newjerseynewsroom.com

BY RICHARD F. KEEVEY

COMMENTARY

The problem of pension liabilities is well-known in the state of New Jersey. Not since the mid-1990s has the state properly funded its pension systems — in most years, it provided no funds. The state should have provided $3.1 billion in the current fiscal year. Today, the unfunded liability has reached $37 billion, making the systems less than 56 percent funded. In addition, municipalities and counties have an unfunded liability of almost $17 billion.

But an even bigger problem facing state government is the unfunded liability for post-retirement medical benefits — totaling $57 billion — of which $32 billion is for retired teachers. The state pays the employer's share of retirement medical and pension obligations for all local teachers. Local governments have an unfunded liability of $10 billion. There is an additional unknown liability for those local governments that do not participate in the state's administered health benefits program.

Unlike the pension systems, no money is reserved for future medical commitments. The requirement is being met solely on a pay-as-you-go basis. The unfunded liability is thus 100 percent. To put this cost in perspective, note that the current fiscal year's state budget includes more than $1.3 billion for retiree medical benefits. This is in addition to the $870 million for current state employees. Similar levels of commitments exist at the local level.

Health costs are increasing at an alarming rate. If nothing is done to contain costs, the total funds needed in the state budget by FY2016 for health benefits will be in excess of $3 billion, or an increase of almost 40 percent. Furthermore, in the past 10 years, medical costs for employees and retirees have doubled as a percentage of the total budget.

Most states are in the same position. According to the Pew Center on the States, only two states have more than 50 percent of the assets they need to meet their liabilities. Most, like New Jersey, have put nothing aside.

One might argue that if the state begins contributing to the pension system — and if the initiatives that have been proposed are implemented, including increasing employee contributions, changing the benefit formula, altering the COLA (cost of living allowance), and increasing the retirement age -- the pension systems can once again achieve a necessary funding level. A more immediate problem is the rising cost for medical care not only for retirees, but also for current employees. Both medical costs and the number of retirees are increasing substantially each year, so the price tag rises much faster than almost any other item in the budget, except for Medicaid.

What to do? There are few options other than to increase the employee and retiree share of medical costs. State employees now pay 1.5 percent of their salary. Under recent legislation, local government and school employees will now pay a similar amount. Many retirees receive free health coverage, or coverage at a much lower cost.

The answer is to begin a transition to greater cost sharing between employee and employer. Many employers, including the federal government, have models whereby the employer pays a percentage of the cost of coverage and the employee contributes the difference. And the contribution is based on a percentage of the cost of the premiums rather than a percentage of salary. Co-pays would also need to be reconfigured.

Unfortunately for current employees and retirees, these health benefit changes will understandably have a negative effect on their bottom line. For current employees, this would come in addition to increased pension contributions. Indeed, this is not a desirable situation for government employees, but options are very limited as the rapid increase in retirement and current health benefits leaves the state with few choices. During the next few months, the governor and the Legislature, along with government employees, need to implement a solution that meets the long-range needs of a state that is very financially stressed.

Retirement pensions, and especially health benefits, are state and local government finances' greatest albatrosses. In a difficult fiscal climate where the total unfunded liability of retirement programs aggregates to more than $120 billion, very difficult choices are necessary, especially in these two rapidly growing cost centers.

Richard F. Keevey is the distinguished practitioner in residence at the School of Public Affairs and Administration at Rutgers University -Newark, a former budget director and comptroller for two New Jersey governors and a former U.S. deputy undersecretary of defense for finance.

THIS COLUMN WAS ORIGINALLY PUBLISHED IN THE TIMES OF TRENTON