State Treasurer Andrew Sidamon-Eristoff will face questions from the Assembly Budget Committee next week about the Christie administration’s decision to change the funding formula for the state’s pension contribution in order to cancel $93.7 million in previously budgeted pension payments due in June and cut next year’s pension bill by $150 million.
Assembly Budget Committee Chairman Gary Schaer (D-Passaic) expressed concern about the cancellation of more than $240 million in expected pension payments to help balance this year’s and next year’s budgets. He said Gov. Chris Christie’s decision to pay $2.25 billion into the pension system in Fiscal Year 2015 — rather than the expected $2.5 billion — was “very disappointing.”
Joseph Perone, Treasury’s communications director, countered that even with the reductions, “this year’s pension contribution is the largest in New Jersey history,” and that the Christie administration’s $5.3 billion in total pension payments are “more than twice the $2.4 billion put in by all governors combined in the prior 10 years.”
Perone defended the change in pension methodology as “an opportunity to achieve savings for state and local taxpayers.” In fact, the two-year $269 million reduction in pension contributions for local governments is larger than the state budget savings, and “can be used for property tax relief, which is a tenet of this administration.”
However, Anthony Wieners, president of New Jersey’s largest police union, sharply criticized Christie’s decision to reduce state and local government pension payments when public employees are paying more toward their pensions and retirees are going without cost-of-living increases as a result of the 2011 pension overhaul.
“For the last two years the state PBA has been expressing our outrage that excess funds generated by extra employee costs and COLA reductions from Chapter 78 have been inappropriately returned to the state and local government by way of cut employer contributions,” Wieners said. “The investigative reporting by NJ Spotlight highlights that the governor is more than willing to play fast and loose with the future of the pension fund and that our complaints about his mismanagement of the system have been right all along.”
The pension changes were a hot topic in public employee union circles yesterday, and the New Jersey Education Association scheduled a meeting with its actuary this morning, recognizing that a return to the higher pension funding formula would require further cuts in a budget that was able to increase school aid by just $20 a child.
NJ Spotlight reported earlier this week that Christie’s solution for this year’s $800 million budget gap — the third year in a row that revenue forecasts have failed to meet projections — included a change in the state’s pension contribution formula that enabled the governor to make a $93.7 million retroactive cut in the $1.676 billion pension payment due under the budget the governor signed into law last June.
The pension formula change also enabled Christie to lower the expected pension payment for the upcoming fiscal year from $2.4 billion to $2.25 billion, and would enable him to put $900 million less into the pension system over the next four years.
In his February 25 budget speech, Christie announced that the state’s pension contribution would be a lower-than-expected $2.25 billion and that local governments would save $135 million on their pension payments, but he attributed the savings to higher-than-expected investment earnings and other initiatives.
The change in the pension formula was buried in the actuarial reports on the various state pension funds that were issued two days later, and it was not until Sidamon-Eristoff released his list of $694 million in current-year budget cuts that Democratic legislators and other fiscal experts realized that Christie was making a retroactive cut in the agreed-upon FY2014 pension payment.
“Did the administration ever come out and say, ‘This is what we’re doing?’ No. Did we eventually put the pieces together? Yes,” said a perturbed Schaer, who succeeded new Assembly Speaker Vincent Prieto (D-Hudson) as chairman of the Assembly Budget Committee. “Having served in the Legislature for the past eight years, and most especially the last five years, nothing surprises me. I can say with certainty that this issue will be brought up when the treasurer comes in to testify” on April 2.
The reason for the cuts in the expected pension contributions also came as a surprise to union leaders, who learned of them when they received the actuarial reports.
Christie had already included both the retroactive $93.7 million cut in his FY14 budget solution and the $150 million reduction in his FY15 budget when the actuarial reports went to the various state pension boards, which include union representatives, for acceptance earlier this month.
“The governor’s spokesman’s statement that the PBA “voted for” the change in pension methodology is yet another lie passed along from Trenton,” said Wieners, president of the state PBA, whose union has two representatives on the Police and Fire Retirement System Board.
“The truth is that the PFRS Pension Board does not “vote” to approve any actuarial method. The Pension Board is given the report and only votes to acknowledge receipt of it. The PFRS Board of Trustees has no control over what assumptions the actuary uses,” said Wieners, who is not a PFRS board member.
Perone, the Treasury Department spokesman, asserted, however, that union representatives “do have a choice. They could have decided not to accept it, but they chose not to.” He noted that Marty Barrett, a PFRS retiree representative, spoke against the actuarial report and ultimately voted against it, but that the actuarial reports were “accepted” by the PFRS, Public Employees Retirement System, Teachers’ Pension and Annuity Fund, and State Police Retirement System boards.
The current pension funding controversy stems from the 2011 law that Christie and Senate President Stephen Sweeney (D-Gloucester) teamed up to pass to bail out a state pension system that was in danger of collapse after 15 years of Democratic and Republican governors skipping billions of dollars in pension payments.
