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Analysis: Retiree Health Benefits Easier To Cut Than Pensions

While unions prepare lawsuits over $2.4 billion pension cuts, Christie has precedent to target free healthcare for retirees next

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.

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