Government

Panel Discusses New Jersey Pension Fund Crisis

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From left, Andrew Sidamon-Eristoff, Nancy Munoz and Tom Byrne Credits: Chip Dickson
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Tom Byrne and Nancy Munoz Credits: Chip Dickson
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Andrew Sidamon-Eristoff Credits: Chip Dickson
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Moderator Lisa Allen and Civic Story Founder Susan Haig Credits: Chip Dickson
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SUMMIT, NJ – New Jersey’s Public Employee Pension Fund is severely underfunded based on projected demands of future pension payments and retiree health care costs and could run out of money in twelve years if actions are not taken to address the problem. That is the conclusion of a report issued February 11, 2016 by a bi-partisan group called the New Jersey Pension and Health Benefit Study Commission

The report’s conclusions and some of its contents were discussed by a panel hosted by the nonprofit organization Civic Story last Monday night at Central Presbyterian Church in Summit. The evening’s event was “NJ Pension & Health Benefits - Sowing Solutions." The purpose of the event was to increase awareness of the issue, highlight some of the suggested solutions and stimulate further dialogue because silence and lack of attention will only make the situation worse.  Here are some of the major points:

1)      If no actions are taken, the rising level of benefit costs could cause the fund to run out of money in a period as short as twelve years as “…the painful reality is that the benefits currently provided to employees are beyond the State’s means”.

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2)      This problem exists because “…elected officials overpromised and underfunded for two decades.”

3)      Underfunding is often the path of least resistance and according to estimates; the pension fund is underfunded by at least $50 billion and possibly as much as $135 billion.

4)      There will not be a bailout from the federal government.

5)      Rising benefit costs will force cuts in other essential services such as education, infrastructure and public policy.

The panel participants included Tom Byrne, Chair of the NJ Investment Council; Andrew Sidamon-Eristoff, former State Treasurer; and Assemblywoman Nancy Munoz. Summit resident Lisa Allen was the moderator.

The consensus of the panel was the public employee pension fund financial condition is a crisis and that corrective steps need to be taken as soon as possible to avoid more punitive and costly steps. They echoed the first of ‘five hard truths’ from the 2016 study, “The State’s current public employee pension system is broken and needs to be fixed now to protect current retirees.” Underlying this view are concerns about the already large and increasing burden of public employee benefits, which the Commission felt must be kept below 15% of the State budget.

Above the 15% level, the Study concludes, “…the State will be in financial jeopardy and New Jersey’s credit ratings will continue to decline.”  In fact, the State received another downgrade in March. This time from Moody’s taking the rating on general obligation bonds from A2 to A3.

The New Jersey Pension Fund has $72 billion of assets. Those assets are meant to help fund the annual retirement and post retirement health care benefits for 800,000 New Jersey public employees that are still working or retired. According to an analysis of future needs, the pension fund is underfunded by at least $50 billion and possibly, $135 billion. At its current level, “The State cannot afford to continue to provide employees with pension and health benefits far greater than those enjoyed in the private sector”, which is the second of five points in the Study.

The pre-reform State benefits spend was $4.6 billion in 2016, or 13.5% of the 2016 Budget. In 2017, it is expected to increase to $5.6 billion or 16.1% of the Budget and already above the Commission’s 15% threshold. According to the Study, State benefits will reach 27.3% of the 2023 Budget without reform.  Health care costs are projected to rise from $3.3 billion in 2016 to $5.8 billion in 2023, while pension costs are expected to rise from $1.3 billion to $5.6 billion. In the 2016 Budget, active health benefits and post-retirement medical benefits represented 9.7% compared to 6.4% in 2008 and 4.5% in 2001. They are 10.7% of the 2017 Budget.

The demands on the pension fund are expected to continue to grow, while the level of assets in the pension fund grew only 1.4% a year between 2008 and 2016, and just 0.1% annually since 2010. Trying to fully fund the existing benefits “…will inevitably force cuts in essential services such as education, infrastructure and public safety” according to the Study. 

The panel felt there were two likely scenarios. The first would be finally arriving at a ‘New Jersey’ solution and the second would involve the federal government. That remedy would likely involve draconian cuts to other parts of the budget to supply the funds necessary to meet the funding needs of the pension plan.  According to Sidamon-Eristoff, federal help means, “…the feds are likely to impose restrictions, or conditions, on the states. So at the end of the day, public employees in New Jersey and elsewhere, if this happens, will end up with much less rich benefits than they have now.” All agreed federal help would not be in the form of a bailout.

