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July 18, 2024
New Jersey Gov. Calls for Huge Pension Reform
Posted On: Sep 14, 2010

Dramatic changes to N.J. pension and health benefits proposed by Christie


Gov. Chris Christie Tuesday unveiled a legislative package that as he described it is designed to make the state and local employee pension system sustainable for current and future retirees and to bring fairness and affordability to the public employee health benefits system.

Christie said the proposals are long overdue and needed to shake up New Jersey's "out-of-date, antiquated and increasingly expensive pension and benefits systems, and restore fairness and affordability to the level of costs that current and future generations of New Jersey taxpayers must bear.''

The cost of the pension system continue to grow and threaten to collapse it and force state and local governments to expend limited budget resources on what the governor sees as overgenerous pension and health benefits. The Christie agenda for pension and benefits is an attempt to modernize the pension and benefit systems and ensure long-term solvency without raising taxes or cutting essential government services.

Christie's plan addresses the problems of skyrocketing costs and taxpayer-borne expenses in these systems by offering what he described as comprehensive solutions, while rejecting the Trenton political culture that has expanding benefits without regard to how to pay for them.

"It is clear that our state can no longer afford a system that is rife with abuse, that promises substantial payouts with little buy-in, and that provides benefits that are wildly out of proportion with the private sector,'' Christie said. "The costs in the system remain dangerously out of balance and additional reforms are necessary to ensure the future solvency of the system."

Key changes in the governor's plan will attempt to modernize New Jersey's public employee health plans with the intention of providing savings for taxpayers, increasing choice for employees.

"I know these reforms will not be popular with everyone," Christie said. "I also know that failure to follow through with dramatic pension reform will imperil the system for everyone, and that failure to control and share costs of health care benefits will continue to eat away at our state and local budgets. We must reverse the damage caused by fairy tale promises that have fattened benefits and pensions to unsustainable levels while ballooning unfunded liabilities to breathtaking levels."

The pension legislation is designed to change the current system by bringing public employee costs into line with other states and the federal government. The governor argues that updating an out-of-date pension system will save taxpayer dollars, dramatically reduce unfunded liabilities over time and ensure long-term stability with better than 90 percent actuarial funding within 30 years.

Christie said that absent his proposals, New Jersey's unfunded pension liability will spike from $46 billion Tuesday, to $181 billion by 2041.

The governor also argues the cost of public employee benefits to taxpayers will grow 40 percent over the next four years. The cost to New Jerseyans for public employee benefits has already doubled as a percentage of state budget since 2001.

The proposals released Tuesday follow Christie's Ethics Reform Plan as the second specific policy proposals of the broader Christie Reform Agenda outlined by the governor last week. Additional proposals address the issues of economic development and job creation as well as education will be released in the coming weeks.

Assembly Speaker Sheila Y. Oliver (D-Essex) indicated Democrats are willing to consider the proposals but she also suggested that Christie needs to discuss the proposals with public employee union leaders.

"Our goal remains to create sustainable benefits for valued public servants such as teachers, police officers and firefighters that is also affordable to taxpayers,'' Oliver said. "To that end, the Assembly Budget Committee will review these proposals and the current state of our pension and benefits system.

"But I also want a higher level of discourse,'' Oliver added. "I am tired of the approach that divides our state. Leaders unite and build consensus. They do not divide and conquer and create enemies of the people who teach our children and protect our safety. I strongly encourage the governor to sit down with the public worker unions and negotiate meaningful reforms. All sides should do this with an open mind, without acrimony and the goal of doing what's best for all taxpayers."

Commenting on the proposals, state Senate President Stephen M. Sweeney (D-Gloucester) said, "For years, I have been concerned with the growing magnitude of the crisis that has left the pension system on the edge of collapse. Obviously, the governor shares that concern.

"The governor is halfway there,'' Sweeney said. "We do need further reform to keep the public pension system afloat, but we also need show we are committed to making the system work for the lifelong employees who are relying on it for a secure retirement.

"The governor must follow the law he signed only six months ago and put money into the pension system,'' Sweeney said. "I am more than ready to sit with the governor and discuss needed reforms, but they will not move in the Senate until a check is cut, deposited and cleared. We can't expect public workers to pay more and not hold up our end of the deal any longer. If the problem is as great as the treasurer says, we can't expect workers to shoulder the entire cost of fixing it. It doesn't matter what else is proposed. Unless we pay into the system, it will remain broken."

Assemblyman John Wisniewski (D-Middlesex), the state Democratic chairman, provided another view of how the Democratic majority that controls the Legislature may react to Christie's proposals. He said the governor needs to live up to his commitments and re-pay money he borrowed from the pension system before pushing the changes.

"Even when considering changes, we have a moral obligation not to break the promises that have been made by the state of New Jersey to countless public employees regarding the benefits they will receive when they retire," Wisniewski said.

"As a candidate, Christie talked about the need to keep faith with those people that were promised certain benefits because they made plans for their life based on that,'' Wisniewski added. "Now he argues that we have no choice, but what he's really doing is breaking his promise and putting his own political agenda ahead of his moral obligations as governor."

Assembly Republican Leader Alex DeCroce (R-Morris) said, "New Jersey can no longer wait to address its pension and health benefit crisis. Governor Christie is making the difficult and necessary decisions needed to give taxpayers relief and ensure the pension program is solvent for public employees. Unless major reforms are made to the present system its future is in jeopardy.

