Explainer: The Split Over Making Quarterly Payments to Employee-Pension System

Democrats want to bring the pension payments issue directly to the people with a constitutional ballot question, while Republicans argue more payments would force state to borrow

Democratic legislative leaders are hoping to ask voters later this year to approve a constitutional amendment that would require the state for the first time to begin making contributions into the public-employee pension system on a quarterly basis.

Right now, the state makes those contributions in one lump sum at the end of each fiscal year, a practice rooted in the irregular tax-collection trends experienced under New Jersey’s current financial calendar and Gov. Chris Christie’s decision in recent years to maintain budget reserves that equal only a small portion of total spending.

The debate: The state’s ability to overcome those challenges is at the heart of a debate over the proposed constitutional amendment that is expected to play out over the next several months in New Jersey leading up to November, which is when the proposal to require quarterly pension payments is expected to go before voters.

The Democrats, led by Senate President Stephen Sweeney (D-Gloucester), have compared their proposal to a homeowner trying to get ahead on their mortgage. Making quarterly payments would allow the state to capture investment gains throughout the fiscal year, proceeds that could reach over $8 billion over the next three decades, they say.

The quarterly payments, the Democrats maintain, would also better address a $40 billion unfunded liability that has helped to drive down New Jersey’s credit rating to the second-worst among all U.S. states.

But Christie, a second-term Republican, and other GOP leaders are lobbying against the proposed amendment. They say the quarterly payments would force the state to seek unnecessary short-term credit and cover interest costs that are associated with that type of financing. And they want to see employee benefits cut to help make the annual pension payments more affordable.

New Jersey’s fiscal calendar: New Jersey’s current fiscal year calendar begins on July 1 and closes on June 30. And thanks to a heavy reliance on revenue from the income and sales taxes, the state’s tax collections don’t come in equally over the 12 months of the fiscal year.

Instead, a significant portion of the sales-tax revenue is collected after the holiday shopping season, and much of the income tax revenue comes in once returns are processed in April. For example, this year the state has collected nearly $12 billion through the end of December, which is the halfway point of the fiscal year. But that’s only a little more than a third of the total that’s expected to come in by June 30.

Making pension payments on a quarterly basis would mean breaking up the contribution equally into four separate payments. Using the $1.3 billion contribution that Christie has budgeted for the current fiscal year, that would mean four payments of $325 million.

But what if the state doesn’t have that much cash on hand in the first part of the fiscal year, when there are also other bills to cover?

Christie raised that concern in a veto he issued last year in response to a bill that sought to establish the quarterly payment schedule as a matter of law. He said the quarterly payments would force the state to take on “unnecessary intra-year borrowing.”

But Democrats this year are seeking to get around Christie’s veto by going right to the voters. They have argued that interest rates have been at record lows in recent years, meaning the state could borrow the money needed to make the first couple quarterly pension contributions with interest and still enjoy a net gain. State pension-fund managers right now assume a 7.9 percent annual rate of return.

Budget reserves: More money could also be available for the quarterly payments if the Christie administration did a better job of putting aside funds to cushion against any unforeseen revenue shortfalls or unexpected spending needs.

Christie was forced to cut planned payments into the pension system during the 2014 and 2015 fiscal years to help close shortfalls that were brought on after his administration missed revenue projections. And since budget reserves at the time represented only a small fraction of total spending, Christie used the pension contribution that was budgeted for the end of each fiscal year as a de facto rainy day fund.

To offset the shortfalls, instead of hiking taxes or cutting spending elsewhere, Christie simply reduced the planned contribution into the pension system – which added to the already large unfunded liability.

Former Democratic Gov. Jon Corzine chose a similar course as the last recession took hold in the late 2000s.

The cushion in the current fiscal year budget is about $700 million, or roughly 2 percent of total spending. With a larger surplus fund, the quarterly payments could be made while also protecting against shortfalls, the Democrats say.

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