What the 2 percent cap means for health care

In the September issue of NJ Cops Magazine, Kevin Lyons ended his article advising negotiations committee members that health care cost increases are outside of the cap. To expand on that point, members must understand what that means.
The 2 percent interest arbitration cap was the most highly touted item in Governor Christie’s “Toolkit” to fix the property tax issue in this state. Fortunately, that was allowed to expire, and it has proven to be unnecessary for property tax relief. Along with that cap, the legislature implemented a property tax levy cap of 2 percent to strengthen a softer cap that has been in place since 1977. Essentially, this means that a local governing body can’t raise taxes by more than 2 percent each year. Since there are many factors beyond the control of the governing body when formulating a municipal government, some commonsense exclusions were permitted to remain “outside of the cap”:

N.J.S.A. 40A:4-45.45 Cap on calculation of adjusted tax levy by local unit; exclusions.
a. (1) In the preparation of its budget the amount to be raised by taxation by a local unit shall not exceed, except as provided in paragraph (2) of this subsection, the sum of new ratables, the adjusted tax levy, and the total of waivers approved pursuant to section 11 of P.L.2007, c.62 (C.40A:4-45.46); provided, however, that in the case of a county, the amount to be raised by taxation shall not exceed the amount permitted by section 4 of P.L.1976, c.68 (C.40A:4-45.4).
b. The following exclusions shall be added to the calculation of the adjusted tax levy:
increases in amounts required to be raised by taxation for capital expenditures, including debt service as defined by law; increases in pension contributions and accrued liability for pension contributions in excess of 2.0%; increases in health care costs equal to that portion of the actual increase in total health care costs for the budget year that is in excess of 2.0% of the total health care costs in the prior year, but is not in excess of the product of the total health care costs in the prior year and the average percentage increase of the State Health Benefits Program, P.L.1961, c.49 (C.52:14-17.25 et seq.), as annually determined by the Division of Pensions and Benefits in the Department of the Treasury; and extraordinary costs incurred by a local unit directly related to a declared emergency, as defined by regulation promulgated by the Commissioner of the Department of Community Affairs, in consultation with the Commissioner of Education, as appropriate.

The exception language in the statute is applicable to negotiations because you may encounter a mayor or administrator who claims the increase in health care costs precludes them from offering much in the form economic gains in the contract. They will point to the municipal tax levy cap as the law that is prohibiting them from proposing a fair raise. If the cost of the state health benefits increases by more than 2 percent, that portion of the increase does not get calculated for cap purposes. This may be most pronounced during current negotiations because of the increase for retiree health benefits that was announced for 2022.

The argument that our negotiations teams face is presented as an inability to pay, when in fact it is a lack of desire to pay. This year also brings another exception into the equation. The extraordinary costs associated with a declared emergency. The COVID-19 response was expensive in many cases, but the CARES Act and other federal aid covered most, if not all the costs associated with the emergency. Moreover, while the public health emergency ended in the summer, the governor’s declared state of emergency continues. Whatever costs the municipality has remaining can’t be calculated under this statute.

I like to enter negotiations with a cooperative approach. When carving up the pie, there is only so much that each side can get. I prefer to work together to increase the size of the pie, and then slice it so all involved can get more. When it comes to negotiating reductions to Chapter 78 contributions, if the employee pays less, the employer must pay more. Several locals have been successful with offering an incentive to members that select one of the lower-cost plans offered by NJ SHBP in exchange for a lower contribution percentage. Of course, the selection of a member’s health plan is very personal and specific to the needs of the member’s family. One size should not fit all and one health plan should not be suitable for all. But for each member in a local association that chooses the lower cost plan, the employer will pay less. That cost saving can be shared.

Too often, governing bodies believe they can gain substantial savings on health care by switching to a plan offered by a broker with lower rates. Invariably, that is a bait-and-switch situation that usually increases costs after just a few years. Fortunately, most contracts contain clauses that acknowledge the employer’s right to choose a carrier as long as the benefits offered are substantially similar or “equal to or better than” the plan that is being replaced. If your local is facing with a change in medical insurance carriers, it is incumbent on you to contact Kevin Lyons to do a comparison of the plans. His ability to explain the various plans is unparalleled and a member benefit offered only by the NJ State PBA.