After vetoing two prior attempts to change the way New Jersey deposits contributions into the state’s public-employee pension system, Gov. Chris Christie has now reversed course, signing a bipartisan bill yesterday that establishes a new quarterly payment schedule.
New Jersey will begin budgeting the quarterly payments at the beginning of the next fiscal year, which starts on July 1, 2017.
The state’s current practice is to make pension contributions in one lump sum at the end of each fiscal year, but that often exposes the payments to midyear budget problems, something that’s helped to drive the pension system deep into debt over the past two decades. The quarterly payment schedule is designed to ensure more of the pension contribution is protected from those budget cuts, and to allow the $73 billion pension system, which is professionally managed, to generate bigger investment returns by getting more money into the system earlier in the fiscal year.
While labor leaders said they ultimately want to see the quarterly schedule go before voters so it could be embedded in the state constitution, Christie and legislative sponsors praised the version that he signed, which still gives the state the flexibility to reduce pension payments during lean years.
The adoption of the new schedule comes about a month after New Jersey suffered its latest credit-rating downgrade, a one-step debt-grade reduction issued by S&P Global Ratings. The major Wall Street rating agency identified the pension system’s huge unfunded liability, which the state measures at $44 billion but others estimate to be much larger, as a major factor leading to the downgrade.
Lawmakers had already tried on two separate occasions to convince Christie that making quarterly payments would help to address the pension system’s funding problem, but he vetoed those efforts, citing concerns about short-term borrowing costs that the state could have to take on at the beginning of each fiscal year to help cover the first installments if sufficient tax revenue isn’t yet available. New Jersey collects most of its tax revenue in the second half of the fiscal year, after sales tax from the holiday shopping season comes in and April income-tax returns are filed.
The legislation that Christie signed yesterday requires the payments to be made by the end of each quarter, not at the beginning as the prior bills had sought, giving the state more time to collect revenue before those bills come due. The measure also calls for any short-term borrowing costs to be covered by the payment itself, not out of the annual budget.
“This compromise legislation provides a budge- neutral approach to funding our state pension obligation each quarter and opens the door for future pension reforms,” Christie’s press secretary, Brian Murray, said in a statement.
Assembly Speaker Vince Prieto (D-Hudson) said the new payment schedule represents progress for a state that has forced public workers in recent years to pay more out of their pockets toward their pensions and then went back on its own promise to follow a strict schedule of increased state contributions.
“Having the state wait until the end of the fiscal year to make one payment is an invitation to skip it, so this will be a common-sense improvement,” Prieto said. “The intent is to ensure the state makes regular payments into the pension system and help ensure the pension payment is not used as the sole budget solution when revenue falls short of projections.”
Wendell Steinhauer, president of the New Jersey Education Association, also praised the bill’s enactment.
“NJEA has long pushed for quarterly payments as a smarter investment strategy and a way to ensure greater fiscal responsibility,” Steinhauer said.
But Hetty Rosenstein, state director of the Communications Workers of America, said government employees would still prefer to see the change made by constitutional amendment, something that would stop future governors and legislatures from shorting even the quarterly bills when they come due.
“Unless the full amount due to the plan is appropriated, quarterly payments are meaningless,” Rosenstein said. “History shows we simply cannot rely on the word of the governor or legislature when it comes to the pension.”