Tab for Unfunded Retiree Benefits Pegged at $30,000 per Household

Mark J. Magyar | September 26, 2014 | Politics
Three months after Christie’s pension cuts, governor’s own panel says failure to make pension payments has made problem worse

Thomas J. Healey
A statistic that is likely to become a favorite at Gov. Chris Christie’s town hall meetings comes courtesy of the New Jersey Pension and Health Benefit Study Commission, which yesterday reported that “each of the state’s 3.2 million households would have to write a check today for $12,000” to pay off the state government’s $37 billion unfunded pension liability.

And that’s not the biggest problem: Those same households would have to write another $18,000 check if the state also wanted to pay off the $58 billion unfunded liability in retiree health benefits.

Christie’s pension panel yesterday issued a dispassionate 45-page interim report laying out the causes and magnitude of New Jersey’s pension and health benefits funding crisis, and pointed to a series of potential solutions, including the adoption of hybrid defined-benefit/defined-contribution plans by the federal government and the states of Utah and Rhode Island.

The panel did not criticize the actions of past governors by name: For example, the report noted that “the initiating cause” of the unfunded pension liability “has been elected officials making long-term commitments to provide public employee benefits that would have been affordable only under assumptions that have since proven to be unduly optimistic,” but did not single out former GOP Gov. Donald DiFrancesco’s 9 percent increase in pension payments with no way to pay for it.

However, the bipartisan panel chaired by Thomas J. Healey, a former Reagan administration Treasury official and Goldman Sachs executive, made it clear that Christie shares blame for the depth of the state’s pension crisis.

Three months after Christie cut promised payments into the pension system by $2.4 billion, the panel noted in its 45-page report that “the failure of the State to make required pension contributions when they have been due has made a bad situation much worse.”

In fact, “the specific cause of the $3 billion gap in FY2014 (between the annual cost of benefits and the money allocated to pay for them) is that the State paid less than $700 million of the $3.7 billion it would have had to have paid to meet its statutory annual required contribution to the pension funds for that year” as a result of Christie’s cuts, the panel wrote.

Yesterday’s interim report was the first test of the independence of the commission — appointed entirely by Christie — and Healey stressed that bipartisanship in releasing the report. “We’ve got a group of people who are very smart,” Healey said. “We’re balanced. [The work of the committee] has been enormously apolitical. Which is the goal.”

In fact, the report included a chart showing that Christie underfunded the ever-increasing actuarially required contribution to the pension system needed to cover future liabilities by $14.9 billion over his first five budgets — compared to underfunding of $6.4 billion during Democratic Gov. Jon Corzine’s four budgets.

That doesn’t mean that Democrats and the public employee unions will be pleased with the gist of the report, however.
“There is agreement, widespread and across party lines, of the need to reform public employee benefits and the State’s funding of them,” the panel wrote. “As former Governor Jon Corzine pointed out, ‘on pension and health care issues, our career employees, and the public, must recognize that current benefits are financially unsustainable. Without a dramatic increase in taxes or a draconian reduction in services, State and local government cannot meet the benefit obligations on the books.’”

“As Governor Christie stated in creating this Commission: ‘if we don’t do more, and we don’t do it now, we’ll be forced to choose between funding what matters, or a bloated, unaffordable entitlement system we couldn’t muster the will to fix once and for all.’”

Senate President Stephen Sweeney (D-Gloucester), whose support will be needed in the Democratic-controlled Legislature to pass any pension and health benefits reforms eventually recommended by Christie’s pension commission, dismissed the report.
“The reforms that the governor so frequently praised in the past for restoring the fiscal stability of the pension system were built on the commitment we made and that he is now trying to abandon,” said Sweeney.

Sweeney put his political future on the line when he teamed with Christie to pass the controversial 2011 law that cut cost-of-living increases and required public employees to pay more toward both their pensions and health benefits, but obligated the state to ramp up to full actuarially required funding of the state’s current and future pension liabilities on a set seven-year schedule.

To Sweeney’s chagrin, Christie’s pension cuts abandoned that promise in the third year — a decision that is being challenged in court by the public employee unions.

“This report adds nothing new to what we know about the system and why Gov. Christie should live up to his promise to make his required contribution,” Sweeney declared. “The employees are paying their share, he should do the same.”

The report did introduce a new concern, however, with its acknowledgement that the $37 billion unfunded pension liability may actually be underestimated. Based on the actual market value of the state’s pension assets at the end of 2013, the state’s unfunded pension liability would have been $42 billion.

The panel noted that poor returns on investment in the state’s pension portfolio in the economic downturn of 2000-2002 and the Great Recession of 2008-2009 fueled the growth of the state’s unfunded pension liability. The $37 billion figure assumes that the state Treasury Department will be able to hit an annual 7.9 percent rate of return on its pension investments — and that is not guaranteed.

“While this figure is within the range currently used by other states, the actuaries for the State’s plans have questioned its use going forward,” noted the panel, whose most prominent Democratic member is Tom Byrne, the vice chairman of the State Investment Council that oversees pension investments. “Use of a lower expected rate of return would tend to increase the plans’ unfunded liabilities because the plans’ assets would be assumed to earn less income in future years.

“Given the uncertainty surrounding these factors, the best that can be said is that the State’s unfunded pension liability at the end of FY2013 was likely at least $37 billion,” the report concluded. “By any measure, the amount of the unfunded liability is grievous.”

“To put the severity of this crisis in a national context,” the panel noted, New Jersey’s pension funding ratio of 54 percent ranked the state as “the 4th-worst funded state in the nation” — ranking ahead of only Illinois (39 percent funded), Kentucky (48 percent) and Connecticut (49 percent).

As previously reported, the panel noted that the unfunded liability in retiree health benefits – which New Jersey, like other states, funds on a pay-as-you-go basis — is actually a bigger problem than the pension system with an unfunded liability of $58 billion.

The panel also focused on the cost of benefits for both current employees and retirees enrolled in the State Health Benefits Program.

“The State Health Programs provide generous benefits with little pricing incentive for employees to select anything but plans with the most comprehensive coverage and highest cost to the State,” the panel asserted, pointing out that “over 80% of participants in the State Health Programs are enrolled” in more expensive traditional health benefits plans.

The panel echoed Christie’s warning that the state will be forced to pay a 40 percent health benefits excise tax under President Barack Obama’s Affordable Care Act on more expensive “Cadillac plans” starting in 2018. Unless health plan costs are cut, the panel warned, the cost of the tax for state government employees and retirees would be $58 million in 2018 and would rise to $284 million in 2022.

“Not only are health benefit costs high, but they also are increasing in both absolute terms and as a share of the budget. In FY2014, those expenditures were roughly $2.8 billion after offsetting for employee contributions, or just over 8% of the budget. By 2024, unless cost containment is effected, health care benefits are projected to consume over 14% of the budget,” the report said.

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