Cops, Firefighters Could Pull Pensions from NJ Public-Employee System

Striking out on their own could give these public employees more control over how assets are managed, better protection from pension-system reforms

While New Jersey’s public-employee pension system was recently ranked the worst-funded state retirement plan in the country, the individual fund for police officers and firefighters is not in such rough shape, a fact that often gets overlooked in the ongoing debate about pension reform.

In fact, at 70 percent funded, the Police and Firemen’s Retirement System of New Jersey is much closer to the standard of being 80 percent funded than the overall pension system, which is only 56.5 percent funded, according to the latest official actuarial reports.

Now, state lawmakers are considering breaking out management of PFRS from the broader retirement system in a move that sponsors say would give the officers and firefighters more control over how their retirement savings are invested, while at the same time insulating their assets against any larger pension-reform proposal that could indirectly punish workers in better-funded accounts.

A bipartisan bill that would transfer the management of PFRS away from the state to its own board of trustees passed the Senate unanimously earlier this week.

The legislation has enjoyed strong backing from some of the largest unions representing police officers and firefighters, but the labor support has not been unanimous. Concerns have been raised by some union officials about the logistics of making the change, which would also involve removing PFRS from the broader $72 billion pension system. The makeup of the new board of trustees has also been questioned, including by representatives of local governments who are concerned that the unions will have a louder voice than the employers.

Seven different funds

In all, the state pension system is made up of seven different accounts, with each one funded at different rates. The retirement account for judges is in the worst shape, funded at only 36 percent, followed by the teachers’ retirement system, which is funded at 47 percent. According to data included in the latest official state debt report, the funds for the judges and teachers could run dry as early as 2022 and 2027, respectively.

By contrast, PFRS is in the best shape of the seven funds, with enough assets to cover liabilities through 2045, according to the debt report.

Part of the reason for the difference in funding levels is that the state covers the employer contributions that are made into the retirement systems for the judges and teachers, while the PFRS employer contributions are generally made by local governments. Under the New Jersey constitution, the state is allowed to short its pension contribution, and the current state budget funds only about 40 percent of the its full pension obligation. And even though Gov. Chris Christie has proposed a record, $2.5 billion pension payment be made during the upcoming 2018 fiscal year, that would still represent only half of the amount that actuaries say the state should be contributing.

By contrast, county and municipal governments are generally required by state law to pay their full employer pension contribution.

Lackluster returns

Union officials say they’ve been exploring the idea of transferring management of PFRS away from the state for the past several years. Their effort comes as they’ve grown frustrated by returns in recent years achieved by the state Division of Investment under policies set by the New Jersey State Investment Council.

Concerns have also been raised about a reliance on investments in hedge funds and other so-called alternative investments that require fees to be paid to outside fund managers. Those fees went up slightly during the 2016 fiscal year, from $415.6 million to $417 million, even as the overall pension system lost value.

“Quite simply, this is my pension too. “I’m not a trust-fund baby,” said Patrick Colligan, president of the New Jersey State Policemen’s Benevolent Association, during a recent Senate Budget and Appropriations Committee hearing.
Colligan said he’s married to a teacher whose retirement plan is facing a “finish line” that’s unfortunately now in sight.

“We want to protect this pension,” Colligan said of PFRS.

Under new management

Under the bill that passed the Senate on Monday, the 12-member PFRS board would take over management of PFRS from the state, hiring its own executive director, actuary, chief investment officer, and ombudsman.

Membership of the PFRS board of trustees would include three active police officers and three active firefighters. The four unions representing police officers and firefighters would also each choose trustees. Active police officers and active firefighters would also elect representatives to fill the two remaining trustee slots.

Five trustees would also be appointed by the governor, with the requirement being that four would either currently hold or have held public office or a position in county or municipal government like administrator or chief financial officer. One of the five gubernatorial appointees would also be required to hold or have held a high-level position in state government.

Current PFRS retirees would also get to choose a trustee to represent their interests.

But Michael Darcy, executive director of the New Jersey State League of Municipalities, raised concerns about how the board would be made up, especially since local governments contribute to PFRS at a greater percentage than the workers do right now.

“That puts employers in a very difficult situation while they’re still shouldering a major portion of the burden of funding the pension fund,” Darcy said.

Dominick Marino, president of the Professional Firefighters Association of New Jersey, said his organization right now is not supporting the bill. He cited concerns about compliance with federal IRS rules and other technical issues raised in research conducted by the union’s attorney as reasons to stall the bill’s advancement.

“To change the system with the current uncertainty of the future does not seem rational to us,” Marino said.

Because it is smaller, Marino’s union is also likely to have less overall clout on the board than the bigger New Jersey State Firefighters Mutual Benevolent Association and Colligan’s police union. That was an issue raised by Eric Richard, legislative affairs coordinator for the AFL-CIO.
“This board is going to have a built-in prejudice,” said Richard, who is also a member of the State Investment Council.

But after the bill passed the Senate on Monday, Senate President Stephen Sweeney (D-Gloucester) said the proposed change would better align the management of the pension system with how private-sector unions handle their retirement accounts. Sweeney, a primary sponsor of the bill, is a high-ranking official with a private-sector trade union.

“It’s a matter of enlightened self-interest for people who have skin in the game,” Sweeney said. “When it’s your own money, you take the responsibility very seriously.”

Senate Minority Leader Tom Kean Jr., another primary sponsor, also credited the union officials for thoroughly researching the issue of managing their own retirement system. That means they will know “what works and what doesn’t,” said Kean (R-Union).
“I have no doubt that they have the best interests of all their members at heart,” he said.