Gov. Christie Looks to Take Huge Bite Out of Public Employee Benefits

Mark J. Magyar | September 15, 2010 | Budget
Retirees are not exempt from sweeping changes governor's reform package would make to pensions and health benefits

Credit: Governor Photos/Tim Larsen
Gov. Chris Christie yesterday proposed a sweeping pension and health benefit reform package that would ultimately shift billions of dollars in costs from state and local budgets to current and retired teachers, police, firefighters and government workers.

While the Christie administration did not provide detailed numbers, the higher pension and benefit contributions proposed by Christie would be tantamount to a 7 percent pay cut for most teachers and government workers, and about a 4 percent reduction for police and firefighters phased in over the next three years, based on preliminary NJ Spotlight calculations.

The Christie plan also would significantly lower pension checks for future retirees by rolling back the 9 percent pension increase approved by a Republican governor and Legislature in 2001 and by eliminating all future cost-of-living increases for retirees.

Sue Me

Christie’s wide-ranging proposals go far beyond the reductions in cost-of-living adjustments adopted by the states of Minnesota, Colorado and South Dakota, all of which have been challenged in court. But Christie said he isn’t worried about legal challenges. “If they want to sue me, tell them to get in line. I have plenty of lawyers,” Christie said.

Christie unveiled his pension and benefit reform proposals, which will require approval by the Democratic-controlled Legislature, at a town meeting in Gloucester Township yesterday. “Pensions are all about numbers. There’s no magic,” Christie proclaimed, as he demanded that public employees “share in the sacrifice” of putting the state’s underfunded pension system back on a firm footing.

Christie said his proposals, combined with the resumption of regular state contributions to the pension system after 15 years of neglect, would cut the pension system’s unfunded liability from the current $46 billion to a more manageable $23 billion by 2041. Similarly, increasing the employee share of health benefit costs from about 8 percent to about 30 percent of premiums would significantly reduce state health benefit costs, which are funded on a pay-as-you-go basis.

Overdue Payment

But Senate President Stephen Sweeney, D-Gloucester, made it clear that he would not post any of Christie’s pension or health benefit reform measures for a vote unless and until the governor makes the $512 million state contribution to the pension system required in a law that Christie himself signed in March.

“We do need further reform to keep the public pension system afloat,” Sweeney said in a press release. “I am more than ready to sit with the governor and discuss needed reforms, but they will not move in the Senate until a check is cut, deposited and cleared.”

Assembly Speaker Sheila Oliver, D-Essex, said she wants the governor “to sit down with the public worker unions and negotiate meaningful reforms.”

New Jersey’s public employee unions will undoubtedly argue, as they did in unsuccessful court challenges to less sweeping pension and benefit changes signed into law last spring, that Christie’s proposals should be subjects for negotiation at the bargaining table.

Negotiating with the Unions

The Christie administration has to sit down with the unions over the next nine months, because the deadline for reaching new contracts with most of the state government unions is July 1, 2011 — the same date as the deadline for enactment of the next state budget, which would include the $512 million state pension payment that Sweeney wants to see.

That convergence of dates makes it increasingly likely that negotiations over pension and benefit reform, the next state budget and the level of pay raises in the next state employee contracts will all be linked in the final weeks heading into the twin July 1, deadlines. While Christie has some ability to impose a contract on the state government unions that do not represent uniformed personnel, he will have to negotiate both the budget and the pension and benefit reforms and will require the assent of a Democratic-controlled Legislature whose 120 members are all up for reelection four months later.

What is unclear is just how much the proposed Christie reforms would lower the amount that the state needs to contribute each year to the pension system to reduce the current $46 billion unfunded liability, which has risen steadily due to the state’s failure to make regular payments over the past 15 years and drops in the value of the state’s stock portfolio during the recent recession.

David J. Rosen, the non-partisan Office of Legislative Services’ budget officer, projected in July that the state would need to make a $3.5 billion contribution every year to the pension system to cover the $46 billion unfunded liability, but that was based upon current levels of employee contributions and pension payouts.

Actuarial Analysis

“We need to see the actuarial charts, but we are talking about fairly significant changes in terms of liability,” Rosen said yesterday. “If enacted, it would make a real difference… These are major changes to the system.””
The $512 million contribution that Sweeney is insisting upon is based upon Rosen’s $3.5 billion projection and the new pension law signed by Christie last spring that requires the state to ramp up to full funding for the pension system over the next seven years, beginning with a one-seventh payment in the next budget, Fiscal Year 2012. While a new actuarial analysis would be needed to gauge the impact of Christie’s proposed reforms, the impact on that pension number could very well be significant, as Rosen suggested.

