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How Can New Jersey, Other States Rescue Underfunded Pension Systems?

NJ Senate President Sweeney says officials need to be honest with the public and state workers about the problem

sweeney pension panel
State Senate President Stephen Sweeney (D-Gloucester), left, participating in a panel discussion on state pension funding Other panelists, from left, included former Maryland Gov. Martin O'Malley and former New York Lt. Gov. Richard Ravitch.

State public-employee pension systems across the country are facing a combined $1 trillion in debt, and many states, including New Jersey, aren’t getting much help on the investment side these days thanks to stubbornly low interest rates. Medical breakthroughs are also testing the math of pension systems as retired workers are now living much longer.

But experts participating in a panel discussion yesterday on state-pension problems that included New Jersey Senate President Stephen Sweeney (D-Gloucester) weren’t ready to throw in the towel and say states should just give up and let their pension systems go bust.

Instead, the group that gathered in Philadelphia for the pension talk organized by Penn Mutual Asset Management took a more optimistic view. Boosting government pension funding, rethinking investment strategies, and adopting reforms were all presented as ways to ensure state pension systems can survive their current challenges. Creating portable retirement plans and using pension assets to finance infrastructure investments were also discussed as future goals during the event, held during the ongoing Democratic National Convention.

“This is all about people, at the end of the day,” said David O’Malley, Penn Mutual’s chairman and chief executive.

New figures released in May by The Pew Charitable Trusts put the scope of the national public pension-funding problem in perspective, detailing $968 billion in unfunded state pension costs as of the 2013 fiscal year. While New Jersey estimates its current pension debt to be $44 billion, behind only California and Illinois, other calculations come up with a figure that’s nearly double that amount.

Former New York Lt. Gov. Richard Ravitch, who worked with New York City officials to help stave off municipal defaults in the 1970s, said it’s been tempting for government leaders over the years, especially in lean economic times, to pad benefits for workers because the bill doesn’t come due right away. Then, he said, the problem is made worse because “we’re not willing to increase taxes enough to pay for them.”

He said decisions made in Washington, D.C., play a big role because so much of the federal government’s spending has traditionally gone to the states.

O’Malley, the Penn Mutual executive, said current investment conditions are making it harder to manage public-employee pension systems. With interest rates well below 3 percent, most funds have to make closer to 10 percent on their other investments just to keep up with assumed rates of return. New Jersey, for example, counts on a 7.9 percent rate of return from its pension investments every year.

“I don’t think it’s all doom and gloom, but there is a bit of a math problem as we sit here today,” O’Malley said.

Sweeney stressed the need for politicians to be straight with both the public and public workers to make sure they understand the scope of pension problems like those New Jersey is facing.

“Reality and honesty really need to be entered into the conversation much more,” Sweeney said.

His participation in the event came at critical time for the future of New Jersey’s $71 billion pension system, with final legislative approval for a proposed constitutional amendment that’s aimed at paying down the state’s pension debt currently being held up by the ongoing impasse in Trenton over transportation funding.

Sweeney told reporters after the event that he’s hoping to resolve the TTF issue soon and put the pension-funding amendment up for a vote when the Senate meets again on Monday. The amendment, if approved by voters in the fall, would write into the state constitution a schedule of state payments that would force New Jersey government in a few years to make the full contributions calculated by actuaries, something that hasn’t been done in two decades.

Sweeney said he’s holding up a final vote on the proposed amendment to make sure any deal struck to renew the nearly broke trust fund doesn’t blow a huge hole in the state budget. The state constitution requires all ballot questions to be advertised at least 90 days before a referendum, meaning the amendment must be adopted by August 8 to get on the November ballot.

“I’m trying to get it done,” Sweeney told reporters. “I’d love to get it done on Monday, but I’ve also got to get the TTF done.”

During the panel discussion, he also explained how New Jersey officials thought they had solved the state’s pension-funding problems back in 2011 with a bipartisan reform bill that made him the target of public-worker unions. But a stalled economy caused Gov. Chris Christie’s administration to walk away from a commitment to follow a seven-year schedule of ramped up state pension contributions even as public workers were required to contribute more toward their pensions, something that they’ve continued to do even after the state reneged on its end of the deal.

Later, former Maryland Gov. Martin O’Malley, who was also a panelist, offered his own pension-reform story, though his had a better ending than Sweeney’s.

O’Malley, who ran unsuccessfully this year for the Democratic Party’s presidential nomination, said his state’s pension system went from being only 59 percent funded to being on a path to 80 percent funding, a standard goal for public funds. He said, like Sweeney, he also took heat from public workers before adopting the necessary reforms, which included increasing contributions from workers.

“The argument had to be made, truthfully, that we needed to make the pension system more sustainable, or there would be no longer a defined-benefit (pension),” the former governor said. “It’s possible if you’re straight with people.”

O’Malley said it’s not unfunded liabilities that are the biggest threat to pension systems right now, but ideologues who simply don’t believe that workers should have a pension in the first place.

“That’s the fundamental threat,” he said.

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