Working Document

A Roadmap to Resolution – Pension and Health Benefit Study Commission Report dated February 24, 2015

The Commission’s proposed approach is to “reset the retirement and health benefits that public-sector employees will receive in the future to private-sector levels and use the resulting savings going forward to pay off the existing pension deficit”. The Commission believes that “the resulting mixture of benefit adjustments, additional funding and structural changes offers the State its best chance to avoid the painful collapse of its public employee benefits system”.

The report can be broken down into two categories as follows (1) Pension Reforms and (2) Health Benefit Reforms. However, for changes to both the pensions and health benefits the Commission recommends a constitutional amendment to permit changes to existing benefits.

For Pension Reforms, the Committee recommends freezing existing pension plans and creating a cash balance plan and with the consent of all parties, transfer to employee entities of the assets and liabilities of the existing pension plans, with governmental employers providing fixed levels of funding to the pension and retirement funds.

For Health Benefit Reforms, the Committee recommends aligning health benefit plans with private sector benefits and plan design changes such as expanding wellness programs; value base design; patient centered “medical homes”; and reference based pricing program.

(Summary of the Roadmap’s recommendations begin on page 2)

Policy Questions/Issues

Overall Report:

1.Report appears to use terms interchangeable. Uncertain if the report applies only to teachers or to all local employees or if elements apply to only teachers while other elements apply to all public employees.

2.Unclear if the “savings” of shifting teachers’ benefits funding from the State back to the boards of education is generated by a reduction in the surplus for the local PERS.

3.Question where the assets are coming from to achieve the cost saving reductions outlined in the report.

Pension Reforms:

1.Appears to recommend shifting education employee expense back to the boards of education (and property taxpayers) and claiming savings of the reforms offset the cost. Do we want to get involved in this fight?

2.Impact on Abbott Districts? What is the change to the funding formula? Any change will impact property taxes.

3.Report vaguely acknowledges the State’s failure to make their pension payments (see pg. 8), however, there is never acknowledgement that the municipalities as well as their employees have made their full pension payments.

4.Impact on mid-career employees. Commission report recommends supplemental pay credits for midcareer employees. According to the report, midcareer employees (generally between the ages of 40 and 50) can be caught in the transition. They lose high-accrual years that occur at careers’ end in final average salary defined benefit plans but are left with less than the length of a full career in which to accrue the amounts of benefits contemplated by a cash balance plan. The report suggests that temporary supplemental pay credits for such employees are one way to ameliorate this concern. Our position?

5.Concern with the potential for mass exodus of employees eligible for retirement to avoid the freeze. This loss of experience and expertise would have an impact on the efficiency and effectiveness of local programs and services. Do we suggest a phase in of the freeze? Do we suggest that the pension plans be amended to permit in service distribution, which would permit an employee to continue working while collecting their retirement? Do we suggest employees have the option to contribute more towards their pension plan?

6.Impact of having management sit on a board with unions to manage the same pension funds.

7.Do we offer an alternative to the pension proposal? If so, what should be the alternative?

Health Benefit Reforms:

1.Impact on the Health Insurance Funds(HIFs) and self-insured health benefit plans. The Commission recommends that all health benefit plans reforms be made across the board regardless if the plan offered is the State Health Benefits Plan. At this time 47,297 local employees are enrolled in the State Health Benefits Plan.

2.Can we support elements of the proposed health benefit reforms? If so, which ones?

Report Recommendations:

1.Freeze existing pension plans

  • Current plan closed to new members
  • Existing members would no longer accrue additional benefits under the current plan. Their benefits earned to date would not be affected. An individual employee’s retirement benefit would consist of pre-freeze and post-freeze components.
  • Pre-freeze would be determined by the terms of the employee’s existing plan, with the exception that post-freeze service would count towards satisfying an employee’s service requirements for vesting or retirement eligibility without increasing the amount of the frozen benefit.
  • Existing plan assets and future State contributions would be used to fund the benefits of existing retirees and the benefits accrued by employees through the date of the freeze.
  • Claim: Reducescombined State and local governments’ pension-funding cost by $2.8billion in 2016.

2.Create new retirement plan to provide future retirement benefits

  • New plan needed to provide employees with means to earn future retirement benefits
  • Cash balance plan best model for new plans.
  • Cash balance plan is a hybrid defined benefit plan that expresses the employee’s benefit as an account balance that , as proposed by the Commission, grows by “pay credits” based on an employee’s salary and periodic “interest credits” based on the account’s balance and some defined measure of investment performance.
  • Employee would be guaranteed both the contributions based on pay credits made to their account and interest credits based on a minimum interest credit rating over the years of participation in the plan.
  • Commission assumed State and local governments would contribute4% salary for employees with social security benefit and 8% for employees without social security benefit.
  • Distinctions between a cash balance plan and a defined contribution plan:
  • Lifetime annuities would continue to be provided from the plan, unlike distributions from a typical defined contribution plans that are paid as lump sums or annuities over fixed number of year.
  • Cash balance plan’s sponsors and investment managers, not individual employees, retain responsibilities for investment decisions.
  • Interest guarantee mitigates the employee’s exposure to investment risk.
  • Consideration for Implementation Task Force:
  • Supplemental pay credits for midcareer employees
  • Potential additional employee contributions
  • Graduated pay credit scale
  • Claim: Based on a total State/local government payroll of $26.637 billion employer cost of the new plan would be $1.23 billion.

3.Align public employee health benefits with high quality private sector coverage

  • Conceptually reset health benefits to a benchmark of 80% actuarial value level and then explore how these benefits can be augmented, given competing funding demands.
  • Assumes employee’s required contribution towards premiums would continue to vary based on income in a manner similar to the current c. 78 schedule, but that the distribution of contribution levels within this range would be adjusted to increase average employee contributions to 25% in an equitable manner that will not impose undue burdens on lower income employees.
  • Assumes retirees would receive employee-level benefits without any contribution requirement in addition to those already imposed by law.

