As Gov. Chris Christie calls for unspecified changes to state employee pension programs to restrain their ballooning costs, a new think-tank report on pension reform in four states describes the plan New Jersey enacted in 2011 as “limited” and “less innovative” than those of other states.
The Brookings Institute report released yesterday describes the political dynamics that allowed Christie, a Republican, and Democratic legislators led by Senate President Stephen Sweeney to reach a compromise that boosted teacher pension contributions, raised the retirement age, and made other cost-saving changes in exchange for obligating the state to make its annual payment into the system, which it has rarely done in the past.
As a result, New Jersey is no longer near the top of the list of states with the largest unfunded pension liabilities, a distinction it once shared with Illinois and California, according to the report by Patrick McGuinn, an associate professor of political science at Drew University.
But the report quotes experts who agree with Christie’s remarks on Tuesday that pension costs, along with health benefits and debt, are still consuming most of new state revenues and will continue to grow, leaving little for increased funding of education, public safety, and other important programs.
“The state did not make the kind of structural changes — such as moving to a defined contribution or hybrid plan — that some observers believe are necessary to ensure the sustainability of pension plans over the long-term and better adapt it to the needs of the workforce,” the report says. “There is some debate over whether the state’s reforms should be considered a ‘success story’ or not, and only time will tell.”
Despite the passage of the compromise legislation nearly three years ago, the eight-year phase-in of the state’s pension contribution will still allow its unfunded pension liability to grow to $58 billion by 2019, the report notes. Christie said this week that the unfunded portion is currently $52 billion.
It is unclear if New Jersey will be able to make the required contributions, which will reach $5 billion a year by 2018. The state is also using overoptimistic projections for the growth rate of pension fund investments and lacks a 401(k)-type defined contribution option for employees, which could save money, the report says. In addition, even the limited reforms that were approved remain under legal challenge by state employee unions.
“New Jersey can be viewed both as a positive example of how reforms can be enacted despite the opposition of powerful interests, and the significant barriers to major structural reform,” McGuinn writes.
The report on public employee retirement system reform in Illinois, New Jersey, Rhode Island, and Utah came a day after Christie’s unveiling of a record $34.4 billion state budget that includes next year’s required $2.25 billion unprecedented pension contribution.
Christie had suggested in his State of the State address last month that the money was needed for other programs, and Sweeney threatened to shut down the government if the budget made less than the full payment required under the 2011 law.
In his budget address on Tuesday, the governor praised the pension reforms but repeated his call for more changes, without making any specific proposals. He cited the cautionary tale of Detroit, whose emergency manager in December won a judge’s approval to cut retiree pension payments as the city works through bankruptcy.
“With our long-term obligations only set to increase in the coming years, the problem isn’t going away by itself,” Christie said. “We must do what we were sent here to do by the people — lead and act decisively once again. The reality is that the aggressive reforms we enacted together have only bought us time.”
McGuinn said Christie’s decision to go ahead with next year’s contribution is a good sign for long-term pension reform, but it is difficult to see how the state will be able to come up with the much larger payments required in a few years.
“If $2.25 billion is really hard, $4 to $5 billion is a heck of lot harder,” McGuinn said in an interview yesterday.
“Particularly when we’re talking about a governor that has made a pretty strong no-new-tax pledge, to generate new revenue that might help pay for that, and where we’re in a situation where, as he acknowledged in his budget speech, 94 percent of the new revenue coming into the state this year went to pay three things, pension, health and retirement benefits, and debt. So there’s very little left over already for new investments,” he said.
McGuinn described Christie’s earlier suggestion that the pension money is needed elsewhere as a “shot across the bow” as he prepares to demand deeper pension reforms in the near future.
“It’s reasonable to think that next year, again, as the payment goes up, he’s going to push, in exchange for making that payment, to open up the reform question again. And again, Democrats said they won’t,” McGuinn said. “Somebody or something’s going to have to budge.”
The state reform efforts analyzed in the report include a plan passed in heavily Democratic Illinois last year that in some ways resembles New Jersey’s. It reduces cost-of-living increases for retirees and hikes the retirement age, while committing the state to increasing its pension contributions. However, unlike New Jersey, Illinois is making its full contribution immediately.
As in New Jersey, critics say Illinois’ reforms only delay the state’s fiscal reckoning and do not make needed structural changes, and the plan faces a legal challenge.
Rhode Island, while also a strongly Democratic and heavily unionized state, made reforms described as the most comprehensive in the nation. In 2011, the Democratic governor, Lincoln Chaffee, signed a law that suspended cost-of-living increases for retirees — including current workers — while gradually raising the retirement age to 67 and creating a hybrid plan with a defined benefit element. It is being challenged in court but a tentative settlement is in the works.
The report notes that New Jersey, like Illinois and Rhode Island, is a pro-labor state with a Democratic-controlled Legislature. “Unlike those other two states, however, New Jersey had a Republican governor in office when the reforms were enacted. It thus offers a rare example of bipartisan pension reform,” the report says.
New Jersey is also unusual in that its pension system encompasses all state employees and some municipal workers, covering more than 780,000 employees, the report says. Of the 500,000 current workers, about 200,000 are teachers.
Utah, which is a largely Republican state, was not facing as acute a crisis. A bill approved there in 2010 allows state employees to choose between a 401(k)-style plan or a hybrid and increased the number of years future employees must work before retiring.
McGuinn concludes the report with a list of lessons, including the crucial importance of making the state’s full annual contribution, as New Jersey is still failing to do even under the 2011 reforms. He stresses the need for a credible and visible individual to champion controversial reforms, as Sweeney did, and described the state senate leader as “uniquely positioned and qualified to deliver the message” because of his history as a union leader.
Reformers also need to disseminate data to add urgency to their efforts, educate legislators and the public, avoid turning reform into an ideological issue, demonstrate pensions’ impact on taxes and other spending priorities, and sell the benefits of reform, as Christie did by discussing the risk of pensions disappearing at 38 town hall events, the report says.