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Retiree health costs 'time bomb' for N.J.
Friday, July 27, 2007
By ADRIENNE LU
TRENTON BUREAU
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If New Jersey taxpayers had to pay off the cost of health benefits for retired state workers and teachers in one fell swoop today, the bill would ring up at $58 billion.
But look on the bright side: It's a lot less than the $78 billion that was previously estimated.
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RELATED LINKS * * * By the numbers New rules require states like New Jersey to estimate how much health benefits for retired employees will cost. Here's a sample of the numbers released Thursday. Actuarial accrued liability for: • Current state employees: $14.7 billion • Current teachers: $23.1 billion • Retired state employees: $6.9 billion • Retired teachers: $13.4 billion • Total: $58.1 billion Source: Aon Consulting |
Aon Consulting of Somerset reported the results of the first actuarial study on the estimated cost to the State Health Benefits Commission on Thursday. Aon also reported that local governments throughout the state are on the hook for another $10.8 billion for their retirees.
To put those numbers in perspective, the entire state budget this year is $33.5 billion.
"It's a ticking time bomb," said William G. Dressel Jr., executive director of the New Jersey League of Municipalities. "These are the reasons why we have high property taxes in this state -- because of state-mandated costs like pensions and medical benefit costs."
For a long time, most states and even private corporations operated on a "pay as you go" system to cover retirees' health-care costs.
Many didn't even bother to calculate their future financial obligations -- picture making mortgage payments on a house without knowing how much it will eventually cost you.
In 1992, new accounting rules required private companies to calculate the costs of the long-term retirement benefits. The rules did not require companies to actually fund the future obligations, but they might as well have: When companies figured out how much they owed, they started scaling back retirement health benefits.
Now, state governments are also being required to calculate and disclose the costs of health-care retirement benefits, and the numbers are just as alarming. Like private companies, state and local governments are not required to pay toward those estimated future obligations.
This year, New Jersey will spend about $1.1 billion on health care for retired state workers and teachers, most of whom receive virtually free health care after working 25 years or even less time, in some cases. Most states do not provide free health care for retired teachers.
The cost of health care for government retirees is expected to grow in the coming years, as costs continue to skyrocket.
Health-benefit costs for current state workers and retirees combined are expected to reach $2.2 billion this year, or 44 percent of total employee benefits costs -- or about as much as the property tax rebate program this year.
Governor Corzine acknowledged the issue earlier this week.
"Now we are under a serious financial challenge on how we handle it," Corzine said.
Seizing on the opportunity to plug his plan to sell or lease state assets, such as the toll roads, he added, "Monetization ... will certainly help with reducing another of our mandated costs, which is debt service."
New Jersey used to save up for future retirees' medical costs, just as it does with pension costs. Saving money, or "pre-funding," makes financial sense, because it saves taxpayers big dollars in the long run -- just like making a bigger down payment on a house saves on interest down the road.
But Governors Whitman and later McGreevey raided the funds set aside by their predecessors to balance the budget and pay for tax cuts.
Now, officials say the state simply doesn't have the spare cash to set aside for the future.
Corzine has projected a $2.5 billion structural deficit for next year. And the state still faces a significant shortfall in its public employee pension system.
"Any discussion regarding pre-funding would be made in the context of many other large liabilities," said Thomas Vincz, a spokesman for the state Treasury, "including the $25 billion unfunded liability for the pension system, the debt service cost to the state along with what we already pay for post-retirement medical costs."
Vincz said those items alone already make up 10 percent of the state budget.
Mark Tenenhaus, a senior analyst at Moody's, said that Wall Street firms have been well aware of the liabilities.
"It's another issue the state is grappling with to find a solution," Tenenhaus said. "It is a liability and it is one that has to be addressed -- it's also a liability that other states are facing, so it's not unique to New Jersey."
But in the future, how states address their retirement benefit liabilities could affect credit ratings, which in turn determine how much it costs to borrow money for schools, roads and other projects.
L. Mason Neely, chairman of the League of Municipalities' health and pension benefits committee, said the situation is not as intractable as it may first appear. While the health-care costs for current retirees are essentially fixed, costs for future retirees can still be changed in upcoming contract negotiations, said Neely, who serves as finance director for East Brunswick.
But that prospect worries unions, who fear New Jersey and local governments could follow the lead of private corporations in downsizing retirement benefit packages.
Jim Marketti, president of Communications Workers of America Local 1032, said his members fear the benefits they counted on could be taken away.
"They stayed with state employment for an entire career in anticipation of getting promised benefits and now, at the last minute, they might be taken away from them," Marketti said.
Dressel said there are no magic bullets.
"It's a politically charged issue," Dressel said. "In this state, you've got the health-care providers on one side, employee groups and unions on the other side, and you've got legislators who quite frankly find it very difficult not to provide rich medical benefits to the employee groups."
E-mail: lu@northjersey.com
