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Sweeney Seeks Constitutional Amendment to Fund State Pensions

Christie, others deride ballot question, arguing that if passed it will lead to higher taxes, drastic cuts to other programs

steve sweeney
Credit: Phil Gregory/newsworks.org
Senate President Stephen Sweeney (D-Gloucester)

A transportation fund that’s on course to run out of money by the middle of next year has been New Jersey lawmakers’ primary concern in recent months, but earlier this week a key Democratic legislative leader reignited the debate over the state’s biggest fiscal challenge, the grossly underfunded public-employee pension system.

Senate President Stephen Sweeney introduced a resolution on Monday that would ask voters to amend New Jersey’s constitution to prohibit the state from skipping out on the full amount it should be putting aside for employee retirements on an annual basis. The state pension payments would also have to be made on a quarterly basis over each fiscal year, which is something that underfunded private-sector pension plans are required to do.

Sweeney’s constitutional amendment is designed to restore the long-term health of a state pension system that right now is at least $40 billion in debt. And the constitutional amendment -- which would not need Gov. Chris Christie’s approval to be placed on the ballot -- would also be put before voters in 2016, just as they will be going to the polls to choose the nation’s next president.

“New Jersey taxpayers cannot wait any longer for fiscal responsibility,” said Sweeney (D-Gloucester), while announcing his pension-funding referendum proposal.

Sweeney’s proposal is the most aggressive response to date from Democratic lawmakers in the wake of a landmark ruling issued by the state Supreme Court earlier this year. That decision said only voters can force the state to fund the pension system at the full amounts calculated by actuaries each year, because the size of those payments has now grown well above limits on debt and other long-term obligations that are set in the state constitution.

The pension-funding proposal also echoes the wishes of public-employee labor unions, a reversal from a few years ago when Sweeney and other Democratic leaders worked with Christie, a second-term Republican, to force workers to contribute more toward their pension and health benefits. And it’s another sign that Sweeney is working hard to shore up support from the well-funded unions in advance of a widely expected run for governor in 2017.

But despite savings in the billions that are projected by Democratic analysts from the shift to a quarterly payment schedule, big questions remain about how the state will come up with nearly $3 billion more in the short term than what’s currently in the budget for the pension system. And that’s led Christie and others to say the ballot question, if passed, will ultimately lead to higher taxes or drastic cuts elsewhere.

“Which taxpayers are you going to rip off in order to pay homage to the public-sector worker-union bosses who own you,” Christie asked of Sweeney during a discussion of the proposal during the governor’s monthly radio show on Tuesday.

Nobody, however, disagrees with the notion that the current state of the pension system is a huge problem.

Accountants have predicted that some of the individual funds that make up the broader $73 billion pension system are in danger of going broke within a decade unless changes are made. That problem was created by a series of skipped or only partial state pension payments by Christie and other governors from both parties over the past two decades.

Lawmakers thought they had addressed the funding problem -- and Christie proclaimed the pension system had been “saved” -- when they enacted a reform law in 2011 that called for the increased employee contributions as well as a series of escalating state payments over a seven-year term. But when New Jersey’s economy stalled in the years that followed, and Christie reversed on his commitment to follow the seven-year ramp-up of state-pension contributions. And the New Jersey Supreme Court ruled in June that the state constitution, which requires a balanced budget, permitted him to do so.

Sweeney said it’s now in taxpayers’ best interest to vote for his plan. It would begin the ramp-up to full payment with a $3 billion contribution during the 2018 fiscal year before ultimately getting to over $5 billion by the 2022 fiscal year. Meanwhile, New Jersey has suffered several credit-rating downgrades in recent years as the pension payments laid out in the 2011 law have been shorted by Christie’s administration.

“This amendment will ensure that the state follows through on the agreement requiring the payment schedule that would have fixed the pension crisis by 2018,” he said.

And as expected, Sweeney’s proposal won immediate support from union leaders.

