Chapter 78, the 2011 health benefits reform law for New Jersey’s public sector, was designed as a cost savings measure for state and local governments that was achieved through increasing the share of the health benefits paid by public employees and retirees. In exchange, the state would commit to making consistent contributions to the State Pension Fund following years of neglect.
Under Chapter 78, members of all local bargaining units that provide health care coverage to employees were included – municipalities, counties, local authorities, and related public agencies including boards of education. The law covered all forms of health insurance in any mix, including state-run, commercial insurers, joint coverage with other local units (through a Health Insurance Fund), and self-insured plans.
“Chapter 78 helped state and local government realize significant cost savings quickly,” said Douglas Solomon, Partner at Genova Burns, “and though the legislation is near the end of its sunset phase, its full intention and its models of healthcare and pension contributions continue to be a reference point for employers, bargaining units, negotiators and arbitration experts.”
Chapter 78 legislation, signed into law by then Governor Christie, became effective June 28, 2011. The law provides for significant changes to the way in which the State-administered retirement systems and their benefit provisions operated in the state. Chapter 78 also changed the manner in which the state-administered Health Benefits Programs operated and the employee contributions and provisions of that program.
Chapter 78 ushered in a period of welcome financial relief to state and local governments, as well as relief to boards of education. For years, the public sector struggled to control the ever rising cost of providing employee health coverage. This landmark law, effective in 2011, required public employees to pay a portion of health insurance premiums. The exact amount of the employee share was a function of the employee’s salary and the plan they chose. Depending on plan choice and salary, the employee contribution ranged from three to 35% of the premium, and no less than 1.5% of the employee’s base salary.
For non-unionized employees, the contribution started to phase in immediately. Unionized employees started the new contributions once the collective bargaining agreement, which was in force when the law was enacted, had expired. The employee contribution had a four-year phase-in period, beginning with a quarter of the full contribution, ratcheting up each year until the full contribution was paid by the employee in the fourth year.
The employee contribution component of the law expired after the four year phase-in, and the employer and employees were bound by the contributions required by law until fully phased-in and in effect for a calendar year.
With respect to retirement health benefits, Chapter 78 also mandated that employees with less than 20 years of service towards their pension on the effective date of Chapter 78, must make a statutorily specified contribution towards the cost of his or her health insurance when in retirement. However, the law carves out an exemption for employees with 20 or more years of service. The exemption frees the retired employee from contribution increases faced by those with a period of service less than 20 years. For retirees with at least 20 years of service, but less than 25 as of Chapter 78’s effective date, the law provides for a health benefits contribution of 1.5% of their retirement allowance or the amount negotiated in the collective bargaining agreement in force at the time the law went into effect.
For many public employers, Chapter 78 began its sunset in 2015, although some employers are only now reaching the end of bargaining agreements that are governed by the law. When employers and collective bargaining units negotiate future contracts, both groups are legally permitted, but in no way obligated, to negotiate another cost-sharing arrangement. As the sun sets on Chapter 78, employers must remember:
- Chapter 78 employee contributions have now become the status quo for negotiation purposes.
- A reduction in employee healthcare contributions cannot be negotiated until the next contract is executed following the employer’s full implementation of Chapter 78
- When employee contributions become negotiable, Public Employers need to carefully consider the long-term effects of moving away from the cost structures under Chapter 78.