"The governor is attacking another problem that has languished in Trenton for years,'' DeCroce added. "His plan is the only one put forth that proposes substantive long-term solutions. It is imperative that we focus our efforts on making the pension system viable by working in a bipartisan manner to enact the reforms needed that will guarantee the program is sound for the future."

The League of Municipalities, the Trenton-based lobbying arm for municipal governments, welcomed Christie's proposals. Bill Dressel, the League's director, said personnel costs are the leading driver of property taxes. He added that pension and benefit costs continue to grow faster than any other local budget line items.

"The governor can count on our support in moving many of these reforms forward," Clifton Mayor Jim Anzaldi, the League's president, said. "We need to see action on management reforms and mandates relief initiatives immediately, so that local officials can cope with the new 2% cap next year. We need to see these new reform concepts introduced in bill form. Then, we need to see action on pension and benefits reform, so that we can continue to deliver high quality local services and long-term property tax relief, into the future."

Anzaldi said many of the proposals have been made by administrations over the years but little action was taken.

"The members of the Police and Fire system will continue to enjoy much more generous benefits than their colleagues in the public's service," Dressel said. "Those benefits are much more costly to our taxpayers. With the noted exception of the disability pension reform proposal, the governor's recommendations fail to recognize the disparity between PERS and PFRS benefits and costs. We regret that the proposals do not do more to address that disparity. We hope that we can work with the administration and the Legislature to correct that deficiency."

Here are the governor's proposals as described by his office:

Christie is proposing changes to bring solvency and long-term stability to the following pension systems: Public Employee Retirement System (PERS), Teachers Pension and Annuity Fund (TPAF), State Police Retirement System (SPRS), Police and Fire Retirement System (PFRS), and Judicial Retirement System (JRS).

Changes for All PERS and TPAF Employees:

Rolling back the 9 percent increase for future service: Christie's proposal adjusts the benefit formula to age 65 for future service from the current age 55. This change will roll back the 9 percent benefit increase for all future earned credit in the pension systems, a change that was authorized in 2001 without any way to pay for it, and will also conform the benefit formula to the proposed new retirement age. This change is not retroactive for prior service earned by current employees.

Changes for PERS and TPAF Employees with fewer than 25 years of service:

Updating the age for retirement eligibility:

  • Establishing the normal and early retirement age at 65
  • Increasing eligibility for early retirement from 25 to 30 years of employment
  • Adjusting the early retirement penalty to 3 percent for each year

A fairer calculation of retirement benefits: This change will require the use of an employee's average annual salary over the highest 5 years, rather than highest 3 years, when calculating their final retirement payout.

Changes for PFRS & SPRS with fewer than 25 years of service:

Updating the age for "special retirement" eligibility:

  • Changes eligibility for special retirement from 65 percent with 25 years of service to 65 percent with 30 years and 60 percent with 25 years.

A fairer calculation of retirement benefits: This change will require the use of an employee's average annual salary over the highest 3 years, rather than the highest year, when calculating their final retirement payout.

Changes for All Active Employees (PERS, TPAF, PFRS, SPRS & JRS):

Setting employee contribution rates at a fair, uniform level across retirement systems.

  • Employee contributions currently vary among the systems, from a low of 3 percent to 8.5 percent. Christie's reforms will align employee contribution rates at a uniform 8.5 percent.

Changes for All Current and Future Retirees:

Eliminating automatic annual payment increases: Christie's proposal calls for the elimination of additional annual future cost of living adjustments.

  • Many states are reducing pension liabilities by lowering or eliminating cost of living adjustments (COLA), or eliminating COLAs for current and future employees. For example, Colorado reduced its 2010 COLA from 3.5 percent to 0 percent with a rate of 2 percent starting in 2011. Minnesota reduced COLAs from 2.5 percent to 1-2 percent depending on the fund, and South Dakota made a 1 percent reduction in 2010 with future years COLAs based on investment performance.

Changes for a More Accurate and Honest Financial Forecast:

Adjust the anticipated rate of return used by the pension fund from 8.25 percent to 7.5 percent to reflect a more realistic picture of today's investment climate; and move the amortization methodology from a percentage of pay schedule (which defers the retirement of any unfunded liability) to a level dollar amount each year in order to retire part of the state's unfunded liability earlier.

Disability Reform Proposals:

Address the growing abuse of accidental disability expenses by better defining the standards for qualification.

Making PFRS and SPRS earnings tests match those used in PERS and TPAF: PFRS and SPRS members would not be able to earn more than the difference between the disability allowance and the projected salary that they would have earned had they remained in police/firefighter employment.

Action is required now before the pension problem Grows to out-of-control proportions

Without action, the total unfunded liability in the system will skyrocket to a shocking total of $181 billion over the next three decades. By 2041, New Jersey will be faced with a $119 billion state obligation, while local municipalities will be looking at a $62 billion burden.

The probability of investment returns making up for the shortfall is very low. The Pension Fund's annualized return on investment was 2.6 percent over the last 10 years and a negative 1.4 percent over the last three years. Additionally, costs will increase more than 430 percent over the next 30 years, and this funding burden will dramatically impact New Jersey's fiscal health and threaten critical resources for education, municipal aid and countless other priorities.

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