Follow Us:

Budget

  • Article
  • Comments

Analysis: Christie, Sweeney, and the Limits of Pension Reform

christie-sweeney
Credit: philly.com
Senate President Stephen Sweeney (D-Gloucester) and Gov. Chris Christie,

Gov. Chris Christie’s dire warning about the threat to New Jersey’s finances posed by unfunded pension liabilities may actually understate the magnitude of the problem. But Christie’s options for tackling the issue are sharply limited by politics, the courts, past legislation, and a lack of simple solutions.

Christie touched off a firestorm of protest from Democrats and union leaders when he used his budget speech to complain that the $2.25 billion pension payment required next year by the 2011 law he teamed up with Senate President Stephen Sweeney (D-Gloucester) to pass -- combined with rising debt and retiree health benefit costs -- was preventing the state from increasing spending on education, colleges, transportation, healthcare, and other vital needs.

By Fiscal Year 2018, when the seven-year phase-in to the full actuary-recommended funding of the pension system is completed, New Jersey will be required to pay an estimated $4 billion to $5 billion -- more than 10 percent of its budget -- to cover pension liabilities for the state’s 800,000 current and retired teachers, police, firefighters, and other state and local government employees. Even then, the problem won't be solved: The pension system that year will still be $52 billion in the red, Christie noted

“I’m ready to work with the entire Legislature to come up with ideas to fix this, but if they’re unwilling to do that, this is a problem we’re going to own” Christie said at a town hall meeting in Long Hill Township Wednesday. “I’m willing to take more extreme measures.” He added later that night on his monthly radio show on 101.5 FM that he had “significant powers” to make changes to the pension system through “executive action.”

Former state Treasurer David Rousseau, who implemented two pension reform measures under Democratic Gov. Jon Corzine before Christie took office, dismissed Christie’s assertion. “There are no extreme measures,” said Rousseau, now the budget analyst for liberal New Jersey Policy Perspective. “It’s a red herring. There is nothing he can do unilaterally to change pensions for public employees.”

In New Jersey, pensions for public employees are not negotiated through collective bargaining, but are modified through laws passed by the Legislature and signed by the governor. The Democratic-controlled Senate and Assembly would certainly challenge any attempt by Christie to modify pensions by executive order, as would the unions. In fact, unions are awaiting a decision by an appeals panel on their lawsuit challenging the Christie-Sweeney bill’s elimination of cost-of-living adjustments to retirees.

Good Enough for the Private Sector

Christie clearly does not have the power to launch the transition from a defined-benefit pension plan to a 401K-style defined contribution plan that Michigan has pioneered. Nevertheless, Christie expressed support for the 401K option during his Long Hill town meeting, saying “it’s where most of America has gone” and that “if it’s good enough for the private sector,” it should be good enough for government employees.

“There’s no doubt that five or 10 or 15 years from now, we will see a phasing in of 401Ks and a phasing out of defined-contribution plans,” said Assembly Minority Leader Jon Bramnick (R-Union). “It’s inevitable because of the cost. You have to make sure you don’t harm the pensions of people already in the system, which means you have to phase it in carefully. And since the Democrats are saying they are not willing to do anything now, it will not happen quickly. But it will happen.”

It could happen more quickly if Moody’s Investors Service pushes ahead with its controversial decision to rate state and city pension liabilities at a more conservative market-valued discount rate pegged to the 15-year Treasury yield -- a move that would drive New Jersey’s unfunded pension liability up from $58 billion to $104 billion.

Moody’s already downgraded New Jersey’s debt outlook to negative in December based partly on “the ongoing pressure of statutorily scheduled pension contribution increases.”

How to pay for huge unfunded pension liabilities is not just a New Jersey issue.

Christie’s complaints about soaring pension costs devouring the state budget are part of a growing national debate over how to pay for public employee pension obligations that has led 40 states to make pension revisions over the past five years in an effort to lower future costs.

