst for New Jersey Policy Perspective.

Christie has every incentive to propose an aggressive plan to cut pension and retiree health benefits because attacks on public employee unions “play well with the national conservative audience he will need if he runs for the Republican presidential nomination in 2016,” Rousseau said.

It also taps into the discontent over generous public employee pensions and health benefits among hard-pressed middleclass New Jersey taxpayers whose private-sector benefits have been cut. Also, “it gives him the opportunity to play to other constituencies by saying ‘I could do more for school aid’ or ‘I could put $10 million back in for cancer research if I could only get pension and retiree health benefits costs under control,’” Rousseau said.

It may not be as popular a position as Christie thinks. A Fairleigh Dickinson University Public Mind survey released yesterday showed that 61 percent of New Jerseyans believe the state’s pension system is in serious trouble, but ‘only 27 percent believe reduced payouts are the answer, as compared with almost two-thirds (63 percent) who believe the state needs to honor the promises it made to its workers.’”

Moreover, the tougher the solution Christie proposes, the more that Sweeney, as a leading Democratic candidate for governor in 2017, has to gain by opposing it.

“Whatever Christie proposes, Sweeney’s isn’t going to post,” said Rousseau, a former Democratic state treasurer. “In fact, Sweeney benefits the most the longer this fight goes on because he gets an opportunity to rehabilitate himself with public employees.”

Sweeney, an Ironworkers Union leader, has not forgotten how public employee union leaders teamed up in August 2011 to deny him the state AFL-CIO’s endorsement for his Senate reelection. Meanwhile, public employee union leaders remain suspicious of Sweeney, especially after he and Christie seemed to be operating under a nonaggression pact during the 2013 campaign. The Republican governor didn’t even try to win back any Democratic legislative seats in South Jersey, the bastion of Sweeney and Democratic power broker George Norcross.

Sweeney and other Democratic leaders, including Assembly Speaker Vincent Prieto (D-Hudson), have asserted that public employees have already made sufficient sacrifices by giving up cost-of-living adjustments, paying more toward their pensions and healthcare , and waiting three more years for retirement, and that it is time for Christie to comply with the 2010 law requiring a seven-year ramp-up for full funding of the pension system.

It is a popular political position to take with the state’s public employee unions, but Christie’s pension cuts already means that it will now take until at least FY19 -- not FY18, as envisioned in the 2010 law -- for the state to ramp up to actuarially required funding of the state’s pension system. And that assumes the Christie keeps his promise to get back on track by increasing pension funding from $681 million in FY15 to $2.5 billion in FY16 – a $1.8 billion increase that Democratic budget experts do not believe he can possibly fund.

For Sweeney, the deeper question is whether he wants to try to fix the long-term budget problems posed by New Jersey’s mounting unfunded pension and retiree health benefit liabilities now, or whether he’s willing to push off long-range solutions -- and a knockdown, drag-out battle with the state’s public employee unions -- until after he or another Democrat potentially succeeds Christie in January 2018.

Christie administration officials estimate that it will cost more than $5 billion in the FY19 budget to cover actuarially required funding of the pension system. That would require the next governor to come up with a $1 billion increase for pensions in his or her first budget, assuming that Christie gets back on schedule, which is not a given if the GOP governor does not gain Democratic support for the pension and retiree health benefit changes he wants to make.

Christie’s second-term agenda already has been crippled by the failure of the state’s tax revenue growth to keep up with soaring pension, retiree health benefit, and debt-service costs, which have effectively killed any chance of the Republican governor getting the across-the-board income tax cut he has been pushing for since January 2012. The prospect of dealing with that pension funding buildup -- and the consequent inability to fund needed policy initiatives -- discouraged at least one potential Democratic candidate from running against Christie in 2013.

Pushing off enactment of a long-term plan to meet the state’s pension and retiree health benefit obligations past Christie’s last budget could saddle the next governor with similar crippling costs that would hamper his or her agenda -- and doom the state to four more years of year-to-year budget crises.

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