Health benefits system for school employees and dependents also deemed unstable
, Health Care Writer | May 21, 2025 | Health Care, Budget
The health insurance system New Jersey uses to cover some 156,000 local government workers, retirees and their families is facing a “death spiral,” according to state officials, the result of rising prices, increasingly sick members and reduced cash reserves.
The system providing health coverage to nearly 300,000 local school employees and their dependents is also dangerously unstable, state Treasury Department officials said in a white paper released Tuesday. The system covering 300,000 state workers and their families is in better shape, they said, but it would benefit from a cash infusion.
Despite repeated efforts to control costs over the years, health care use during and after the COVID-19 pandemic increased the price of these plans significantly, with premiums for local government coverage rising 59% between 2022 and 2025, officials said. Taxpayers pick up almost all of the tab for the three state-run systems. Plans are administered by Aetna and Horizon Blue Cross Blue Shield, but the state is responsible for all the costs associated with patient claims instead of paying an insurance company to shoulder this risk.
The rising cost of care is only one of the threats, according to the white paper. The State Health Benefits Program for Local Government is also imperiled by a mix of extremely generous benefits — most workers pay just 3% of their health costs — along with depleted financial reserves and a limited ability to spread the risk of expensive medical treatments, officials said. For active local workers, New Jersey spends 60% more on coverage through these state-run health plans than the national average cost for public worker insurance, according to the white paper.
The white paper, prepared at the request of the governor’s office, detailed in its 18 pages the structure and problems officials identified with these three health insurance plans.
‘The situation is not one of temporary imbalance – it reflects deep-seated structural challenges that, if unaddressed, will further destabilize the [local government benefit] plan.’ — Structural and Financial Challenges in the State Health Benefits Program for Local Government paper
A key problem is that local governments can opt out of the state system anytime, if they find cheaper coverage elsewhere for example, and return to the state program if costs elsewhere grow — a cycle that leaves the system with fewer healthy members and more sick workers on its books. Of the more than 1,200 local governments in New Jersey, just 692 — just over 56% — now participate in the state plan, officials said.
“The State Health Benefits Program for Local Government (SHBP-LG) has reached an inflection point. What began as a commitment to offer affordable, high-quality coverage to public employees has become a structurally unstable and financially unsustainable system, due to adverse selection, diminished participation, and cost escalation,” officials at the state Treasury Department wrote.
The school employee benefit plan is slightly better off, officials said. But its reserve is nearly gone and — like with the local government system — because of its structure, the group that determines the benefit package, which is made up of equal numbers of employer and employee representatives, is unable to quickly respond to market changes.
The state worker health benefit structure is more stable with its fixed pool of participants, they said, although it lost $113 million last year and spent nearly 24% more on prescription drugs than anticipated.
The paper outlines several potential responses, including strategies to salvage the local government plan and strengthen the other two. It also envisions “a phased and orderly closing” of the local public employee system with state-funded support to help local municipal employers identify other health insurance options. It offers examples from other states but does not take a position on the next steps, which would require legislative action.
‘I’ll say this, maybe it’s not today or tomorrow, but does the state even belong in the health insurance business?’ — Sen. Paul Sarlo (D-Bergen)
“The situation is not one of temporary imbalance — it reflects deep-seated structural challenges that, if unaddressed, will further destabilize the [local government benefit] plan,” officials wrote. Premiums are slated to increase another 60% over the next four years, they said, changes that “would likely make the plan unaffordable, requiring stricter reforms that reduce benefits more drastically.”
Union officials pushed back, blaming state government leaders for mismanaging the plans and ignoring their repeated suggestions to trim costs. “Let’s be clear: the SHBP is in serious trouble, and immediate, bold reforms are necessary,” said Dennis G. Trainor, vice president of CWA District 1, which represents more than 75,000 public sector workers. “Treasury’s answer to this crisis is to scapegoat public sector workers — the very people who keep our communities running — instead of taking on the powerful corporate interests that are bleeding the system dry and overcharging taxpayers by millions of dollars every year.”
Sen. Paul Sarlo (D-Bergen), the chair of the Senate Budget and Appropriations Committee, indicated he was open to the idea of significant changes during a hearing with Treasury Department officials last week. “I’ll say this, maybe it’s not today or tomorrow, but does the state even belong in the health insurance business?” he asked.
As it is, the rising costs are “killing our communities,” said Sarlo, who is also the mayor of Wood-Ridge, echoing concerns raised by many local officials.
‘There is no easy path forward.’ — Treasurer Elizabeth Maher Muoio
New Jersey residents pay some of the nation’s highest local property taxes, with the average annual tab now more than $10,000, according to state officials.
“We need to protect everybody’s health care, but at the same time, we need to kind of grapple with that. I don’t know what the future is here,” Sarlo said. “Yes, there are some difficult decisions [to make], but we do need to make some difficult decisions and everybody needs to be at the table.”
Treasurer Elizabeth Maher Muoio, appearing before the committee to share a state tax revenue update, said unfortunately there was no quick fix for the health benefits systems.
“There is no easy path forward,” she said. “We have made a decision, over years and years, as a state, to make sure our employees have access to very rich health benefits, to make sure there are fewer impediments to taking advantage of high-quality health care. But it comes with a cost, as we are seeing.”
Total state tax collections are up on a year-over-year basis this year, but Gov. Phil Murphy and lawmakers authorized in the latest annual budget spending more than the total amount of revenue the state is taking in, leaving a wide structural budget gap. Murphy, a Democrat in the last year of his final four-year term, has prioritized narrowing that gap, even as state government itself is facing a series of rising costs, including for employee and retiree health benefits.
Murphy’s $58.3 billion budget proposal for the new fiscal year, which starts in July, includes $4.7 billion for the state’s share of these benefit plans, a $350 million increase from the current year, administration officials said in February. Premium costs for the three systems are anticipated to rise an average of 8% for medical care and as much as 20% for prescription drugs in 2025, according to the white paper, although restoring the cash reserves would require an additional 19% to the annual cost increase for the local government plan.
State officials have repeatedly struggled to address rising public worker health benefit costs in recent decades, a challenging task in a pro-union state with a lot of government employees, many of whom vote. Murphy worked with labor leaders to identify health plan efficiencies in 2018 that he said would save taxpayers hundreds of millions over several years. A 2011 reform effort under former Gov. Chris Christie, a Republican, gave public workers more say in their benefit package, among other changes designed to control costs.
— John Reitmeyer contributed reporting.
Lilo H. Stainton has covered New Jersey for two decades, much of it with Gannett newspapers, reporting on public policy, national political conventions and the 9/11 attack on lower Manhattan. She later served as press secretary to Gov. Jon S. Corzine and led a nonprofit coalition’s successful advocacy for federal funding in the wake of Superstorm Sandy. She joined NJ Spotlight News fulltime in 2016 to cover health care.
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