Dueling Plans to Fix Public Pension System, One with a ‘Safety Valve’

John Reitmeyer | June 8, 2016 | Budget, Politics
Democrats and unions are cool to Republican O’Scanlon’s offering, which allows governors to skip or skimp on payments if financial projections are off

Sen. Declan O'Scanlon (R-Monmouth)
Democratic leaders want the voters to decide this fall whether the state should make a series of hefty contributions to the underfunded public-employee pension system.

But Assemblyman Declan O’Scanlon (R-Monmouth) wants voters to consider a different pension funding proposal. He claims that his scheme would eliminate the possibility of new tax hikes or drastic cuts to state programs.

Either proposal could end up as a ballot question in November that, if ratified, could become a constitutional amendment.

“This is the start of a dialogue as far as I’m concerned,” said O’Scanlon, while rolling out his plan yesterday during a State House news conference.

Democrats didn’t dismiss his plan outright. But they aren’t likely to go for it, since it doesn’t ban a governor from skipping full pension payments. That’s how the state dug a deep pension-funding hole in the first place.

Union leaders reacted to O’Scanlon yesterday by saying they still favor the plan put forward by Democrats. That plan doesn’t require public employees to accept less generous healthcare coverage in return for more pension funding, which is a key element of O’Scanlon’s proposal and something a group of benefits experts impaneled by Gov. Chris Christie has also called for.

New Jersey’s $71 billion public pension system is more than $40 billion in debt thanks to years of skipped or partial payments made by Christie and a long line of governors from both parties before him. While a 2011 bipartisan reform effort forced employees to pay more into the system, Christie later reneged on a promise to follow a specific ramp-up in the state’s payment schedule.

After the state Supreme Court said last year that only voters could authorize such financial obligations, Senate President Stephen Sweeney (D-Gloucester) and other Democratic legislative leaders proposed putting a new state payment schedule before voters this fall. The Democrats’ proposal called for the state payments to be made on a quarterly basis instead of in a lump sum at the end of the fiscal year, which is the current practice.

To get on the ballot, the Democrats’ proposal needs to be approved with a simple majority twice by the Legislature. The first approval came last year, and legislative leaders are now working toward getting the second and final passage for the measure by the end of this month. It cleared an Assembly committee along party lines earlier this week.

Since the beginning of the year, Christie and business lobbying groups have loudly criticized the Democrats’ proposed amendment, raising questions about how the Democrats’ plan to fund their new ramp-up payment schedule. The opponents argue if voters change the constitution to protect annual pension payments (projected to grow from less than $2 billion now to more than $5 billion in a few years) it could bring on massive tax increases or spending reductions.

But the sponsors of the Democratic proposal maintain that normal growth in the state economy, along with new revenues from an expanded state Transportation Trust Fund and new casinos possibly opening in North Jersey, could produce enough cash to fund the larger pension contributions each year without disrupting services or requiring taxes to go up.

O’Scanlon said yesterday that his pension funding proposal addresses both affordability issues and concerns about tax hikes or program cuts. While his plan also calls for increased contributions into the pension system that would be required via a constitutional amendment, it features a key difference from the Democrats’ plan, which would be the establishment of a “safety valve.”

According to O’Scanlon, that “safety valve” would allow governors to reduce the planned pension contributions during years when official state revenue projections were off by at least 1.5 percent, thus ensuring that any misses in the forecasts would not lead to tax hikes or program cuts, he said. “You would be able to suspend pension payments for the amount of the difference.”

But his plan would also force governors to share a portion of unexpected revenue windfalls with the pension system during years when revenue forecasts were at least 0.5 percent ahead, he said. His proposal would not require quarterly payments to be made, something that O’Scanlon said is not feasible since the state collects a good chunk of its revenue only at the end of each fiscal year.

Instead of counting on revenue growth to help fund rising state pension contributions, O’Scanlon’s plan relies on savings the government would get from forcing public workers to accept less generous healthcare plans. Private healthcare exchanges would also be used to trim retiree healthcare costs, he said.
Those reforms and others could generate as much as $2.25 billion in annual savings that in turn could be used to shore up the pension system and likely lead to property tax relief at the local level as well, O’Scanlon said.

If that sounds familiar, it’s because the idea to make government workers accept less costly healthcare plans to fix the state’s pension problem was one of the recommendations made last year by the commission of benefits experts impaneled by Christie. This year that same group came out strongly against the Democrats’ pension funding plan.

Asked why his projections for savings are any more solid than the Democrats’ forecasts, O’Scanlon said he’s relying on reputable actuaries while Democrats are just hoping for growth.

“Those things don’t a policy make, and they don’t pay the bills,” he said.

Christie’s commission of experts recommended freezing the current pension system and moving public workers into a new “cash-balance” retirement plan with some features of a 401(k), but O’Scanlon said that for now he envisages keeping the current pension system in place.

The Christie commission also called for local school boards to take on the costs of retired teacher savings and healthcare coverage, but O’Scanlon’s plan only shifts the retiree healthcare costs onto the local level.

O’Scanlon said he gave public-worker union leaders a heads-up before putting forward his plan yesterday, but none embraced the proposal after it was rolled out.

Hetty Rosenstein, state director of the Communications Workers of America labor union, said O’Scanlon’s “safety valve” would essentially allow governors to continue to reduce the planned state pension contribution whenever there were revenue problems. “That would merely allow them to do what they have done for two decades,” Rosenstein said.
Steve Baker, a spokesman for the New Jersey Education Association, pointed to comments his organization’s president, Wendell Steinhauer, made on Monday while testifying in favor of the Democrats’ pension funding plan.

“The bottom line is, politicians have had 20 years to fix the system, and they have failed,” Baker said. “We are pursuing the solution that the New Jersey Supreme Court pointed to in its decision last year by getting the voters of New Jersey to approve a responsible, sustainable funding plan.”