Why Are New Jersey’s State Finances Worst In The Nation?

Retirement

It’s time, once again, for the Truth In Accounting Financial State of the States report, in which they rank each of the 50 states by its available assets or, conversely, its indebtedness, on a per-taxpayer basis. And, yes, due to the exceptionally long time that many states take to release their consolidated financial reports (at the most extreme, Illinois, at 298 days), the results are based on 2019 financial year-end reports, which may be as early as June 30, so they do not even reflect the further debt incurred due to the pandemic.

The top five states they label as “sunshine states” and they are virtually unchanged since last year:

Alaska – $77,400 per-taxpayer surplus in 2020, $74,200 in 2019.

North Dakota – $37,700 in 2020; $30,700 in 2019.

Wyoming – $19,600 in 2020; $20,800 in 2019.

Utah – $5,500 in 2020; $5,300 in 2019.

Tennessee – $3,400 in 2020; $2,800 in 2019.

Tennessee displaced Idaho, which had been at the number five spot in 2019 with a surplus of $2,900. That state dropped slightly to $2,800 in 2020.

The bottom five “sinkhole” states are likewise nearly unchanged:

New Jersey – $57,00 in per-taxpayer debts, vs. $65,100 in 2019.

Illinois – $52,000 in 2020 vs. $52,600 in 2019.

Connecticut – $50,700 in 2020 vs. $51,800.

Hawaii – $31,700 in 2020 vs. $31,200 in 2019.

Massachusetts – $30,100 in 2020 v. $31,200 in 2019.

Note that Massachusetts was ranked 4th-worst and Hawaii 5th-worst in 2019 due to their unrounded debts.

But before Illinoisans get too excited about their not-worst-in-the-nation status, let’s look at Illinois and New Jersey side-by-side, doing a bit of math to split out the per-taxpayer numbers for each type of indebtedness, where OPEB = Other Post-Employment Benefits, that is, another label for retiree healthcare (though, strictly speaking, “OPEB” includes the additional costs of retiree life insurance):

If you’re skeptical of the “per-taxpayer” calculation approach (which attempts to show debt on a proper apples-to-apples basis considering that taxpayers, not children, are the ones who will pay off the debt), here’s the same math on a per-capita basis:

Yes, the relationships are basically the same; backing into some numbers, Illinois has 2.92 residents per taxpayer and New Jersey, 2.71.

It turns out, Illinois is 5% more indebted on a bonds and “other liabilities” (after subtracting off assets) basis, than is New Jersey. Illinois is likewise 6% more indebted in terms of its unfunded pensions. But Illinois’s debt for retiree medical is about half the size of New Jersey’s — and that, even though New Jersey made significant strides in reducing its healthcare costs during 2019.

So what’s going on? Illinois, after all, is so trapped into healthcare provision that the Supreme Court weighed in, with a ruling in 2014 that its state constitution’s clause protecting past and future pension accruals also applied to post-retirement health insurance benefits. Its benefits for state employees are exceptionally generous, requiring no premiums for retirees with over 20 years of service, and a prorated share for lower service years. (See the most recent annual report; all available reports can be found at the Commission on Government Forecasting and Accountability.) This means that while New Jersey’s benefits are indeed gold-plated, Illinois’ are platinum-plated, and Illinois state employees’ retiree healthcare liability is 20% higher than New Jersey’s.

But that’s not the whole story. In New Jersey, the largest share of OPEB liability comes not from state employees at all but from teachers — 60% of the total. This turns out to be more-or-less the same proportion of the total pension liability for the state of  Illinois that’s due to teacher pensions. But in New Jersey, the full amount of the teachers’ OPEB liability is reported in the state’s financial reporting. In Illinois, the liability is split between the state and the local school districts, and, in addition, the Chicago Public School’s teachers’ OPEB liabilities are not a part of the state’s balance sheet at all.

Now, to be fair, the apples-to-oranges nature of the states’ calculations is still not the full picture. New Jersey teachers’ OPEB liabilities on a per-participant basis are nearly 50% higher than in Illinois, and, reviewing the actuarial reports’ claims rates, the differences appear to be largely due not to plan design (copay, coinsurance, etc.) but the simple fact that Illinois teachers were not let in on the same generous OPEB benefits as state workers were, and consequently pay considerably higher monthly premiums.

So where am I headed with all this?

Fundamentally, we who write about state retirement benefits spend a lot of time on the massive underfunding of state pensions. But, as a recent Wirepoints report explained, Illinois is just one of a significant number of states which have not made any efforts to prefund their retiree medical expenses, leaving a costly burden for future generations. This is a burden which has gone undiscussed for many years, in part because the relevant financial reporting requirements only became fully effective in 2018, but it’s time to start paying attention to this as well.

As always, you’re invited to comment at JaneTheActuary.com!

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