The new law gave the state seven years to ramp up to the full actuarially required pension contribution needed to make the system solvent — a decision that meant that the state government’s unfunded liability would continue to grow during that period. Christie projected it would hit $54 billion by FY2018, the year the phase-in would be complete.
Therefore, officials decided that its actuarial payment would be determined as if public employees were still contributing to their pensions at the old rate of 5.5 percent for teachers and state and local government workers and 8.5 percent for uniformed public safety personnel — rather than the new employee contribution rates of 6.5 percent and 10 percent.
As Milliman, the actuarial firm for the Teachers’ Pension and Annuity Fund (TPAF), explained in its February 27 report, “When Chapter 78 was passed, it was our understanding that the additional member contributions in excess of 5.5 percent would serve to reduce the unfunded actuarial accrued liability rather than serve as a direct offset” to reduce the size of the state’s pension contribution.
That understanding remained in effect as Milliman and the other pension funds’ actuaries prepared their FY2012, FY2013, and FY2014 reports, but it changed this year.
“A decision was made this year to follow standard actuarial practice in using employee contributions to offset employer contributions to the pension system,” Perone said. “That resulted in a reduction in the actuarially recommended contribution amount for the state and its local partners in fiscal 2014 and 2015. The law does not prohibit the use of this methodology, and it is a standard practice in the industry.”
“There was no violation of any agreement, either explicit or informal, with the Legislature,” he said. “This methodology was analyzed by actuarial consultants.”
Perone said the “change in methodology has a minor effect on the funded ratio over decades and we feel that the savings in payment for the state and locals is justified.”
However, Milliman warned that over a 30-year period, the change in the pension formula would increase the state’s unfunded pension ratio by 10 percent. The New Jersey state government’s unfunded pension liability was $37 billion as of July 1, 2013, according to Treasury spokesman Christopher Santarelli, and the combined state and local government unfunded liability was $51 billion as of that date.
“The governor’s office can spin their reduced contributions to the pension system however they like,” said Wieners. “What is clear from a review of the facts and the numbers is that the state and local governments are not paying their fair share into the pension system once again. Reducing employer contributions by relying on increased employee costs is what got us into this mess in the first place.
“It is sad that after all of the Governor’s boasting that he only wanted to save the pension system through Chapter 78 that it is becoming more plain that his underfunding is doing the exact opposite,” the police union leader said.
Christie signaled in his January State of the State speech that he was looking for ways to reduce the projected $600 million annual increase in pension costs needed to ramp up to the full actuarially required level of at least $4.2 billion to $4.5 billion by FY2018, which would be the Republican governor’s last budget. The change in the pension funding formula is expected to reduce that final-year figure by at least $260 million to $300 million.
However, Christie already had calculated in the new pension methodology when he threatened to take “extreme measures” if the Democratic-controlled Legislature did not come up with additional cost savings, presumably by requiring public employees to pay more toward their pensions. The governor warned that the rising cost of pensions, retiree health benefits, and debt service was eating up 94 percent of the revenue increase in the FY2015 budget, leaving little money for other budget priorities.
The strain on the state budget of meeting those pension, retiree health benefit and debt-service costs, coupled with the expected rise in New Jersey’s unfunded pension liabilities, were among the main reasons cited by Fitch’s Ratings last Friday when it followed the lead of Moody’s and Standard & Poor’s in revising the state’s rating outlook from “stable” to “negative.”
While Fitch’s did not downgrade New Jersey’s AA- bond rating, it warned that the state’s “long-term liabilities are considerable. Above-average state debt obligations are compounded by significant and growing funding needs for the state’s unfunded retirement liabilities. Continued pension funding-level deterioration is projected through the medium term as full actuarial funding of the required contributions is several years off.”
Fitch’s noted that “New Jersey’s debt levels are high for a U.S. state,” equaling 7.6 percent of 2012 personal income – almost three times the 2.7 percent national average.
“Unfunded pension liabilities attributable to the state are also well above average,” Fitch’s pointed out. “Unfunded pension liabilities are expected to increase over the next several years absent additional reform measures, as the state continues its plan to phase in full funding of its actuarially required pension contributions (ARC), with four years remaining in its seven-year plan to achieve full funding.”
As of July 1, 2012, Fitch’s said, the state’s Public Employee Retirement System was 49.1 percent funded and the Teachers’ Pension and Annuity Fund 59.3 percent funded.
“While pension and retiree health benefit reforms have been implemented and are expected to slow the growth in liabilities, the state’s seven-year pension contribution phase-in will continue to delay funded ratio improvement in the near term and add stress to the state’s operating budget,” Fitch’s warned.
“On a combined basis, New Jersey’s net tax-supported debt and unfunded pension obligations attributable to the state, as adjusted for a 7 percent return assumption, total 16.2 percent of 2012 personal income, well above the 7 percent median for states rated by Fitch,” the rating agency noted.