By now everyone knows that Governor Christie’s promises on funding the New Jersey State Pension System are as worthless as President Putin’s statements that there are no Russian troops in the Ukraine.
And everyone also knows that while all public employees increased their pension contributions to the system—for PFRS members it is now 10 percent, the highest or among the highest in all 50 states—and are required to pay more for their health benefits, as required under Chapter 78 of the laws of 2008, and lost their COLA’s, the Governor has reneged on the State’s obligation to fully fund the system. In 2001, all three of New Jersey’s main public pension plans were over 100% funded (PERS—117%; PFRS—101%; Teachers’ Plan—108%). Since 2001 the State has fallen short in its required contributions to ensure long-term financial stability. Today, there is a $47 billion unfunded pension liability, as well as an additional unfunded liability of another $40 billion plus in the State’s Health Benefit System. And Governor Christie has now unilaterally (and as charged in a number of public employee lawsuits, illegally) failed to make more than $2.4 billion in pension payments through June of 2015 in order to balance his budgets. Moreover, after proclaiming that he had solved the pension crisis with the enactment of Chapter 78, he now declares that his own law may be unconstitutional.
However, as a side note, not everyone associated with the State Pension System has been losing. In 2005 State employee stock and bond buyers who managed the public employees’ pension investments were paid less than $10 million. In 2006 the State began hiring private managers (political friends?) to handle pension investments—in 2013 they were paid $410 million, regardless of the performance of their investments.
So where does this leave us.
According to Governor Christie, we need a study commission. On August 1, 2014 by Executive Order 161 the Governor created the “New Jersey Pension and Health Benefit Study Commission” and gave it 30 days after organizing to issue a report with findings and recommendations. The truth is the findings have been available for years—the State has not obeyed the law and has not properly funded the pension system—and this includes Governor Christie. And the recommendation is obvious—obey the law, Governor.
While this column was written prior to the Governor’s Study Commission issuing its “findings and recommendations,” I feel safe in saying the obvious recommendation—obey the law and fund the system—will not be the Governor’s first choice—unless you believe Putin when he says any Russian troops that might have been in the Ukraine were on vacation. In fact, the Governor, in Section 3 of his Executive Order 161, already states what he wants his Commission to recommend: courses of action regarding plan design changes to current pension and health benefits.
Read between the lines—what the Governor will be pushing for is switching new employees (if not current employees going forward as well) to 401 (k) type pension accounts—so-called Defined Contribution Plans—or a hybrid plan that includes a mix of Defined Benefit (which public employees currently have) and Defined Contribution Plans. Currently, there are three states that switched to 401 (k) type plans—Alaska, Michigan and West Virginia.
Based on various media reports, switching from Defined Benefit to Defined Contribution Plans is not a guaranteed cost saver. Placing new employees into individual defined contribution accounts will most likely increase the cost of paying down the unfunded liabilities of state pension plans (the so-called transitions’ cost), because it will decrease the pool of employees in the system and thus diminish investment returns on the assets of the current pensions. In return, if investment returns pay for less of New Jersey’s existing pension obligations, New Jersey taxpayers would have to pay more. And while Alaska and Michigan closed their defined benefit plans to new employees in the hope that this would reduce their pension debts, the unfunded liabilities of their plans have since mushroomed. In addition, West Virginia reversed course and changed back from defined contribution accounts to a defined benefit plan because (1) the defined contribution accounts were producing low returns to its members, and (2) too many retirees with defined contribution accounts were increasingly applying for means-tested state social programs, at taxpayer expense.
It does not take a study to determine that New Jersey’s large pension debt is not the fault of its public employees but rather that the blame lies with the political shenanigans of its elected officials over the past 15 years. The answer to how to improve the financial status of the pension system is simple: eliminate politics from its operation, improve its management and, Governor Christie, obey the law, beginning with obeying the mandate of your own Chapter 78 of the laws of 2008.