Loophole in workers’ comp cost NJ public pension system for years. Insurance companies benefited

State agency has closed the loophole and pledged to implement other recommended changes
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A long-standing loophole in workers’ compensation policy shifted “substantial” costs onto New Jersey’s already strained public employee pension system, according to a new report from a top state financial watchdog.

A precise estimate of the financial impact could not be determined, but the findings released on Thursday by the Office of the State Comptroller suggest insurance companies benefited the most from the loophole.

At the same time, the report determined the loophole effectively shifted more costs onto the pension system, which as of last year, was operating with a nearly $130 billion unfunded liability, according to estimates disclosed in recent state bond documents.

The report recommends the drafting of new workers’ compensation policies that would “prevent the State from incurring these unnecessary expenses.” It also suggests new laws could be enacted to further protect the pension system.

“State agencies should all be rowing in the same direction and not implementing or tolerating policies that expose the pension funds to costs that insurers already agreed to pay,” said Acting State Comptroller Kevin D. Walsh.

The Division of Workers’ Compensation has already closed the policy loophole and pledged to implement other recommendations included in the report, the comptroller’s office said.

Among the worst-funded state retirement plans

Government employees in New Jersey are provided with pension benefits funded with contributions from both the workers and their employers. Public employees can also receive workers’ compensation benefits when injured on the job, and in the worst cases, accidental disability pensions.

Thanks largely to state government’s chronic underfunding of pension benefits, New Jersey’s overall pension system is frequently ranked among the nation’s worst-funded state retirement plans.

Still, the most recent valuation of the pension funds, counting those that cover retirements for state, local and county employees, as well as teachers, was more than $83 billion. That means no one is in immediate danger of not receiving pension checks, even with the costs triggered by the policy loophole that drew the scrutiny of the comptroller.

However, a number of new policies have had to be enacted over the last decade in New Jersey to address the unfunded liability and improve the overall health of the pension funds. They include forcing employees at all levels of government to contribute to their pensions at higher rates. The state has also been increasing pension contributions that are funded in the annual budget. And at the local and county level, taxpayer-funded pension bills have also increased this year to keep pace with rising costs.

The investigation by the Office of the State Comptroller found the workers’ compensation policy loophole had been in place in New Jersey since an agency memorandum covering “medical monitoring” settlements was issued in 2006.

The long-standing loophole covered in the memorandum encouraged injured workers to forgo cash settlements from insurance companies that, if accepted, would have reduced the size of their disability pensions. In exchange, the employees were offered long-term medical monitoring, the report said.

The policy circumvented New Jersey’s workers’ compensation law by allowing for the waiving of a two-year limit on medical coverage for work-related injuries, the report said.

The effect of the loophole

Workers’ compensation benefits are supposed to be deducted or “offset” from the value of an accidental disability pension to prevent double compensation for the same injury. But the loophole prevented that from occurring by offering injured workers lifetime medical coverage instead of a cash settlement, according to the report.

From just 2016 to 2019, medical-monitoring settlements were approved in at least 114 cases where a disability pension without any corresponding monetary offset was also provided, the report said.

“The pension funds would have retained an incalculable, but no doubt substantial, amount of money,” if it weren’t for the policy being in place, the report said.

Meanwhile, state law allows workers’ compensation attorneys to charge fees based on how much an injured worker receives from insurance companies. But the loophole allowed fees for attorneys to be collected even when the medical-monitoring settlements were reached that did not involve any cash payments, the report said.

The report recommended that the Division of Workers’ Compensation, an agency within the Department of Labor and Workforce Development, rescind the 2006 memorandum, as well as another memorandum issued about five years later that built on the first one. It also called for better coordination between the Division of Workers’ Compensation and the Division of Pensions and Benefits, an agency within the Department of Treasury.

New laws could also be drafted to “prevent pension funds in all instances from being used prematurely to compensate injured employees who have not exhausted their workers’ compensation benefits,” the report said.

The investigation was launched after a complaint was received about the improper avoidance of pension offsets. To lodge complaints with the Office of the State Comptroller, call 1-855-OSC-TIPS, or go to https://www.nj.gov/comptroller/divisions/investigations/complaint.html.