Gov. Chris Christie’s high-powered pension commission has proposed a sweeping plan that would save the state billions in retirement and health care costs while reducing benefits for hundreds of thousands of public workers.
The commission says New Jersey needs to drastically change its pension and health plans. Christie’s budget address will launch the complex proposal, which he’ll hold up as the answer to a $37 billion unfunded pension liability — which balloons to $83 billion under new accounting rules — and $53 billion in unfunded health care liability.
Christie, who once declared that his 2011 pension reform package had saved the system, has taken to saying they didn’t go far enough.
His bipartisan panel agreed and said in the report that New Jersey’s future without a meaningful overhaul is “bleak” and “burdensome.” Any delay, the commission warned, and the system will be beyond repair.
“We recognize that there are elements of this approach that are likely to be unpopular at first, but believe in time they will be viewed as the best way to move forward,” the report said. “The need for urgency in adopting a solution cannot be overstressed. The already narrow window for a reasonable solution is closing fast.”
Unlike the 2011 reforms, which left the pension system intact while making changes to employer and employee contributions, the commission’s far-reaching recommendations include freezing that plan and moving active public employees onto a hybrid of a traditional defined-benefit pension plan and a 401(k)-like defined-contribution plan.
That change is part of a scheme that calls for less expensive health care plans and for employees to pick up a larger share of their health insurance costs. The state’s health care savings would be recycled into closing the gap in pension funding.
Perhaps the report’s biggest bombshell is the proposal to freeze the existing state and local pension plans and move workers onto a so-called “cash balance” defined-pension plan.
Freezing the existing pension system would save the state and local government more than $2 billion in a single year. The cash balance plan would cost the state and local governments $1.23 billion a year, based on $26.6 billion in combined payroll.
Employees who are now under the traditional pension plan would not be able to accrue more benefits, their existing benefits are protected, and the state must continue to make payments on it.
Like a defined-contribution, or 401(k), plan, an employee’s benefits would show as a lump sum in a “hypothetical” personal account, which is funded by employer and employee contributions and investment returns. But unlike a 401(k), employees can receive their benefits in lifetime payments determined by their balance.
As of 2005, nearly a quarter of private sector workers with defined-benefit pension plans were enrolled in cash balance plans, according to the U.S. Bureau of Labor Statistics.
The cash balance plan could be a boon to younger, newer employees who currently receive the lowest tier of benefits offered by the state. It would be less attractive to more tenured workers.
An Urban Institute study of a similar plan created last year in Kentucky found that employees with fewer years of service would receive higher benefits than under their traditional defined-benefit plan, and employees with “many years of service would receive less.”
Along with the retirement overhaul, the panel proposes health care cuts it characterizes as bringing benefits in line with what the private sector offers. That “significant reduction” in state and local costs is crucial to freeing up funding for the pension plans, the panel said.
Public employers pay, on average, 95 percent of an employee’s health care expenses, while the average employee pays 18 percent of premium costs. Benefits would be reduced, with the employer paying 80 percent of expenses and the average employee contribution to their premium increasing to 25 percent. Retirees would receive the lower level of coverage without having to kick in more.
The commission didn’t venture into choosing a new plan’s mix of deductibles, copays, coinsurance and other features.
“The commission’s proposal will mean changes for employees, but they will still end up in a good place and avoid the draconian cuts that would follow an attempt to fund the existing benefits,” commission Chairman Tom Healey said. “On health care, they will enjoy the same kind of benefits provided by quality private-sector employers.”
The commission also suggests that local school districts should absorb the cost of local education retiree health benefits and the new pension plan. It says the changes in pension plans would generate enough money to absorb the cost.
Paying those bills without the help of local districts would require the state to find $1.53 billion in additional revenue.
For their sacrifice, employees would be rewarded with a constitutional amendment guaranteeing that the state make required pension payments. At the same time, the proposed constitutional amendment would strip a group of employees of the “nonforfeitable right” to receive certain benefits that has exempted them from previous reforms.
“A constitutional amendment permitting the reduction of benefits and implementation of these reforms, and also compelling compliance with the payment schedule intended to fund these obligations, would provide an enforcement mechanism that beneficiaries could trust,” the report said.
Those changes demand brisk action by the Democratic-controlled Legislature, which would need to approve a proposed amendment by Aug. 3 to get it on the November ballot.
The commission paints a grim picture of New Jersey finances in laying the groundwork for the proposal.
By the fiscal year beginning July 2016, the state’s pension contribution is expected to rise to $4.3 billion. The price tag for state employee health benefits — which ranks third-highest in the nation — will increase to $3.7 billion. At the local level, that bill could reach $10 billion.
The state portions of funding pension and health care that year combine for total of $8.05 billion, or nearly a quarter of an annual budget.
The alternatives to its recommendations, the commission cautioned, are extreme tax increases: it would take raising the sales tax from 7 percent to 10 percent or increasing the income tax by 29 percent to generate $3.6 billion a year.
Even with a “millionaire’s tax” charging the state’s 16,000 richest an extra $50,000, on average, the state would still need to raise income taxes 23 percent. Funding the $3.6 billion entirely on the backs of millionaires would cost each an additional $228,000 a year, according to the report.
“This is a pretty unique window in time, and we may never have another opportunity to solve this. The chasm may just get too wide,” said Tom Byrne, a member of the pension commission and former chairman of the state Democratic Committee.
Under the commission’s plan, the state’s total payment for the budget year beginning in July 2016 could be cut from $8.05 billion to $4.59 billion. The state would contribute $1.72 billion toward the new, lower health care system, $2.6 billion to the frozen pensions plans and $266 million to the new retirement plans.
Even with the cuts to retirement and health benefits, the state would still come up about $179 million short, according to the report.
And the frozen plan would still require increasing payments, likely to the tune of 3 percent to 4 percent a year, forcing the state to come up with about $500 million in additional revenue by 2020.
“While there is reason to hope that this revenue will become available through natural growth in the state budget and capture of a modestly disproportionate share of that growth for benefits funding, there are no guarantees,” the commission said,
While Christie said his administration is working with the New Jersey Education Association teachers union on a framework of the plan, some unions are likely to bristle at its recommendations. The police and firefighters’ unions, for instance, are locally funded and are much healthier than the state-funded plans.
Patrick Colligan, president of the New Jersey State Policemen’s Benevolent Association, immediately dismissed the findings, saying his group’s fund should simply be carved out from the state system.
“The five state and local pension funds should have been analyzed individually rather than as a whole,” Colligan said in a statement. “Our pension system is funded by local governments who are making their payments and which, along with our 10 percent member contributions, makes it the healthiest employee pension fund in the state… To propose solutions to further reduce employee benefits essentially ignores the math of (Police and Firemen’s Retirement System) and punishes nearly 40,000 law enforcement officers and firefighter who have no part to play in the state’s underfunded pension plans.”