Health care + pensions equal insolvent NJ
New Jersey has gotten a lot of publicity lately because Chris Christie has balked at meeting the state’s extraordinary pension burden, arguing that further reform of the system is necessary. But as a recent NJ report makes clear, Jersey really has a problem of expensive health care for workers and retirees on top of bulging pension debts, which have raised the cost of employee benefits in NJ well above the norm for states. The reason Jersey isn’t paying all of its benefit costs is because it couldn’t possibly afford to.
As I’ve said before,in order for Jersey to actually begin chipping away at its enormous pension debt, it would need to contribute about $5 billion a year out of a projected (and maybe overly optimistic) $34 billion in revenues. Now add the cost of health care, detailed in the chart below from the report I link above. Jersey has already reached the point where health care for retirees equals health care costs for its workforce. So Jersey is essentially paying health care for the equivalent of two state workforces. Without changes, in coming years retiree health care costs will explode, so that by 2021 the state will be paying $1.60 in health care for retirees for every dollar it expends in health coverage for workers.
What’s more startling is that when you add the real cost of paying off pension debt to the health burden, these two budget items alone would consume about one-quarter of the state’s budget. On average, states devote about 27 percent of their operating budgets to total compensation, that is, salaries plus benefits, according to the federal government’s annual census of state finances. But Jersey needs to be spending nearly that much just on pensions and health care for workers and retirees. The reason why it’s not is obvious. The rest of your budget doesn’t work if just two items (and two items that traditionally don’t make up the bulk of compensation) would gobble up such a big part of your budget.
The chart below explains how health care costs have ballooned in the state. The cost of insurance in NJ is more expensive than the national average, for a host of reasons, including that NJ had one of the most highly regulated and restricted insurance markets even before Obamacare. But the state has also for years offered Cadillac coverage, and employees traditionally contributed little. As you can see below, for a family policy costing $19,488 a year, state employees historically have contributed just 8 percent of the total. For public employees nationally the average is 18 percent, and for all workers the average is now 28 percent. When you pay that for what is essentially two workforces–your actual workers plus your retirees, the number comes up very big indeed, especially because NJ state workers retire well before they qualify for federal Medicare. The average retirement age of a state worker, according to the report, is 61.5 years. For a teacher it’s 61.9 years. For police and fire it’s 52 years old.
The health care costs are just one more example of how the reforms that Jersey passed in 2011, which encompassed minor changes to both pensions and health care , were inadequate. The state has a benefits burden that is staggering relative to its budget, and to what other states pay. What Jersey is actually contributing is more in line with what other states must pay as a percent of its budget. But Jersey has achieved that by simply ignoring some of its costs.