NJ Fiscal Folly

Wednesday, May 24, 2006

The Good News Never Ends

One of my favorite topics is NJ's liability for post-retirement health care benefits for public employees (sometimes designated PRM, for post-retirement medical). This liability is a form of debt, a future obligation to be paid by NJ taxpayers. Unlike pension obligations, there are no assets set aside and invested to pay for these future expenses.

It should also be noted that NJ public employees have generous health care benefits, especially PRM, that most private sector employees can only dream about.

Back in December, the Benefits Review Task Force Report made a rough estimate that NJ's PRM obligation was at least $20 billion. I expressed skepticism about that figure in a prior post, and suggested that a more realistic number might be as high as $40 billion.

Today, I came across an interesting tidbit buried in an OLS analysis of the proposed budget for "Interdepartmental Accounts", a cost center which contains state funded employee benefits. The OLS analysis includes a background paper on "Other Post Employment Benefits" (OPEB, essentially the same as PRM).

Here's the good news hidden away in the OLS paper (see page 40):

"Notwithstanding the unofficial estimate of $20 billion for New Jersey's OPEB liability, Mercer Consulting, a global corporate consultant firm, estimates that OPEB liability will be 40-60 times an entity's annual medical expenditures. This suggests that New Jersey's OPEB liability is in the $40 billion to $60 billion range."

NJ currently spends about $1 billion per year for retiree health care benefits. This expense category is projected to grow by more than 22% per year over the next four years.

Furthermore, due to new government accounting regulations, NJ will have to start reporting the OPEB liability on a yearly basis. The bond rating agencies will begin to include this data in their evaluations of the state's finances, which will affect future borrowing costs. I wouldn't bank on any credit rating upgrades, particularly when the OPEB liability is combined with current state debt ($33 billion and growing), unfunded pension liabilities (at least $18 billion), and endless Abbott spending requirements.

Like so many other components of the state's finances, PRM costs are out of control. However, it's a pretty good bet that feckless politicians and public employee unions will do nothing to change course as our car accelerates straight over the cliff.


At 9:12 PM, Blogger Enlighten said...

Good post. The day will come when all of these cots really come crashing down and the public will be totally shocked by the magnitude of the problem.


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