The Employee Benefits Crisis We All Have A Stake       Philip D. Murphy   Chairman, New Jersey Benefits Review Task Force

When the members of Governor Codey’s Benefits Review Task force accepted the May

The Benefits Review Task Force discussions were based on the belief that public employee benefits are more than simply a budget line item.

2005 invitation to serve, we were fully aware of the political and economic consequences that our recommendations would have on the short-and long-term health of New Jersey.

We soon discovered that public employee benefits are not simply a line item in the budget. Benefits are an integral tool of state and local governments to attract and retain a high quality workforce. We were also made cognizant of the increasing cost of providing these benefits; the annual challenge that governments face in funding these benefits; and the need to protect the interests of all citizens.

The Task Force spent the last six months engaging in thoughtful debate, listening and studying public employee pension and health benefits. From a government perspective, our debate was based on the belief that state and local government have a moral obligation to their employees to make the payments they promised and to act with fiscal integrity, openness and honesty. From an employee perspective, the pension benefit structure must be able to attract and retain a high quality workforce. But that goal must be consistent with a benefit structure that is affordable.

The consequences of inaction for the state as a whole—from the governor’s office to the mayor’s office—are simply too grave to ignore: lower bond ratings leading to higher borrowing costs; essential services foregone so that an unchecked future obligation may be paid; or far more burdening tax policies.

We arrived at the conclusion that some sacrifices on the part of all stakeholders are reasonable as a way to shore up the finances of the system, ensuring that benefits continue to be available over the longer term. Our final report provides recommendations in the following five key areas: meeting government obligations; stopping the abuse of the system; reforming the pension benefits structure; reforming the health care benefits structure; and strengthening the process for reviewing benefit enhancements.

Reforming Health Care Benefits Unlike pension changes, which are made through legislative action, changes in health care benefits are made through negotiations between the government and its employees. Our recommendations respect this process and are meant to encourage significant change in the cost sharing and health care arrangements presently offered. With this in mind, the Task Force has recommended:

• Active and retired employees contribute a greater amount to their health care whether through co-pays, deductibles, or other means.
• The state should provide a fixed contribution to health care coverage and create greater options to ensure that every employee has access to coverage and is protected against a catastrophic incident.
• New Jersey should increase the use of generic drugs to narrow the gap in the state’s proportionally higher prescription drug costs.

Strengthen Process for Reviewing Benefit Enhancements The governance and process for approving benefit enhancements is broken. The current process is overly political and does not offer sufficient independent analysis of information. To remedy this situation, the task force has recommended:

• A more fortified, independent Pension and Health Benefits Review Commission, which would serve as an impartial public voice as it relates to any pending pension or health care benefits legislation.
• Every benefit bill should identify a revenue source; certify that its costs and revenues have been developed in accordance with generally accepted actuarial principles; and estimate the benefits and costs to impacted constituencies.

Government Obligations Government at all levels must meet its current and future commitments to fund the pension plans. They must also commit to using financially sound practices and be accountable to taxpayers. The task force recommends:

• State government use consistent and generally accepted actuarial standards to determine pension fund asset values, obligations and annual contributions.
• Through sound fiscal stewardship, government must resume making full, annual pension payments.
• Immediately address the Defined Benefits Plans’ $12.1 billion deficiency.

Abuse of the System We must end the practices of pension boosting, padding and tacking, which erode the integrity of the system that was designed to benefit career public employees. Presently, these practices are overly political and not nearly objective enough. The task force has recommended that government:

• • restrict end-of-career salary hikes,
• require employees to designate a single job for pension purposes,
• eliminate pensions for professional service contractors and vendors, and
• limit sick day payouts at all levels of government.

Pension Benefits Reform Public employee pension benefits are an integral part of state and local efforts to attract and retain a high quality workforce. The task force also recognizes and supports the policy goal and societal benefit of providing a secure retirement for its citizens. However, those goals must be consistent with a benefit structure that is affordable to the state and fair to the taxpayers who pay the pensions and the employees who contribute to their pensions. The current structure of the benefit programs cannot be sustained over the long term. The task force identified two major ways to modify the benefit structure. The first is to raise the age at which one can retire with full benefits from fifty-five to sixty. This recommendation is based on increasing life expectancies, longer work durations, and a possible “brain drain” at the state and local level due to the upcoming retirement of baby boomers. The second change is that pension benefit payments should be based on the average salary of the five highest years (as opposed to the current three) or on the average of the three highest years (for those individuals for whom it is now based on the highest single year).

The Future These ideas should be the platform upon which a healthy, energetic debate takes place: a debate that involves everyone – mayors, business administrators, comptrollers, county executives, cabinet level officials and, of course, public employees. Everyone has a stake in helping to solve this crisis.

Our current predicament, if left unresolved, will be inherited by our children. In the past, the process for changing benefits has often failed to meet the highest standards of fiscal integrity. Future changes must be considered under a process that is more transparent, accountable and responsible or this unfortunate moment in our fiscal history will simply repeat itself.

Article published in March 2006, New Jersey Municipalities