Health benefit deal a credit positive for New Jersey

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New Jersey’s new health benefit agreements with public sector labor unions mark an important step toward managing a growing expense, according to Moody’s Investors Service.

The deal Gov. Phil Murphy reached last week with state and school district collective bargaining groups is expected to lower the state's anticipated health insurance costs by nearly a half a billion over the next two years, a move Moody’s called a credit positive in a report released Wednesday. Moody’s analyst Baye Larsen noted that while the savings are small relative to New Jersey’s $37 billion budget, health benefits have consumed 8.4% of past spending plans and has grown twice as fast as other discretionary spending items.

The new savings arrive at a time when the Garden State is set to absorb $824 million of average annual pension contributions while also chipping away at a $6.5 billion structural budget gap over the next four years. A heavy pension burden and structural budget challenges have contributed to New Jersey having the second-lowest Moody’s bond rating at A3 with a stable outlook. The state’s debt is rated A-minus by S&P Global Ratings and A by Fitch Ratings and Kroll Bond Rating Agency.

“In the immediate, this agreement reduces fiscal year 2019 budget risk by achieving health savings that were built into the budget plan,” said Larsen in her report. “Although the state has implemented modest health benefit changes in each of the prior two fiscal years, fiscal 2019 is the first year the state has reached an agreement with the union representing teachers of this scale.”

Larsen noted that at least half of the proposed savings derive from controlling the growth of New Jersey’s other post-employment benefits costs, which have been rising an average of 6.5% annually over the past five years. New Jersey budgeted for the 2019 fiscal year $1.9 billion for OPEB compared to $1.2 billion for current employees, according to Moody’s. The state projects combed fixed costs of OPEB, pension contributions and debt service will reach 30% of its own-source revenues by the 2023 fiscal year, up from 14% in 2014.

“This is a tremendous step in the right direction and we look forward to continuing to work with our partners in labor to find ways to provide health care in the most effective, comprehensive, and cost-efficient way possible,” New Jersey State Treasurer Elizabeth Maher Muoio said in response to the Moody’s report. “We are highly cognizant of the impact these costs have on our budget and the administration is committed to pursuing smart strategies to lower these costs for both government and public employees.”

Murphy’s bargaining with labor groups on healthcare benefits in his first year as governor follows clashes that former Gov. Chris Christie often had with the New Jersey Education Association and other public unions. The cost-cutting agreement steers active and retired public workers to in-network doctors and generic drugs, which is projected to save the state $496 million combined in 2019 and 2020.

“It’s reassuring to know that Moody’s understands the significance of the savings Governor Murphy announced last week and the impact it will have on state and local budgets over the next several years,” said Maher Muoio. “Moreover, Moody’s recognizes that the savings we were able to achieve through good faith negotiations signal a new approach, hopefully one that will continue producing positive developments moving forward.”

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