Property Tax Reform -Pension & Health Benefits

The need for property tax reform is a recognized and well documented fact. Property tax reform, when implemented, must deal with the costs associated with employee health and retirement benefits.

On December 1, 2005, the State Benefit Review Task Force reported in part some changes which would be advantageous to the State. Abuses identified were validated by the report. In January of 2006, the League issued the COPE report (Correction of Pension Errors) to expand and clarify areas neglected by the Governor's Task Force. In March of 2006, the NJ Commission on Investigation issued a report entitled "Taxpayers Beware" which identified questionable and hidden compensation paid to public school administrators. Each report recognized abuse must end and systemic changes should be made to all pension systems.

For more than eight years, the State of New Jersey borrowed from the assets of the Pension System by not funding (appropriating) the normal employers' share. Eventually, this created a significant deficit (akin to only paying the minimum on a credit card). The deficit was further compounded by passage of legislation (Chapter 108, P.L. 2003) designed to "smooth the transition" and permit full funding to occur over a five year gradual increase commencing with 20% and eventually reaching 100%. In year 2007, the normal costs to be funded by the employer will be at the 60% level for PERS and 80% level for PFRS. The State did not fund its "smoothing" amounts, therefore, the gradual payment structure has compounded the deficit problem thereby causing the unfunded accrued liability factor to grow significantly. Combine this with the employer's holiday where no contributions were made during the eight year period and the result is a structural deficit of billions of dollars.

To help rectify the problem of system abuse, the League produced the COPE report. The data contained therein is still relevant and should be a first order of priority for legislative change during this coming year. Important to note, the League of Municipalities does not consider pension funding to be at the "crisis level" as reported. Pension abuse, just as any abuse, is at "crisis level" and should be addressed. But proper funding by local employers of their normal costs will soon result in a solvent system. In fact, the local government portion of Public Employee's Retirement System (PERS) is quite healthy compared to national standards and other State systems.

High payments are recognition that funding the accrued liabilities which occurred over the past ten years, due to lack of appropriations, is painful and causing every local mayor and governing body to reassess priorities. Local appropriations for Police and Fire Retirement System (PFRS) places a significant demand on property tax dollars. The accrued liability is large and is compounded by legislative mandates which continually grant enhanced benefits to this select system at the expense of the local property taxpayer. Such actions must cease.

The following tables show a comparison of normal and accrued liabilities for PERS and PFRS. The payments which will be due in April, 2007 are based upon these tables from the valuation report of the actuaries. PERS lags in billing by two years and therefore the current billings will be based upon the valuation of July 1, 2005. When full payment is not made, the accrued liability continues to grow and the problem is further exacerbated.

Healthcare Spending Crisis

The State of New Jersey and its political subdivisions are facing a crisis. The situation is immediate and must be addressed on a large scale basis. The crisis is health care funding.

It was recently reported there were up to 100,000 deaths attributed to healthcare errors in the United States during 2003. If such a statistic were presented for the manufacturing industry or car industry, there would be outrage. No other industry is in more need of reinventing itself than that of healthcare. The same report went on to state that 2,000,000 patients per year in the United States acquire an infection while hospitalized for another condition. Some 88,000 patients die as a direct result and cause an additional cost of $5 billion in healthcare funding. It is no wonder health insurance premiums rose an average of 14% in 2003. U.S. healthcare consumers pay the highest price in the world for drugs, therapy, and diagnosing and treatment techniques. Two percent of hospital patients on average experience an adverse drug reaction resulting in increased length of stay with an average cost to each of an additional $4,700 in expense.

The State of New Jersey is paying in direct appropriations equal amounts to provide health benefit coverage to its working employees as it pays to provide post-retirement health benefits for those who have retired. In essence, the State is supporting two full workforces with regards to health benefits. The June 30, 2005 Comprehensive Annual Financial Report produced by the Division of Pensions and Benefits asserts that 55% of county and municipal employers are part of the State Health Benefit System. Fifty one percent of the educational employers are part of the State Health Benefit System. Therefore, the League recognizes the crisis confronting healthcare spending is not just a state government issue, but an issue which affects every level of government. The amount of resources committed by government budgets to healthcare is unsustainable. There is an urgent need to develop a new paradigm for healthcare. It must begin with personal responsibility. We must change the incentive structure and empower the customer. Such will require greater financial participation by employees, direct audit and review by agencies, and improved efficiency and service by institutions and service providers. A difficult task, but should be number one in reform package.