4.Apply a Unified State/Local Approach to benefits funding

  • The Commission initially considered pension and health benefits reforms for only State employees and retirees. However, for a number of reasons including the State’s assumption of education retiree expenses, the State and local employee benefits systems were, in the opinion of the Commissioners, effectively intertwined from a fiscal perspective.
  • Because local health benefits costs are so high, even moderate reforms would result in huge local savings.
  • The Commission states that it is sensitive to the existing burdens on municipalities and believes that the local impact of this approach should be limited to aggregating local savings for use in funding the pension deficit. As a result, this reform would be cost-neutral to local governments.

5.Enactment of an Adequate, Sustainable, and Certain Funding Mechanism

  • Amend the State Constitution to confirm, notwithstanding anything in the Constitution or laws of the State of New Jersey to the contrary, the power of the State to reduce existing pension and health benefits.
  • Amend constitution to permit changes to existing benefits.
  • Constitutional amendment to provide a mechanism to guarantee the pension funding obligations defined in the proposal.

6.Transfer assets, liabilities and risks of existing pension and new retirement plans to employee entities willing and able to assume this obligation.

  • With the consent of all parties, transfer to employee entities of the assets and liabilities of the existing pension plans, with governmental employers providing fixed levels of funding to the pension and retirement funds.
  • Plan includes membership from more than 1 union and/or includes non-union employees. To break existing plans to separate entities could present legal and fiscal difficulties. More practical alternative might be to set up entities to receive each plan, with each entity governed by a board of trustees reflecting the makeup of the trusts’ beneficiaries.

7. Health Benefits

  • Affordable Care Act (ACA) Cadillac tax goes into effect 2018. The ACA Cadillac tax is an excise tax any healthcare plan that exceeds a certain value. The tax is at 40%. The Cadillac tax is tied to a dollar figure not a health care level.
  • At present, the typical State or local employee is enrolled in a plan that has an actuarial value (measure of the average percentage of the cost of essential benefits that the plan pays for, as oppose to out-of-pocket costs paid by the covered individual) that is above the 90% level of a Platinum plan under the Affordable Care Act (ACA).
  • Public employers could satisfy the ACA coverage requirements by providing Bronze-level coverage to employees. Bronze level coverage is at 69%. Meaning the employer pays 60% of the cost and employee pays 40% of the cost. At this time all of the plans offered by the State Health Benefits Plan are above the Bronze level. Footnote 60 on page 43 details the various levels of the plans offered by the State Health Benefits Plan.
  • Commission did not attempt to design a specific plan.
  • Baseline for determining financial viability, the cost estimates in this Report are based on an 80% actuarial value plan, a level of reimbursement that the Commission believes is affordable and would continue to attract and retain a qualified workers.
  • Local districts to assume responsibility for the cost of education retiree health benefits for the new education retirement plan.
  • Increase focus on wellness programs
  • Value-based insurance design, which reduces or eliminates employees’ out of pocket expenses for certain treatments that are considered “high value” because they reduced the cost of care over time. For example, low cost sharing for prescription medicine that has proven record of great results. Lipitor to reduce chance of heart attacks.
  • Creation of patient centered “medical homes” and accountable-care organizations – create financial incentives to encourage beneficiaries to use in-network primary health care providers who in turn receive financial incentives to practice preventive medicine and to manage and coordinate care in ways that keep patients healthy and that limit unnecessary and duplicative test and treatments. Healthcare plans pay primary care physician more money to spend more time on preventive care. For example, a plan may pay for a nurse to manage patients testing and medicine needs. Horizon has been very successful with this program. Please note, Senate President Sweeney has proposed a similar change.
  • Referenced based pricing programs – directing care for certain routine services (i.e. hip replacement) where variations in provider costs are wide but bear little relations to patient outcome. California has been successful in reducing their cost for employee hip and knee replacements. Focus on planned surgeries not specialty items.
  • Medical malpractice reform.

8.Implementation Task Force and Time Schedule for Reforms

  • Governor Christie should establish an Implementation Task Force to assume the responsibility for the details of the reforms. The Task Force shall have all the resources necessary, including staff and legal and actuarial support, to address these complex implementation and transition issues.
  • Task Force to address both health and retirement issues.
  • Deadline should be defined by the deadlines to amend the State constitution this year.
  • 3 year review to evaluate the effectiveness after implementation

“Highlights” of the Report

  • Based on 2014 data using GASB, the projected year in which PERS would be unable to cover its projected payments is 2024. It is unclear if this date is combination of the State and local liability or just State liability. (pg. 4)
  • “Because the Commission has sought to minimize initial revenue demands in light of the current tightness of the State budget, the first year of the Commission’s approach would require approximately 13% of the State budget be devoted to State employee and retiree benefits. Going forward, as costs invariably rise, every effort should be made to limit these obligations to no more than 15% of the budget.” (pg. 5-6)
  • “Commission has striven to limit the immediate need for revenue” (pg. 6)
  • This is not only a State-level pension problem. The State’s current troubles serve as an object lesson why it would be better for local governments to act now to get ahead of this curve. (pg. 22)
  • Abbott district municipalities benefitted from the decision “as the municipalities employing them did not have to account for funding education retirement benefits out of the same property tax base in reconciling local budgets with salary and benefits demands of police, firefighters and other municipal workers.” (pg. 22)
  • Augment post-reform benefits above baseline levels and for other government use can only be realized if these local savings are not spread across 565 municipalities, 590 school districts and a host of other local government entities. (pg. 24)

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