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Should the State Offload Teacher Retirement Benefits Onto Local School Districts?

That’s one of the suggestions of Christie’s expert commission, but the big question is what happens to property taxes

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Credit: Governor's Office/Tim Larsen

In New Jersey, school districts pay the salaries of their teachers, but it’s the state that picks up the costs of their retirements. Cities and towns, meanwhile, cover their employees’ salaries as well as their retirement costs.

That split responsibility is at the heart of one of the core elements of the sweeping changes to public employee benefits that were put forward last week by the nonpartisan commission of experts impaneled by Gov. Chris Christie. Boxed in by a state economy that hasn’t grown as quickly as he once envisioned and a recent court ruling ordering billions in additional state pension contributions, Christie charged the group with finding ways to make worker benefits more affordable.

The commission has proposed shifting the cost of teacher pensions from the state to the school districts, whose primary source of funding is local property taxes. It is also proposing the adoption of less-generous health coverage for teachers and other public workers, and it made the case that there would be enough savings from changing the health plans to allow the local governments to cover the cost of the pensions, which right now cost the state about $2.5 billion annually just for teachers.

“This reform would be cost neutral to local governments,” the report says.

But not everyone sounds convinced just yet. Bill Dressel, executive director of the New Jersey League of Municipalities, questioned the logic of diverting any savings realized by local governments when told of the commission’s ideas. He also noted that the pension funds for local employees like police officers and firefighters are among those in the overall pension system that are in the best shape.

And while the state for more than a decade hasn’t made the full pension payment required by actuaries for the teachers and its own employees, he noted “the local governments have been making their payments into the pension system.”

Both Senate President Stephen Sweeney (D-Gloucester) and Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen) also raised fairness concerns last week after the commission’s report was released at the same time Christie put forward his proposed $33.8 billion budget for the fiscal year that begins July 1.

“If you’re a mayor, and you can save $100,000 on your healthcare costs, are you giving it to the state? That makes zero sense,” Sweeney said.

“They’re talking about taking savings from municipal governments, county governments, money that’s not theirs,” he said. “If I’m a local government … I’m going to put the money back in my budget, I’m not giving it to the state.”

And what if the savings projected from moving public workers to less-generous health plans don’t materialize? Many would argue there’s already enough pressure on New Jersey’s local property taxpayers to discourage even the chance that they could be exposed to new costs.

The average New Jersey property tax bill rose to a record high of $8,161 last year, while state Homestead property tax credits were pushed into 2015 due to state-budget problems. And those credits are set to remain flat in Christie’s budget for the next fiscal year, meaning that even if they are paid out on time they will not keep up with the pace of growth for the 695,000 New Jersey seniors and low- and moderate-income homeowners who qualify for the relief.

When asked about those concerns Friday, Christie spokesman Kevin Roberts referred to a section of the commission’s report that makes note of prior efforts to implement a similar pension cost-shift. Both former Govs. Jim Florio and Christie Whitman delved into the issue of having school districts cover teacher-retiree costs, but without spelling out exactly how the districts would pick up the added burden -- and without success.

“A premise of the Commission’s advocacy of unified State/local approach is that it be implemented in a manner that would be no worse than cost-neutral to local governments, a goal that should be possible, given the magnitude of local health benefits savings available,” the report says in the section Roberts referred to.

“It would make little sense to solve the employee benefits funding problem by exacerbating the property tax problem,” the report says.

The commission also argued it’s more logical for a school district to have to consider when involved in contract negotiations with its teachers what the implications of any salary increase would be on post-retirement benefits costs.

Tom Byrne, a member of the commission, said in an interview that great pains were taken among the members of the panel, which included actuaries and other benefits experts, to ensure property taxpayers were protected.

“We were very sensitive to that,” said Byrne, founder of Byrne Asset Management and also the acting chair of the New Jersey State Investment Council, the panel that oversees the $81 billion pension system. Teacher retirements make up a good chunk of that system, and another feature of the commission’s proposal is a freezing of the current pension system in favor of moving all state and local employees to a new hybrid retirement system that would have features of both a traditional pension and a defined-contribution, 401(k)-style plan.

The commission has also proposed paying off the debt of the current pension system, which totals between $37 billion and $83 billion depending which accounting standards are applied, over a 40-year payment period, largely by using the savings from the less-generous worker health plans. The payment plan would be put before voters in the form of a constitutional amendment to ensure the payments are made.

In making a case for more reform, Daryn Iwicki, state director of the conservative Americans for Prosperity organization, said the annual payment into the pension system has become too costly to keep up with.

He pointed to last week’s Superior Court ruling that ordered Christie and lawmakers to come up with another $1.6 billion for the pension system this fiscal year to honor a commitment made in 2010 and 2011 benefits-reform measures signed into law by Christie, who is appealing the ruling. Right now, Christie is scheduled to make only a $681 million payment.

“Regardless of how the courts rule, the simple fact is the money to meet New Jersey’s pension and benefit obligations is not there,” Iwicki said. “This is no longer just an option; it’s an imperative.”

Though the New Jersey Education Association has said it is open to at least the rough framework of Christie’s commission’s proposal, many other unions are speaking out against it, offering little hope the commission’s full plan would eventually be implemented.

The New Jersey Communications Workers of America posted a new video on YouTube airing the fears that several long-term and retired state workers are harboring due to the uncertainty of the pension funding.

And the state AFL-CIO, in a critique of Christie’s budget speech, stressed that employees have already been forced to pay more for the benefits as a result of the prior reforms.

“It’s time for the governor to stop wasting taxpayer dollars on legal challenges to his own reform law and make the $1.6 billion pension payment the law requires this year,” the union said.

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