New Report Raises Doubts About Cost of Shifting Teacher Pensions

Rutgers study questions Christie administration claim that having local school districts assume responsibility would be ‘cost-neutral’

Map created by Colleen O’Dea.

Among the sweeping changes to public-employee benefits recommended in a report Gov. Chris Christie embraced earlier this year was a proposal to shift state-funded teacher-pension costs to local school districts.

The idea is for the districts to take on that added expense after saving money by moving employees into less-generous healthcare plans, which was another one of the report’s recommendations.

But there was no detailed breakdown the report to show exactly how the cost-shift would work in a way that the benefits experts who drafted it maintained would be “cost-neutral.”

Yesterday, advocates for school boards and municipalities attempted to fill that information gap, releasing a new study with estimates outlining how much it could cost local school districts — and the homeowners who fund them through their property tax bills — to take on the burden of funding teacher pensions.

For the local officials, the study provided evidence for concern. Local officials have been skeptical that there will be enough savings realized after changing employee healthcare plans to take on the additional costs without raising property tax bills

But defenders of Christie’s report, including the pension expert who led the nonpartisan panel that drafted it, said the new study’s own math shows there is still potential for savings even after the cost-shift.

Christie, a Republican with presidential aspirations, embraced the panel’s recommendations in February as he was facing heavy pressure on the issue of public-employee benefits. It was less than a year before that a major piece of a signature reform effort that Christie signed into law in 2011 fell apart after the state didn’t take in enough tax revenue to fund increased state contributions into the pension system that were designed to reverse years of underfunding.

The new changes proposed by the panel of experts and immediately embraced by Christie included freezing the current pension system and moving employees into a new hybrid retirement plan with features of a 401(k). Public workers would also be moved into less-generous healthcare plans, with the savings being used to pay down the current pension system’s massive debt.

But those savings were also being counted on to be significant enough to also cover the cost of local districts taking on the burdens of paying for retired teachers’ healthcare and funding teacher pensions going forward. And the report envisioned employees and the school districts each making 4 percent contributions toward the new retirement plan.

The study released yesterday by the New Jersey League of Municipalities and the New Jersey School Boards Association indicated that if the school districts take on the 4 percent employer contributions it would increase their costs by an estimated $372.6 million across the state.

And each additional percentage point would add another $93.1 million to the tab, according to the study, which was compiled by Dr. Raphael Caprio, director of Rutgers University’s Bloustein Center for Local Government Research.

For homeowners, every 1 percent of teacher pension cost shifted onto the local districts would translate into the average homeowner statewide paying $28 more annually in taxes. If the contribution ends up being 5 percent, that estimated homeowner impact would jump to $140 more in taxes, according to the study.

Those findings were released yesterday amid an ongoing debate over what the state should do about public-employee benefits following a decision handed down last week by the state Supreme Court in a major pension-funding case that challenged Christie’s decision to reduce the promised state pension payments that were a major part of the 2011 reform effort.

Public-worker unions sued the state, arguing the payments were a contractual right of the employees shielded by constitutional protections, but the high court sided with Christie’s administration in a 5-2 ruling.

Now, Democrats who control the Legislature have sided with the unions in arguing that the pension-funding law should be followed, even if the Supreme Court isn’t requiring the state to do so.

They have called for increasing the income-tax rate on earnings over $1 million to help bring in more revenue.

But Christie and Republican lawmakers have embraced the new changes spelled out in the report issued by the nonpartisan panel of experts, arguing the state simply can’t afford to cover the current cost of employee pensions and health benefits.

Piscataway Mayor Brian C. Wahler, who serves as president of the state League of Municipalities, said the study released yesterday “illustrates in real numbers what the local property tax impact will be shifting the state’s cost to local property taxpayers.”

“Our major concern, and those we believe of property taxpayers, is whether this roadmap is cost-neutral,” Wahler said.
Lawrence S. Feinsod, executive director of the state School Boards Association, said his organization has the same concern.

[related]And not included in the analysis was how the local districts would also take on the estimated $1 billion cost of paying for retired teacher health benefits that’s also called for by Christie’s panel.

“The most critical issue right now is what would happen to educational programs, and local property taxpayers, if school boards are required to take on these new costs today,” Feinsod said.

But Thomas Healey, a pension expert who led Christie’s benefits-review commission, said the new study’s cost estimates came in lower than those used for the report, which bodes well for the commission’s premise that implementing all of the recommendations would ultimately be cost-neutral for homeowners.

“As set forth in our report, there should be no net cost to this shift,” Healey said.

He also said that changing employee healthcare coverage could save the average homeowner up to $800, leaving “far more than enough” room to absorb the estimated added costs from the teacher pensions.

Spokesmen for the state Department of Treasury said they were reviewing the report but did not provide any comment on its findings.