Can Quarterly Payments Help Rescue NJ’s Underfunded Pension System?
Christie gets bipartisan plan that he calls ‘more fair than the previous proposals,’ but it offers no constitutional guarantee enforcing payments
After failing to find any common ground for the past several years over the best way to address New Jersey’s grossly underfunded public-employee pension system, state lawmakers reached a rare, bipartisan agreement yesterday, voting in favor of legislation requiring quarterly instead of yearly state pension contributions.
The measure — which legislative leaders say they are confident Gov. Chris Christie will eventually sign — would help the $73 billion pension system by breaking up the annual state pension contribution into smaller installments that the sponsors hope will be easier for the state to afford than the lump sum that administrations typically try to make at the end of each fiscal year.
Depositing the payments on a quarterly basis would also protect more of the pension contribution from end-of-the-year budget cuts and allow the pension system, which is professionally managed, to generate bigger investment returns by getting more money into the system earlier in the fiscal year.
But even as legislative leaders praised their bipartisan agreement on pension funding — no lawmaker in either the Assembly or Senate voted against the measure yesterday — they also conceded that the change to the payment schedule will not have the constitutional protections long favored by public-employee unions. Instead, the quarterly payments will be required as a matter of law, just as a major public-employee benefit reform law that was enacted in 2011 called for the state to follow a strict schedule of annual pension contributions that Christie ultimately didn’t honor, citing his constitutional requirement to maintain a balanced budget.
Whether the state will be able to afford even the smaller quarterly payments in future years as the overall contributions are projected to ramp up also remains an open question, especially after Christie and lawmakers agreed onlast month to settle their dispute over transportation funding that will take more than $1 billion out of the state’s revenue stream in just a few years.
Public-worker unions offered their support for the quarterly payments bill yesterday but said they’d still like to see the payment schedule established as a constitutional amendment to ensure future governors and lawmakers can’t disobey it during years when the budget is tight or revenues fail to meet expectations. Christie, when asked about the measure during his monthly radio show on NJ 101.5 FM yesterday evening, said he had yet to review the bill thoroughly but is encouraged by changes made to a prior version of the legislation that he’s previously rejected.
The passage of the quarterly payments bill came just a week after S&P Global Ratings gave the state. The pension system, which covers an estimated 770,000 current and retired workers, is at least $44 billion in debt, a funding gap that S&P highlighted in the downgrade notice it sent to investors last week. The major Wall Street rating agency also raised questions about whether the state will ultimately be able to cover its pension obligations once cuts to the sales tax and estate tax that were adopted last month are fully phased in.
Lawmakers had tried on two separate occasions to convince Christie that making quarterly payments would help to address the pension system’s funding problem, but he vetoed those efforts, citing concerns about short-term borrowing costs that the state could have to take on at the beginning of each fiscal year to help cover the first installments if sufficient tax revenue isn’t available.
The legislation that passed yesterday requires the payments to be made by the end of each quarter, not at the beginning as prior bills had sought, giving the state more time to collect the revenue. The measure also calls for any short-term borrowing costs to be covered by the payment itself, not out of the annual budget.
Those were meaningful changes, said Senate Minority Leader Tom Kean Jr., who signed on as a cosponsor this time with Senate President Stephen Sweeney (D-Gloucester).
“This is a better version than anything that’s been through the Senate before,” said Kean (R-Union).
Christie, during the radio interview, said that he remains concerned about how the quarterly payments would line up with the state’s cashflow cycle because much of the state’s tax revenue comes in toward the end of the July 1-June 30 fiscal year from income tax payments. He also pointed specifically to the new provision that would keep taxpayers from having to foot any short-term borrowing costs as an improvement on the prior legislative efforts.
“That’s something that I think is much more fair than the previous proposals,” Christie said.
Sweeney had originally been planning to putbefore voters this year that would have established the quarterly payment schedule as an amendment to the state constitution. That would have forced future governors and lawmakers to strictly follow the payment schedule, which also called for regular increases until the state was making the full contribution required by actuaries, something that hasn’t occurred in two decades.
But Christie, Kean, and other Republicans strongly opposed the proposed constitutional amendment, and Sweeney eventually decided to keep it from going on the ballot this year over concerns that it wouldn’t pass. The decision enraged, but Sweeney has maintained that it was the right call given that voters earlier this month overwhelmingly rejected a ballot question seeking to allow casino gambling in North Jersey and only narrowly passed a question dedicating fuel-tax revenue to transportation projects.
Republicans, meanwhile, said they were willing to embrace the quarterly payment schedule as a matter of law and not as a constitutional amendment, to maintain the flexibility the state currently has to hold back spending authorized by law if it would plunge the budget into deficit. If the quarterly payments were given constitutional protections, Republicans feared the pension contributions would take precedence over other spending priorities, such as education.
“Although I was adamantly against a constitutional amendment that removed the financial flexibility lawmakers must have to manage the state’s finances, I have always supported a flexible solution that protects taxpayers,” said Assemblywoman Holly Schepisi (R-Bergen).
Assembly Speaker Vince Prieto (D-Hudson), another of the bill’s sponsors, said he preferred the constitutional amendment because it also would have secured the new payment schedule to bring the state up to the full pension contribution that’s required by actuaries. Instead, lawmakers will now rely on Christie and future governors to honor a commitment to keep increasing the state contribution by 1/10th each year. The current fiscal year budget calls for a $1.86 billion pension contribution, which is 4/10ths of the amount calculated by actuaries.
“That’s the difference,” Prieto said, though he added supporting the legislation yesterday was also a “no-brainer.”
“Hopefully promises are kept,” he said. “I think doing quarterly payments helps.”
Even though they welcomed passage of the quarterly payments bill, public-worker union officials labeled it only a good “first step” yesterday.
“Our legislators need to also develop a responsible plan that guarantees a fully funded pension system in the long term,” said Wendell Steinhauer, president of the New Jersey Education Association.
“When it comes to this state's pension, history shows we simply cannot rely on the word of the governor or Legislature,” said Hetty Rosenstein, state director of the Communications Workers of America.
Sweeney conceded making the quarterly payments will be difficult in the years ahead, but he pointed to the recent credit-rating downgrade as a reason for the state to stop ignoring the pension’s system unfunded liability.
“I’ve always said we can make the payments; it’s just a matter of will,” Sweeney said.