Analysis: Christie Needs Pension Panel for Political and Practical Reasons

Mark J. Magyar | August 11, 2014 | Politics
Governor’s choice to head commission is former Reagan Treasury official who laid out options for cutting pension benefits in 2012 policy paper

Credit: Governor's Office/Tim Larsen
Governor Chris Christie announces the signing of Executive Order 161 to to create the "New Jersey Pension and Health Benefit Commission" at the town hall in Parsippany on Friday, Aug. 1, 2014. Listening in is Parsippany Mayor James Barberio.
Faced with a pension crisis that imperils both future budgets and his presidential ambitions, Gov. Chris Christie once again is turning to a commission to provide policy options and political cover.

This time, the panel is headed by a former Reagan administration official who coauthored a 2012 policy paper that details dramatic ways to cut public employee pension benefits.

For Christie, the need for the newly appointed Pension and Health Benefit Study Commission to provide a credible and comprehensive plan to cut the state’s long-term pension and health benefits liability is arguably more critical than the demands that led to creation of previous panels on gun control (after the Sandy Hook School shootings) and reforms to the NY/NJ Port Authority (in the wake of Bridgegate).

For three years, Christie has touted his 2011 pension and health benefits law to national GOP audiences as his greatest policy triumph and a prime example of his ability to work with Democrats to solve intractable fiscal problems.

But that was before April’s unexpected plunge in state tax revenues led Christie to cut pension benefits by $2.,4 billion, casting doubt on the governor’s assertion that he had put the pension system back on the road to fiscal solvency.

For Christie, the reemergence of New Jersey’s pension crisis poses a political headache as he raises money nationwide as chairman of the Republican Governors Association and prepares to decide whether to pivot immediately into a campaign for the 2016 GOP presidential nomination.

Christie’s executive order creating the commission, and his repeated warnings that retiree liabilities threatened to drive New Jersey into bankruptcy like Detroit. made it clear that Christie would be looking for the commission to focus primarily on recommending cuts or changes in benefits that would bring New Jersey’s public employee plans more closely in line with the private sector.

“It’s time to think out of the box and be prepared to abandon the sacred cows that have long been off limits in reforming our entitlement programs to make them permanently affordable and sustainable,” Christie said in announcing the appointment of the nine-member commission on Friday. “Only by bringing together such a nonpartisan group — none of whom are impeded by special interests — can we truthfully assess the problem, its roots and its potential remedies.”

The governor’s public statements and executive order said nothing about the possibility of raising revenues to meet the state’s past pension obligations, and his decision to exclude “special interests” eliminated the possibility of putting public employee union pension experts or, indeed, anyone concerned with protecting public employee benefits — on the panel.

Thomas J. Healey
Christie’s intention to focus on benefit cuts was underscored by his announcement that the panel would be led by Thomas J. Healey, a former Reagan administration official and Goldman Sachs executive who laid out a series of options for cutting pension benefits for states and cities to consider in a 2012 policy paper he coauthored with Carl Hess, an investment executive and actuary with Towers Watson whom Christie also named to the commission.

The biggest cost-saving recommendation identified by Healey and Hess in their paper for Harvard University’s John F. Kennedy School of Government was to base pension benefits on the average salary earned by an employee over his or her entire career, rather than on an average of the five highest-salary years, as New Jersey currently does. Healey and Hess estimate that this change would cut pension costs – and retiree benefits – by 33 percent for a typical pension system.

Other potential changes outlined by Healey and Hess in their paper, “Underfunded Public Pensions
in the United States: The Size of the Problem, the Obstacles to Reform and the Path Forward,” included:

  • Shifting to a hybrid system combining a traditional pension plan with a 401K-style defined contribution plan, along the lines of the Rhode Island system, which the Christie administration has been considering.
  • Allowing employees to contribute to a supplemental 401K-style “thrift savings plan,” as federal government employees currently do; and
  • Raising employee contributions or reducing pension benefits by reducing the salary multiplier upon which pension benefits are based, which were part of New Jersey’s 2011 pension law, but could also be included in Christie’s next round of proposals.
  • In addition to Healey and Hess, a critical commission appointee is Tom Byrne, a former state Democratic chairman who serves as vice-chair of the State Investment Council that oversees the state’s $80 billion in pension investments. Byrne has worked closely with the council’s chairman, Robert Grady, a top Christie political adviser, and he has been an outspoken advocate in recent years of the need to cut both state and local government spending to make New Jersey more competitive.

    The commission’s only member with New Jersey labor ties is Ken Kunzman, co-counsel for the pension funds of Locals 472 and 172 of the private sector Laborers Union. The Laborers’ powerful vice president, Raymond M. Pocino, backed the 2011 pension law that required public employees to pay more for their pension and health benefits, endorsed Christie for reelection in 2012, and has been reappointed by Christie to both the Port Authority and New Jersey Turnpike Authority boards.