The proposed New Jersey solution involves honoring pension promises to date and reforming pension plans going forward so that retirements benefits are not based on income from the last three years of service. It also involves shifting to a hybrid pension structure called a cash balance plan that targets a meaningfully lower rate of return than the current return target of 7.65%. Additional cost savings are expected to come from reforming public employee health care benefits by capping the type of coverage provided to the ‘Gold Plan’ level. From the Study, “Active employees… are almost invariably enrolled in plans with the highest actuarial values in the nation.” According to the Study, the average pre-subscriber costs in State-run programs pre-reform is $16,642 for an active employee, $29,748 for an early retiree and $9,970 for a Medicare retiree. The estimated save from reforming health benefits was $2.23 billion. 

Increasing taxes was not considered to be a major part of the remedy because the potential contribution was not estimated to be of sufficient magnitude and the risk of error the revenues would be lower than expected was felt to be high.  Also, income tax revenues are over 40% of State revenues and too dependent on a small group of tax payers. No more than 570 individuals represent about $1.1 billion of state income tax revenues, which are about $13 billion. Losing just a few of these individuals to other states could negate much, if not all, of any proposed tax rate hike on the highest income earners. 

Another constraint from taxes is the recent slower growth but relatively higher burden of benefit expenses. New Jersey State revenues are almost flat with the level reached in 2008. When property taxes are included, total receipts exceeded the 2008 level in 2013 as shown in the following chart, New Jersey Taxes and Other Revenues. According to IRS data, total income in New Jersey was lower in 2011 than 2007 and responsible for part of the drop in revenues during that period,

HOW DID THIS HAPPEN?

The summary statement from the Study, “Because elected officials overpromised and underfunded for two decades, the painful reality is that the benefits currently provided to employees are beyond the State’s means.”

According to Byrne, who is also the son of the former Democratic Governor Brendan Byrne of New Jersey and former Head of the New Jersey Democratic Party, the last six administrations failed to contribute a sufficient amount of funding to the pension plan as suggested by the actuaries because of other budgetary priorities. Governor Christie appointed Byrne to Chair the Commission.

The period starts during the Whitman Administration through the Christie Administration, which provided the highest level of funding. Combined there was just under $10 billion contributed to the pension fund, which is a level that would be sufficient for a fwe years at most and certainly not 23 years. Since 2000, a much higher level of funding demands coincided often with periods of anemic revenue growth and the lowest levels of contributions tended to occur during the period of strongest revenue growth.

From Fiscal Year 1995 to Fiscal Year 2010 (000)

Governor                                                       Contribution

Whitman                                                         $     963,934

DiFrancesco                                                    $            563

McGreevey                                                     $     101,424

Codey                                                             $     165,026

Corzine                                                            $  2,175,596

Total                                                                $  3,406,543

Christie                                                            $  6,274,505 through FY 2017

OTHER

Unfunded liabilities of defined benefit plans are a much bigger issue in the government sector than in the private sector.

State & local government defined benefit obligations totaled $5.763 trillion at the end of 2016 and $1.9 trillion was unfunded or 33.0%. State & local defined contribution plans totaled $490.6 billion. 

Federal government defined benefit obligations totaled $3.43 trillion and $1.83 trillion was unfunded, or $53.5%. Federal defined contribution plans totaled $466.6 billion.

Private sector defined benefit obligations totaled $3.38 trillion and $496.0 billion was unfunded, or 14.7%.  Private sector defined contribution plan assets totaled $5.74 trillion. Private sector employees represent over 80% of the workforce and 47.3% of combined retirement obligations. Source of this data is the December 31. 2016 Flow of Funds

Sources - Commission Report:   http://www.state.nj.us/treasury/pdf/NJPensionCommission-Supplemental-Report-on-Health-Benefits.pdf

State of New Jersey Department of Treasury:  http://www.nj.gov/treasury/omb/publications/archives.shtml

State of New Jersey Department of Community Affairs: http://www.state.nj.us/dca/divisions/dlgs/resources/property_tax.html

 

 

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