“By skipping and delaying payments year after year, the state has increased the cost of fixing the problem, and passed those costs on to our children,” said Wendell Steinhauer, president of the New Jersey Education Association. “This constitutional amendment will finally put the state on the road to fiscal responsibility.”

“Changing the constitution is not a step we support lightly,” said Charles Wowkanech, president of the New Jersey AFL-CIO. “But we believe this action is the only way to force the state to abide by the law and fully fund pensions.”

Assembly Speaker Vince Prieto, meanwhile, said at this point he supports the concept of Sweeney’s proposal, but is also planning to hold more talks with other Assembly Democrats to go over it in more detail.

“I’ve always strongly advocated for the state to meet its promised obligation and make its required pension payments, as the public employees have been doing year after year,” said Prieto (D-Hudson).

But a big question that’s left unanswered in Sweeney’s proposal is how exactly the state will come up with the money to make the bigger pension payments that the constitutional amendment would require. The $33.8 billion budget for the state’s current fiscal year includes a $1.3 billion pension contribution that’s scheduled to be made before the fiscal year ends on June 30, 2016.

Under Sweeney’s plan, using the latest actuarial calculations, the payment would jump to $3 billion by the 2018 fiscal year, and to more than $5 billion by the 2022 fiscal year. It’s unclear right now if the modest annual economic growth the state has been experiencing in recent years and revenue from a higher tax on income over $1 million that many expect to be enacted once Christie leaves office will provide enough money to fund those larger payments called for in Sweeney’s plan.

Christie, during a speech before New Jersey business leaders on Tuesday, excoriated the plan, saying it would inevitably lead to major tax hikes.

“Where are you getting the $3 billion? Where are you getting it?,” Christie asked. “It’s totally about playing politics.”

He also accused Sweeney of caring more about the unions than New Jersey taxpayers solely for political reasons. And during his monthly radio show on New Jersey 101.5 FM, Christie said the state doesn’t collect enough money during the earlier months of the fiscal year to make the quarterly pension payments the referendum would require possible.

But those quarterly payments, which could be covered by short-term borrowing until budget surpluses are built up, are projected by Democratic analysts to save $8.5 billion over three decades through investment gains, assuming a nearly 8 percent compounded rate of return.

Sweeney, in a statement issued in response to Christie’s speech before the business leaders, said his proposal was issued directly in response to the Supreme Court’s ruling.

“The suggestion this is a knee -jerk reaction to pander to any special interest couldn’t be further from reality,” Sweeney said.

Earlier this year, Christie proposed his own pension-reform plan, and it also featured a constitutional amendment to force the state to pay down its pension debt. But Christie’s proposal, based on recommendations made by a nonpartisan commission of benefits experts, also recommended freezing the current pension system and moving employees into a new, more affordable retirement plan with some features of a 401(k).

And Christie’s proposal also called for forcing employees at all levels of government in New Jersey to accept less generous healthcare options, and then redirecting the savings to pay down the current pension system’s debt under a schedule that would be approved by voters.

In a presentation made last month during the New Jersey League of Municipalities convention in Atlantic City, Tom Healey, the leader of Christie’s nonpartisan benefits commission, demonstrated how the state is on a course to see the cost of employee health and pension benefits rise to nearly 1/3 of all state spending if no changes to those benefits are made.

Healey, a financial analyst and former assistant U.S. secretary of the Treasury for domestic finances under President Ronald Reagan, told NJ Spotlight yesterday that Sweeney’s proposal could result in a “crowding out” of funding for other priorities like education and infrastructure.

“The commission agrees that constitutional reform is necessary to solve the problem permanently, but has always believed that benefits have to be reformed to be affordable before the state makes an irrevocable obligation to pay for them,” Healey said. “(Sweeney’s) proposed amendment fixes the amount due, but doesn’t do anything to ensure the state can afford the resulting payments.”

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