    Other members of the commission — which includes no “politicians,” Christie pointed out –are Raymond Chambers, a prominent Newark philanthropist who supports charter school reforms and contributed the maximum amount to Christie’s reelection campaign; investment executive Leonard W. Davis of SCS Commodities; actuary Ethan Kra, and pension consultants Margaret Berger and Larry Sher.

    Christie has been promising a plan to cut the state’s growing $90 billion unfunded liability for future pension and retiree health benefit costs for months, going all the way back to his February 25 budget address.

    When he announced in May that he would be unable to make $2.4 billion in payments required by a 2011 law he signed requiring a seven-year ramp-up to full actuarially required funding of the state’s pension system, Christie promised to give the Legislature a long-term plan to cut pension and retiree healthcare costs by mid-June – before they had to vote on a budget bill that omitted the required pension funding.

    That self-imposed deadline for a comprehensive plan came and went without comment, and Christie launched a “No Pain, No Gain” summer tour in early July designed to build public support for what were expected to be tough pension and benefit cuts.

    Christie promised to unveil that plan by the end of this month and, indeed, Republicans who met with Christie administration officials told NJ Spotlight that the plan was almost finished and would be unveiled either in late August or early September.

    “Obviously, whatever plan Treasury came up with didn’t meet the governor’s political needs,” said one Republican who asked not to be identified. “That’s when he decided to go to a commission.

    “This issue is more difficult and complex than I expected it would be,” Christie said in Parsippany on August 2 after signing the executive order creating the commission. “I came to the conclusion that I wanted outside help to come and give me some advice before I made a proposal. It’s no more complicated than that.”

    Christie’s executive order said the commission would use the research compiled by Treasury on various policy options and pension and benefit changes adopted by other states, but Christie’s assertion that he had just discovered how difficult it would be to cut pension and health benefit costs was surprising, given his focus on the issue during his four-and-a-half years in office.

    It isn’t complicated, Senate President Stephen Sweeney (D-Gloucester) and Assembly Speaker Vincent Prieto (D-Hudson) asserted: If the governor had kept his promise to ramp up to full actuarially required funding by FY18, as required by the 2011 law – instead of cutting state pension contributions from $1.6 billion to $694 million in FY14 and from $2.25 billion to $681 million in FY15 – the state’s pension problem would have been solved. After reaching a projected $4.8 billion in FY18, the state’s annual pension contributions would rise modestly and eventually level out.

    Because of Christie’s decision to slash pension funding in the wake of the state’s unexpected revenue shortfall — and his refusal to consider Sweeney’s and Prieto’s push for a millionaire’s tax and corporate tax surcharges to put the state back on its pension payment schedule – Christie’s pension commission is going to have to develop a new plan to pay down the unfunded liability.

    Healey and Hess know this well: “There must be a ‘catch-up’ mechanism for costs not met,” they wrote in their 2012 paper.

    The question is how long the commission plans to give the state to catch up.

    “Without the hit that revenues took in April, Christie might have gotten there,” said one tax policy expert who asked not to be identified. “The seven-year schedule to get back to the full actuarially required payment may have been too aggressive. We may need to start the clock again, and maybe we should give ourselves 12 years to ramp up to full funding this time.”

    What could make the pension issue really complicated for Christie, his tax policy commission and the Legislature are two pension cases currently being decided in state Superior Court.

    In a ruling issued just five days before the June 30 deadline for the enactment of a balanced budget, Superior Court Judge Mary Jacobson allowed Christie’s $900 million pension cut for FY14 to stand on the basis of fiscal emergency. But Jacobson also indicated that the state may have a contractual obligation under the 2011 law to make the full $2.25 billion contribution for FY15 by next June 30 – which is the point of a revised lawsuit by the state’s public employee unions. Such a ruling by Jacobson would create an immediate budget crisis.

    Meanwhile, an Appellate Division panel ruled the following day that the 2011 law’s elimination of $74 billion in future cost-of-living benefits for retirees violated a contractual obligation. The appeals panel ordered a full Superior Court trial that union leaders hope will require the restoration of three years of cost-of-living cuts and the restoration of future benefits. Such a decision would add billions to the state’s unfunded pension liability, which will rise from $38 billion to $40.4 billion this year as a result of Christie’s most recent pension cuts.

    Because Jacobson already had held oral arguments on the state’s pension-funding obligation under the 2011 law, union legal experts say it is possible that she could issue a quick ruling on FY15 pension funding soon – perhaps in time for its fiscal implications to be taken into account by the pension commission.

    Christie’s executive order requires the pension commission to issue an interim report on its findings within 30 days of the panel’s first organization meetings – which means delivery of the interim report would not occur before mid-September. The governor said he hopes to have the commission’s final recommendations by the end of September, and that he would present a comprehensive plan soon after that.

    In the meantime, Christie is continuing his public relations offensive, heading Thursday to Ocean City, the latest stop on his “No Pain, No Gain” summer campaign to lay the groundwork for pension and benefit cuts.

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