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June 14, 2011

Re:      S-2937, Pension and Benefit Reform Update

Dear Mayor:

As reported in our June 10th Dear Mayor letter, Senate President Sweeney will introduce S- 2937, which will make various changes to the pension and health care benefits for public employees.  While the text of the bill is still unavailable, Senate President Sweeney has issued details of the bill.

These details can be viewed on-line at www.njbenefitreform.com.  According to this information released by Senate President Sweeney:

Health Benefit Changes – All Employees

  • Employees’ contribution will shift from a percentage of salary to a percentage of the premium
  • Percentage will be based on salary on a sliding scale. 
  • The cost will be phased in over 4 years ranging from 3% to 35% at year four
  • At no time will an employee pay less than 1.5% of their salary for health benefits
  • The grid would not impact employees currently in a collective bargaining agreement, until that agreement expires
  • Current retirees will not be impacted
  • Current employees with 25 years of service on the effective date will not be affected when they retire
  • The premium share will be “smoothed” for employees close to, but not yet at, 25 years of service.  Employees with 21 to 24 years of service will be subject to x/5 of the required premium share.  For example, an employee with 23 years of service will contribute 2/5th of the premium share in retirement.
  • The requirement for use of the premium share will sunset in 4 years after the effective date.  For any contract that expires over the next four years, the subsequent contract will require the use of the new premium grid.  After that point, the premium grid could be altered through contract negotiations.
  • All local government employers would be required to participate in a Section 125 “cafeteria plan”.  This will allow employees to make the required premium payments for health care prior to withholding of taxes.

 

Health Benefit Changes – State Health Benefit Employees

  • Two boards will be created at the state level to administer health benefits.  One will be for State Health Benefits Program and the other will be for the School Employees’ Health Benefits Program
  • The boards will be comprised of half employer and half employee representation
  • Employer representatives will be chosen by the Governor
  • Employee representatives will be chosen directly by the unions
  • The boards will be responsible for designing health plans offered and would work with participating insurers to develop the plans
  • The boards would be prohibited from rescinding health coverage mandates
  • Plan design will include co-pays, deductibles, network, out-of-network reimbursement rates, etc.
  • The boards will be required to work with insurers to develop at least 3 plans for each level of coverage (individual, family and individual +1), differentiated by out of pocket cost to the employee
  • The boards will be required to develop a health savings account, high deductible plan.  Entry into this plan would be totally optional for employees
  • Out-of-pocket costs currently dictated in statute would be eliminated
  • A form of super-conciliation will be used to solve any impasses on the board

 

Health Benefit Changes – Miscellaneous

  • Local employers not participating in the State Health Benefits Program will be able to negotiate a different premium share and out-of-pocket cost arrangement that results in the same level of savings as the statutory premium share formula and plan design changes.  Savings would have to be certified by the State.
  • The state will be required to conduct an annual study of the risk impact of employers moving in and out of the State Health Benefits Program and private plans, long-term sustainability of the State Health Benefits Program/School Employees’ Health Benefits Program, and impact of the change under the law

 

Pension Changes

  • Seven different boards will be created as follows
    • State PERS
    • Local PERS
    • State PFRS
    • Local PFRS
    • TPAF
    • SPRS
    • Judicial Retirement System
  • Contribution rates will increase for all employees. 
  • PERS employees will have an immediate 1% employee contribution and an additional 1% increase phased in over 7 years.  For a total increase of 2%.
  • PFRS employees will have an immediate 1.5% employee contribution
  • Once the system reaches the target fund ratio the board will become autonomous
  • Automatic annual retirement COLAs for all pension plans are eliminated.  However, they can be restored by the board, once that board becomes autonomous
  • The State would be prohibited from skipping its required pension payments by a new contractual right to employees, which requires the State to make its actuarially required payment.
  • The contractual right will include a 1/7 phase-in after which it could not be altered.
  • If the State does not make its payment, employees will be able to sue
  • For new PERS and TPAF employees
    • retirement age is raised to 65 years
    • 30 years will be required for an early retirement
  • For new PFRS employees regular pension would be
    • 65% of salary at 30 years
    • 60% of salary at 25 years

Pension funded ratio, based on NJ Department of Treasury analysis:

Fund

Before Reform

After Reform

State PERS

52.2%

58.3%

Local PERS

69.1%

77.5%

State PFRS

51.1%

61.2%

Local PFRS

71.5%

83.2%

TPAF

57.6%

70.2%

SPRS

69.0%

79.8%

JRS

53.1%

58.9%

New Pension Board

  • Each pension fund will have a new 8 or 10 member governance committee
  • Governance committees will contain equal number of employee and employer representatives
  • Impasses will be resolved through a form of super-conciliation
  • Unions will directly select employee representatives
  • Once the fund reaches the target fund ratio funding the committee will be authorized to:
    • Hire their own actuaries and consultants
    • Determine the n/x for future accruals
    • Determine formula for calculation of final average salary
    • Determine the retirement age
    • Determine the normal and early retirement ages/benefits
    • Determine disability benefits
    • Determine whether a COLA shall be provided to retirees in years during which the system is above target fund ratio funding
  • The committee would be prohibited from making any change that the pension system actuary determines will place the fund below the target fund ratio funding within the following 30 years
  • In year one the target fund ratio is 75% and will increase over 7 years until reaching 80%

The bill is scheduled for a hearing before the Senate Budget & Appropriations Committee on Thursday, June 16, 2011.

It is extremely important that the Senate and the Assembly pass pension and health benefit reform legislation by June 30th in order to realize savings in this year’s budget.  We would encourage you to contact your Senate and Assembly representatives as well as the Governor’s office to impress upon them the importance of passing pension and health benefit reform in an expeditious manner. 

We will continue to provide you with details as they become available.  Please note that this is a very fluid situation and any of the above provisions are subject to change.   The League will continue to advise you of any developments as circumstances warrant.  If you have any questions please do not hesitate contact Lori Buckelew at lbuckelew@njslom.com or 609-695-3481 x112.

Very truly yours,

 

Hon. Eldridge Hawkins, Jr.                                       
Mayor, City of Orange                                              
Chair, Management Reform Committee                              

Hon. Wilda Diaz
Mayor, City of Perth Amboy
Deputy Chair, Management Reform Committee

Hon. Chuck Chiarello
Mayor, Buena Vista
President, League of Municipalities

 

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