Christie’s plan would require teachers and state, county and local government workers, who currently set aside 5.5 percent of their salaries for pension payments, to pay an additional 3 percent, under a proposal that would require all government workers to pay the same 8.5 percent that police and firefighters currently do.

The plan would also roll back the 9 percent pension increase for current government workers that was approved by GOP Governor Donald DiFrancesco and a Republican-controlled Legislature on the eve of the 2001 elections. The change would leave the 9 percent increase in place for pension credit earned for years worked between 2001 and the presumed 2011 passage of rollback legislation, but would rescind the increase for “future earned credit.” However, this proposal is likely to be challenged on the basis of the 1997 state law passed by that same GOP Legislature that established pension promises as a “property right.”

Perhaps the most significant aspect of Christie’s proposal is his call to eliminate all future cost-of-living adjustments for both current and future retirees. Pensioners who receive a 3 percent cost-of-living adjustment for 10 years receive checks that are more than 35 percent higher at the end of that decade, so the elimination of all cost-of-living adjustments would greatly reduce expenditures from the state’s pension system over the next 30 years.

Cutting Pension Payments

Another Christie proposal that would reduce pension payments is his plan to require pension payments to be based on the five highest years of salary for teachers, school employees and non-uniformed state, county and municipal workers, up from the current three-year average. Police and firefighter pensions would be based upon the three highest years of salary, rather than simply the highest year.

Christie also is proposing an increase in the normal retirement age from 62 to 65 for teachers, school employees, and non-uniformed state, county and municipal workers; an increase in the number of years required to qualify for early retirement from 25 to 30 years of service; and an increase in the early retirement penalty to a 3 percent pension payment reduction for each year. The current penalty is just 1 percent per year for those retiring between the ages of 55 and 62, and 3 percent a year for those retiring under age 55.

For police and firefighters, Christie would change “special retirement” eligibility from 65 percent of salary with 25 years of service to 65 percent after 30 years and 60 percent after 25 years.
The changes in pension payment calculations, retirement age and early retirement provisions would not apply to workers who already have hit the 25-year service mark and thus would already have been eligible to retire under the old rules.

Changing Health Benefits

Christie’s major change on the health benefits side of the ledger is his proposal to increase the share of health benefits paid by current employees from 8 percent to 30 percent of the actual premium. The increase in health benefit deductions would be phased in over three years, and Christie defended the increase as fair, noting that federal employees currently pay 34 percent of their health care costs.
The governor stopped short of making the same requirement for shared sacrifice from retirees, evidently concluding that trying to alter the state’s promise of free health benefits for life after 25 years of service would have little chance of standing up in court.

However, Christie did require retirees to join current employees in participating in any changes in copays, deductibles or modifications in health care plans that may be enacted.

‘Shared Sacrifice’

New Jersey’s public employee unions charged that Christie’s requirement for “shared sacrifice” by current employees and retirees is a direct result of the well-documented failure of the state to make payments to the pension system over the past 15 years — a failure that was covered up by a succession of governors and state treasurers, according to a fraud suit brought by the Securities and Exchange Commission.

“The state PBA has for nearly a decade argued that the lack of government accountability and pension contributions would lead to this day,” Anthony Wieners, President of the New Jersey State Patrolmen’s Benevolent Association, asserted. “The state and local governments have kicked the can to the end of the road and, as we have feared, law enforcement officers have become the scapegoat for years of government’s mismanagement of the pension system.

“Pensions are a promise and PBA members have lived up to their end of the promise by making our pension contributions. The state and local governments must do the same if we are to have an honest discussion about preserving our pensions for the future,” Wieners said.

Barbara Keshishian, President of the New Jersey Education Association, agreed: “For much of the last decade and a half, the state of New Jersey has failed to make any contributions to the pension funds, allowing a large deficit to grow. Over that same period, teachers and other school employees contributed billions of their own money into the funds, and even increased their contributions in a good faith effort to stabilize the pension funds.

“It’s impossible to take seriously the governor’s claims that he is trying to reform pensions while perpetuating the greatest abuse of all — the absolute failure of the state to do its part, even as public employees have paid their share of pension costs out of every paycheck,” the NJEA president concluded.