NJ Seeks Help from Bankers to Bring Down Public-Worker Pension Costs

John Reitmeyer | January 10, 2017 | Budget
Spokesman says Treasury hopes for ‘new and innovative ideas’ for what is now the worst-funded system in the U.S.

New Jersey is already one of the nation’s most indebted states, and its public-employee pension system, according to one recent estimate, is now the worst-funded state-retirement plan in the country. But the state is also facing even more fiscal trouble thanks in part to nearly $3 billion in pension bonds that were issued two decades ago.

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Annual debt payments tied to a bond issue that was called the “Pension Security Plan” in 1997 are continuing to ramp up and will reach $500 million in the next few years. The state’s annual pension contribution is also set to increase by nearly $600 million when Gov. Chris Christie introduces a new state budget next month.

In the face of that burden and other rising costs tied to retiree benefits, the state Department of Treasury last month issued a formal Request for Proposals from investment-banking institutions looking for their recommendations for “reducing the budgetary burden on the State.”

The request from Christie’s administration forcefully emphasized that New Jersey is not interested in issuing any new pension-obligation bonds like those floated 20 years ago by then-Gov. Christie Whitman. Instead, it appears to be a sort of brainstorming exercise to see what, if any, new ideas the financial community can come up with to help the state deal with its rising retiree-benefit costs.

“The State is performing its due diligence in soliciting potential new and innovative ideas from firms interested in providing investment banking services in connection with the State’s pension obligations,” Treasury spokesman Willem Rijksen said.

Last year, New Jersey ranked as the third-most indebted state in the nation, according to data collected by the Pew Charitable Trusts. New Jersey also ranked third-worst for unfunded retiree-pension obligations and third-worst for retiree-healthcare costs, according to Pew’s “Fiscal 50” data.

A comprehensive review of state pension systems in the United States conducted by Bloomberg in November also determined New Jersey’s pension system had become the nation’s worst funded, falling below both Kentucky and Illinois.

But when it comes to New Jersey’s debt and pension obligations, things are on schedule to get even worse thanks to the 1997 pension bonds. The debt-payment structure for the bonds was backloaded, and the state is approaching the most punishing payments, according to Treasury’s latest official debt report. The payments tied to the pension bonds will rise from about $400 million in the current fiscal year to $500 million in the 2022 fiscal year, and they won’t mature until the 2029 fiscal year.

A report issued last year by New Jersey Policy Perspective, a liberal think tank based in Trenton, put Whitman’s pension bonds on a list of “notorious nine” decisions that have left New Jersey with steep fiscal challenges. But Whitman administration officials have said that her successors deserve blame as well since governors from both parties over the last two decades have contributed to the pension system’s funding problems by not making full payments or even skipping them altogether, as Christie did during his first year in office in 2010.

After Christie in 2014 went back on a 2011 promise to dramatically increase state pension-contributions over a seven-year term in exchange for hiking employee contributions, he’s been following a new, less aggressive contribution schedule to help hold the line on the state’s pension debt, which measures at least $44 billion, according to the state’s calculations, but much higher using other methodology. That means the state pension contribution is set to rise as the debt payments on the 1997 pension bonds are also going up.

The pension payment for the current fiscal year budget totals nearly $1.9 billion, which is a record for New Jersey. If Christie sticks to his latest ramp-up schedule, the payment in the budget the governor is set to introduce next month will increase to about $2.4 billion.

Christie also recently signed into law a bill that won bipartisan support in the Legislature that calls on the state to begin making its pension payments on a quarterly basis starting with the 2018 fiscal year. That means the payment would be broken up into $600 million installments instead of a lump-sum contribution made at the end of the fiscal year. The new payment schedule should 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.

But the request for investment-banking services that was issued last month by Treasury indicates that the Christie administration — which has also tried unsuccessfully to convince lawmakers to adopt new reforms following the benefits changes made in 2011 — remains on the lookout for new ways to further reduce retiree costs.

Among other duties, the request says the state is looking for an investment-banking firm to “advise the State regarding the identification, evaluation, and development of strategies to most effectively and efficiently satisfy its obligations toward its Pension Plans and Other Post-Employment Benefit Obligations.”

It’s unclear how many firms have responded to the request for proposals, and when the state is planning to move forward. Responses were due by December 21, and Treasury has yet to issue a formal selection notice.