In fact, despite Christie’s repeated warnings that Detroit’s bankruptcy due to $9.5 billion in unfunded pension and retiree health-benefit liabilities offers “a preview of what could happen to us,” New Jersey no longer makes Moody’s Investors Service’s most recent top 10 list of the states with the largest unfunded pension liabilities as a percentage of annual state budget.

Illinois’ $187 billion pension shortfall in 2012 represented a whopping 308 percent of state revenues, and No. 2 Connecticut’s $57 billion clocked in at 243 percent of its annual state budget. Maryland, Massachusetts, Maine, and even oil-rich Texas and Louisiana ranked ahead of 11th-place New Jersey, whose $57 billion pension liability equaled 126 percent of its budget that year.

Like most states, New Jersey got into trouble because a succession of Republican and Democratic governors and legislatures kept voting additional benefits for public employee unions in a competition for their campaign support, while failing to make the pension contributions required to keep the pension system solvent. In fact, in the 15 years before Christie took office, five governors paid a total of just $3.4 billion into the system -- and $2.2 billion of that was by Corzine.

As Christie noted, “an astounding 78 percent of this year’s $2.25 billion payment goes to making up for the legacy of years of irresponsibility from governors and legislatures who paid little or nothing into the system.”

He gets no argument on that point from Sweeney, the Ironworkers Union leader who was a back-bench two-term senator when he was picketed by the public employee unions for calling for pension changes that would require government workers to pay more for their pensions back in 2005, four years before Christie ran for governor.

What Sweeney argues with is Christie’s evident effort to back out of their public promise to bear the burden of paying for annual $600 million to $700 million increases in pension payments in the state budget to put the pension system on a sound footing – especially after they required public employees to pay more toward their pensions, to put off retirement until age 65, and to give up cost-of-living increases until their pension plans are on a solid ground.

Protecting Pensions

Sweeney, other Democratic legislative leaders, and union officials agree that the 2011 pension overhaul is sufficient to guarantee the health of the pension system for future retirees, and that the state should honor its commitment. “We’re not breaking the commitment,” Sweeney said emphatically. “If we stay the course, the pension system will be fine -- it’s not going to bankrupt us.”

Rousseau said the seven-year phase-in to full funding of pension costs, while difficult for Christie’s second-term budget-makers, will stabilize the pension system. Once the build-up to full funding is completed in the Fiscal Year 2018 budget, pension payments would rise only incrementally in future years similar to other costs.

“You have to wonder how serious the governor is about this. You listen to his budget speech, and ‘There is no there there,’” Rousseau said, quoting Gertrude Stein. “He didn’t say anything about what he wanted to do.” Christie faces significant policy, legal, and political challenges in any effort to overhaul New Jersey’s pension laws.

First, New Jersey’s pension laws already have been overhauled three times in the past eight years, and both the Democratic-controlled Legislature and the public employee unions feel strongly that is enough.

In a preview of the approach that Christie and Sweeney would take four years later, Corzine pushed through legislation as part of his first budget that raised the retirement age from 55 to 60, increased employee pension contributions from 5.0 percent to 5.5 percent of salary, and imposed other changes that altogether were projected to save almost $3.6 billion over the next 15 years.

At the same time, Corzine made a $1.02 billion contribution to the state pension system in FY2007 that was more than his four predecessors had contributed in the previous 10 years combined. He followed up with a $1.05 billion pension payment the following year before the Great Recession wiped out his budget in the year after that.

Nevertheless, Corzine pushed through a second pension law in FY2009 at the behest of Sweeney and Senate Majority Leader Barbara Buono (D-Middlesex) that further hiked the retirement age to 62 and limited the number of part-time employees in the pension system, saving $120 million more over a 13-year period.

Sweeney’s 2011 pension overhaul, which he passed with Christie’s support, further raised the retirement age to 65, reduced pensions by 3 percent a year for those taking early retirement, increased pension contributions from 8.5 percent to 10 percent of salary for police and firefighters (who are allowed to retire after 20 years) and from 5.5 percent to 6.5 percent for teachers and other non-uniformed government workers. These reforms combined were projected to save $48 billion over the next three decades.

