New Jersey Will Need $58B for Present, Future Health Benefits for Retirees
New Jersey officials are expected to announce Thursday that the state will need $58 billion in today's dollars to provide health benefits it has promised to current and future retirees -- "nearly twice the state budget and nearly twice the amount of its outstanding debt," the New York Times reports. In 1994, the state stopped allocating money to a reserve fund to pay for its retiree health obligations, so it has "virtually no money" in reserve to cover the costs, according to the Times.
The state's liabilities are coming to light as a result of accounting standards that are beginning to take effect this year (Williams Walsh, New York Times, 7/25). A new Governmental Accounting Standards Board rule requires all public employers to report the cost of their health care liabilities. States must pay their liabilities over a 30-year period, and liabilities will count against net assets for states that do not allocate funds to cover the costs each year (Kaiser Daily Health Policy Report, 6/4).
When New Jersey stopped contributing to the health care fund, it also "stopped trying to keep track of the cost" of retiree benefits, creating the "illusion that the long-term obligation was zero, not billions of dollars," according to the Times. Former state Treasurer Clifford Goldman said, "This is a very pressing situation that can't go on much longer without being repaired." To account for the liabilities that are being highlighted by the new GASB rule, many states are placing money in retiree trust funds that will gain interest over time. Goldman estimated that the state would have to contribute $6 billion annually to create a retiree health fund from scratch in order to make up for several years without any contributions. New Jersey officials say the state has too much debt to establish such a fund and instead will pay yearly benefits out of revenues while working to control future costs.
The state expects to pay about $1.1 billion in retiree benefits this year. The state treasury said the portion of the $58 billion in liabilities that will need to be paid each year will "rise sharply because of soaring health costs and a burgeoning population of retirees," the Times reports. Meanwhile, the state's annual revenue has been largely static.
Seeking a Solution
Gov. Jon Corzine (D) last month said that the challenge of retiree health benefit and pension liabilities "truly keeps me awake at night." The Corzine administration plans to have more retirees pay part of their premiums and to establish provider networks with negotiated fees for doctors. The switch to a network is scheduled for 2008, although the government in June decided to exempt retirees enrolled in preventive wellness programs from the network requirement. Corzine also has proposed selling or leasing the New Jersey Turnpike to raise funds, but that issue has become a "political lightning rod" and has been postponed, the Times reports.
The Corzine administration recently increased the retirement age to 62, which will lower costs, but very slowly because it applies only to new retirees. In October 2006, New Jersey's Office of Legislative Services issued a legal opinion that retirees could not be denied health benefits but that "reasonable modifications" are allowable. However, it is unclear what modifications would be considered reasonable, according to the Times (New York Times, 7/25).
