Healthcare Costs for Retired Public Workers Edge into the Political Crosshairs

John Reitmeyer | March 31, 2016 | Politics
Public-employee pension payments have been the high-profile target, but rising cost of retiree healthcare coverage could make it a bigger problem

retirees doctor
The future of New Jersey’s grossly underfunded public-employee pension system has been the subject of a high-profile feud between Gov. Chris Christie and Democratic legislative leaders for well over a year.

But the growing cost of providing healthcare coverage to the state’s retired public workers, another one of the state’s big fiscal challenges, has received far less attention.

A new report issued today by the Manhattan Institute, a conservative think tank based in New York, lists New Jersey among the states with the highest per-capita retiree healthcare costs in the entire country. The report — which seeks to draw more attention to the broader issue of unfunded retiree healthcare obligations — makes the case that states like New Jersey should give getting that problem under control a higher priority than reforming their pension systems.

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And the end game, according to the two think-tank senior fellows who wrote the report, should be governments eventually getting out of the business altogether of providing healthcare coverage to retired public workers, just as most private-sector employers already have.

“When fewer and fewer private employers offer retiree medical insurance, governments’ insistence on preserving this benefit seems increasingly wasteful,” the report says.

The report comes out just weeks after a commission of experts that was impaneled by Christie to study the issue of public-employee and retiree benefits costs detailed its own set of recommendations. They didn’t call for retiree healthcare benefits to end, but they did recommend offering less generous healthcare coverage to both employees and retirees to help the state cut costs.

The commission also roundly criticized a proposal backed by Senate President Stephen Sweeney (D-Gloucester) that seeks to ask voters this fall to change the state constitution in a bid to shore up the pension system. If approved, Sweeney’s proposed constitutional amendment would require the state to make the full pension payments required by actuaries, and also make contributions on a quarterly basis instead of all at once at the end of the state’s fiscal year, which is the current practice.

The proposal has already cleared the Legislature once, and needs to be approved by a majority one more time to get on the ballot this fall.

But the report written by Manhattan Institute senior fellows Daniel DiSalvo and Stephen Eide argues that reforming healthcare benefits for retired workers is really the bigger priority. And that holds true for New Jersey, DiSalvo said in an interview yesterday, where a series of pension reforms were enacted in 2011 that included requiring employees to contribute more toward their pensions.

Though Christie, a second-term Republican, and Sweeney worked together on the 2011 reform effort, the two men are now at odds on the future of the pension system. Christie has criticized Sweeney’s proposed amendment, saying it will lead to tax increases.

[related]Other places face similar challenges in terms of political obstacles, making reform of retiree-health benefits the better target, said DiSalvo said, who is also an associate professor of political science in the Colin Powell School at the City College of New York.

“In a lot of places, you’ve gone as far as you’re going to get with pension reform, politically,” he said.

DiSalvo said pension problems in general tend to get more attention than retiree healthcare funding, which is one of the reasons why he and his colleague wrote the new report. Part of the challenge is most journalists simply don’t understand or aren’t that interested in complicated healthcare policies, he said.

“This hasn’t been debated and discussed enough,” DiSalvo said. “It’s complicated, it’s technical.”

Another case for prioritizing retiree health-benefit costs that’s made in the report involves how most governments currently fund the two liabilities. Pensions typically are paid for out of a separate investment account, like New Jersey’s pension system, with money coming in from employees, government employers and, hopefully, investment returns.

But retiree healthcare costs are funded largely on a “pay-as-you-go” basis out of the annual budget. And as healthcare costs have been rising at higher rates than state tax revenues, that means more of the pie goes to the healthcare costs, leaving less funds available for other priorities like transportation infrastructure.

“In short, the problem created by rising retiree healthcare costs is the ‘crowding out’ of other government priorities,” the report said.

In New Jersey, the commission impaneled by Christie highlighted a similar concern in a report it issued in 2014. The commission determined New Jersey’s healthcare costs that year, net of the contributions made by current employees, totaled $2.8 billion, which was nearly 10 percent of total state spending. And roughly half of that cost, about $1.4 billion, was attributable to retirees.

Without reform, the commission said, the combined healthcare costs will rise to more than $6 billion by 2024, a calculation many Democrats have disputed. Still, to combat the problem, the panel has proposed offering employees and retirees less generous health plans, reforming out-of-network rules, and utilizing private healthcare exchanges under the federal Affordable Care Act.

The panel also recommended freezing the state’s current $70 billion pension fund and moving employees into a new cash-balance retirement plan with some features of a (401)k. But while Christie’s administration has called for freezing the state pension fund, some governments have considered setting up new accounts like those used to fund pension benefits as a way to address the problem posed by rising retiree healthcare costs.

That set up in theory would allow governments to “pre-fund” their employee healthcare obligations. It would also require them to “double pay” for several years to catch up to the costs of current and retired employees.

And if a state can’t afford to do so?

That would create a circumstance similar to the one New Jersey is currently facing with its inability to make the full payments required by actuaries, DiSalvo said. The report opposes “pre-funding” as a viable solution.

“Is that actually a model you want to imitate?” DiSalvo asked