Report of the Benefits Task Force – Part 1

Federal Reserve Chairman Alan Greenspan today warned about huge looming fiscal strains from government health and retirement programs that pose "significant" risks to the U.S. economy.

"Tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base," he said, reiterating his conviction that the government should seek to "close the fiscal gap primarily, if not wholly, from the outlay side."

Acting Governor Codey confronted similar issues in the preparation of New Jersey’s budget last winter. “Each year the state's fixed costs grow larger and larger and consume more and more of the budget. This is an issue we can no longer ignore.”

Faced with the unsustainable growth in the cost of healthcare and pension benefits for state and local government workers, Codey established a Benefits Review Task Force to recommend ways to reverse this trend.

Yesterday the New Jersey Report of the Benefits Review Task Force was released. The task force concluded:

The current process for reviewing benefits is haphazard at best and excessively influenced by political instead of fiscal motivations. The non-stop requests (and too often action) for legislative action have eroded the state’s fiscal health and created a benefit structure that the State cannot currently afford.

The benefit enhancement process far too frequently happens in the complete absence of an informed debate on the actual costs of the change, yet alone how it will be paid for over the long term. And far too often, the taxpayer’s interests are absent.

Unfortunately, the record remains unbroken as the interests of taxpayers are virtually absent from task force recommendations. The task force apparently was prevented by certain members from using the private sector for comparison purposes and from recommending major changes to benefit structures. Further, the task force did not study other “fringe benefits totaling approximately $5.2 billion annually” as it was not within the scope of their charge.

There are differences between the public and private sectors that complicate a pure comparison between the two. The Task Force spent a great deal of time comparing and debating public versus private sector compensation structures. At the end, we agreed to disagree.

The Task Force attempted to ensure that every stakeholder contributed toward solving the problem, without unduly burdening any particular group. For reasons explained below, we rejected a massive structural change such as a move to a defined contribution plan. Instead, we made more targeted strategic reforms designed to maintain the current systems with modifications.

While the task force specifically concludes New Jersey has “a benefit structure that the State cannot currently afford”, the group ultimately recommends this structure be maintained. The task force recommends changes around the margins and avoids those that would result in major long–term savings to taxpayers:

Increase the retirement age from 55 to 60

Base pensions on the highest five years of salaries rather than the highest three years and in cases where pensions are based on highest single year use highest 3 years

Increase the minimum annual salary for inclusion in the pension system from $1,500 to $5,000

Put an end to pension tacking, padding and boosting and end early retirement incentives

Employees should no longer be permitted to take loans against their pension fund contributions as employees have been charged less than half of the state required rate of return

Revisit legislation that provided parameters for simultaneously receiving a public pension and a full public salary

Implement the state’s cap on sick day payouts of $15,000 to local government levels
End pensions for non-government employees and public officials convicted of crimes

Offer elected and appointed individuals a defined contribution (401k style) plan rather than the currently offered defined benefit plan

Retirees and current employees should contribute toward the cost of health insurance – at least 5%

Reduce prescription drug costs by: contracting directly with a Pharmacy Benefit Manager (PBM)*; encourage greater generic drug utilization; require mandatory mail-order for maintenance prescriptions

Immediately apply health care benefits changes negotiated by the State in the last contract to local employers and employees, consistent with historical practice

Provide greater health insurance options for local negotiations

Revamp governance process for benefit enhancements

Use consistent and generally accepted actuarial standards to determine pension fund asset values, obligations and annual contributions

To sure up the pension funds the task force recommends:

Immediately reduce the Defined Benefits Plans’ [pension funds] $12.1 Billion deficiency by selling state assets

In the future make annual full, actuarially sound pension payments

Unbelievably, a task force charged with reducing the escalating costs of government employee benefits couldn’t resist recommending benefit enhancements themselves:

Change vesting from 10 years to five (5) years. Lower the vesting requirements from 10 years to five (5) years. The vesting requirement reflects the years of service credit in the retirement system necessary for the employee to be entitled to future retirement benefits.

While the Task Force considered that if vesting were to remain at 10 years it would prevent more pension liabilities, it considers the cost of lowering the requirement to five (5) years to be minimal.

While the Task Force acknowledges “early retirement incentives have provided limited, short-term savings in exchange for large, long-term retirement system liabilities”, they now suggest the introduction of severance packages.

To avoid a “brain drain” the task force foresees “programs to encourage older employees to continue to work may be necessary.” And finally the group recommends the state “offer a life-long survivors benefit.”

* We had to laugh when we read this recommendation – this is the service Doug Forrester’s BeneCard business provides. It was constantly denigrated by Democrats, especially Jon Corzine in the governor’s race last month.