Op-Ed: Fixing the Pension System for Teachers and Taxpayers
We have made great progress, especially in the past year, to put our pension system on the road to full funding
Fixing the pension system remains the greatest fiscal challenge facing the new governor and the 120 legislators who will be elected next week.
But we have made great progress, especially in the past year, to put our pension system on the road to full funding in a way that protects the security of pensions for our teachers and other public employees while maximizing future savings for taxpayers.
A month ago, the state government made its first quarterly payment of $377 million into the pension system for teachers and state employees to comply with the Quarterly Pension Payment Law that I sponsored and fought two years to enact.
Requiring the state to make pension payments every three months — rather than at the end of the year — will eventually generate hundreds of millions of dollars in additional investment income each year, making the pension systems for teachers and public employees more secure and savings billions of dollars for taxpayers.
Another important development that went virtually unnoticed was the payment of the first $181 million in monthly Lottery revenues into the pension system in July and August under legislation sponsored by Senate Budget Chair Paul Sarlo.
Like quarterly payments, the Lottery revenues also provide guaranteed funding to shore up the pension system and increase investment earnings that will save billions of dollars for taxpayers.
If these advance payment plans had been in place a year ago, the state’s fiscal year 2017 pension contribution would not have missed out entirely on the 13 percent investment return that the State Investment Council earned on its pension portfolio during that 12-month period.
Because of compounding, quarterly pension payments alone are projected to save taxpayers $8 billion and add $4 billion to the pension portfolio over the next 30 years
Just as important to the long-term fiscal health of the pension system, the quarterly payments and monthly Lottery revenue will ensure that pension contributions are made regularly, not skipped at the end of the year, by future governors. It was 15 years of skipped pension payments by governors of both parties that put our pension systems so deeply into the red.
There are some misunderstandings about the state’s pension obligations that are important to clear up.
First, the pensions earned by teachers and public employees are deferred compensation that will have to be paid. The pension law passed in 1997 made pensions a contractual obligation, the 2011 law underscored that legislative intent, and court decisions have made that obligation clear. Public pensions are secure and have to be paid. No ifs, ands, or buts.
Second, the $2.5 billion the state government is paying into the pension system this fiscal year is the exact same amount that the state would have paid under the proposed constitutional amendment. Not a penny more. Not a penny less.
Third, it is much better for taxpayers to ensure that the state ramps up to full actuarially required funding of the pension system over the next four or five years than it is to let the pension systems slide into bankruptcy. If the state’s pension systems were to go bankrupt, the cost to taxpayers of paying those pensions on a yearly basis would be $4 billion a year higher.
Finally, there is no magic, painless solution to fix the pension problem. Contrary to what some people say, state governments — as sovereign entities — cannot go bankrupt, like Detroit did, to get out from pension obligations. And the favorite solution you hear from conservatives — switching public employees over to 401(k) plans instead — would actually cost more money in the early years.
As an international vice president for the Ironworkers Union that manages funds in New Jersey and southeastern Pennsylvania, I know we can learn a lot from the private sector.
My legislation requiring the state to make quarterly pension payments into our severely underfunded pension system for teachers and state employees parallels the requirements of the landmark Employment Retirement Income and Security Act (ERISA) law enacted by the federal government in 1974 to protect private pensions.
ERISA requires quarterly payments for significantly underfunded private pensions that have less than 70 percent of the assets needed to meet future pension obligations. New Jersey’s pension fund for teachers and state employees is actually worse off, with just 50 percent of the assets needed.
Another good idea I took from the private sector was the legislation I sponsored to allow police and firefighters to manage their own pension fund with a board that would include representatives of county and municipal government who have no representation on the State Investment Council.
This proposal makes sense because the Police and Firefighters Retirement System is 70 percent funded as a result of New Jersey county and municipal governments making the required pension payments over the years. I am optimistic that it will be signed into law by the next governor.
We need to do everything we can to solve the pension crisis. I look forward to completing the ramp-up to full pension funding in a way that preserves the pension system for our teachers and public employee, while saving billions of dollars for taxpayers.