However, the biggest chunk of the pension savings -- about $74 billion over 30 years -- was to come from the elimination of annual cost-of-living adjustments for the 300,000 retired teachers, police, firefighters, and other state and local government workers in the six state pension systems until those funds were solvent.

Sweeney and Assembly Speaker Vincent Prieto (D-Hudson) both emphasized that they believed public employees were paying their fair share toward their retirements -- a point that Christie disputed in responding to a question at his Long Hill town hall meeting. “When defined-benefit plans started, people’s life spans were significantly shorter,” Christie noted. “What we have not done is make both sides put in enough to match that different life span.”

Rolling Back Benefits

Second, while Christie might want to roll back benefits for current employees and retirees, he would undoubtedly face an immediate legal challenge based on a law passed by a previous Republican governor and GOP-controlled Legislature.

While New Jersey’s state constitution does not provide protections to pension benefits similar to New York and some other states, the Communications Workers of America, the state government’s largest union, traded their support for a controversial pension-refinancing scheme in 1997 for Republican Gov. Christine Todd Whitman’s support for a law that expressly "confers on a public employee a non-forfeitable right to pension benefits established by law after the employee has served for five years."

Through that 1997 law, New Jersey essentially established pension benefits as contractual rights. That extended the provisions in the United States and New Jersey Constitutions prohibiting the impairment of a contract to prevent any reduction in pension benefits for retirees or current employees vested in the pension system, as Corzine’s Attorney General’s Office and the nonpartisan Office of Legislative Services warned when lawmakers asked in 2006 if they had the right to roll back current benefits.

It is that law that forms the basis of the lawsuit by the CWA, the New Jersey Education Association, and the Patrolmen’s Benevolent Association challenging the provision of the 2011 pension bill that eliminated cost-of-living adjustment allowances for retirees -- and that provides the bulk of the long-term savings from the initiative.

While the unions lost at the Superior Court level in 2012, an Appellate Division panel is expected to issue its decision later this spring -- a decision that Bramnick, the Assembly Republican leader, said would be critical not only to future reforms, but also to the stability of the pension system itself.

Faced with a similar lawsuit, Rhode Island earlier this month negotiated a settlement with its unions that restored some of the cost-of-living adjustment it had cut.

Third, while Christie and Sweeney shared similar policy and political goals when they pushed through the 2011 pension overhaul, their policy and political needs have clearly diverged three years later.

Christie’s hopes for the Republican presidential nomination in 2016 have taken a major hit over the past seven weeks as a result of Bridgegate and other potential scandals that are currently under investigation by the U.S. Attorney’s Office and the Legislature’s Joint Select Committee on Investigation.

The GOP governor is starting to face the increasing likelihood that instead of running from primary state to primary state next year setting up a White House bid, he could very well spend the next four years in New Jersey hamstrung by the requirements of the pension bill that was the proudest bipartisan accomplishment of his first term.

But while Christie might want to renegotiate a tougher deal with the unions or extend the current seven-year phase-in to full pension funding beyond FY18 to give him the opportunity to put money into other priorities during his governorship -- as he suggested during his budget speech Tuesday -- Sweeney has other priorities, Democratic insiders noted.

Standing up to Christie against any further changes in the pension bill gives the Senate president the opportunity to rebuild a working relationship with the public employee unions with whom he has been feuding off-and-on since his original 2005 call for them to pay more toward their pension plans.

Just as important, Sweeney wants the pension phase-in completed with passage of the FY18 budget in June 2017, so that if he is able to win the governorship in November 2017, he can take office that spring with the pension burden off his back.

With an extra $600 million or so a year in hand once the pension phase-in is completed, Sweeney will have plenty of money to fully restore property tax rebates and the Earned Income Tax Credit for the working poor and/or the four-year property tax credit on income tax bills he proposed as an alternative to Christie’s 10 percent across the board income tax cut.

That’s the tax cut that Christie wanted so badly to take to the Republican National Convention in 2012, but Sweeney wouldn’t give it to him because revenues were coming up short and there was a $600 million pension payment to be made.

Read more in Budget, Politics
Sponsors
Corporate Supporters
Most Popular Stories
«
»