Citing the need to protect both the stability of the state’s pension funds and New Jersey taxpayers, Gov. Phil Murphy on May 10 issued a conditional veto (CV) that proposed a long list of “technical changes” or amendments to an incredibly complex 58-page bill (S-5) that transfers management of the $27 billion Police and Firemen’s Retirement System (PFRS) from the State Investment Council and the Treasury Department to the PFRS board of trustees. Police and fire union chiefs joined the legislative leadership in quickly embracing the changes, which are now certain to become law. Our state’s leading newspaper applauded Murphy for “retooling a terrible bill” and offering “much stronger protections for taxpayers,” and Senator Declan O’Scanlon, the Legislature’s most diligent and effective critic of the original bill, issued a cautious statement saying that the CV appeared to reflect “genuine concern for taxpayers.”
Forgive me for spoiling all the fun, but maybe we should take a closer look before we break into a chorus of “Kumbaya.” The stakes are just too high.
The original bill, which first advanced in the spring of 2017, was indeed “terrible” for a host of reasons too numerous to repeat here. For the sake of clarity, instead of reprising all the serious issues — many of which remain notwithstanding amendments and the CV — let’s focus for now on the most notorious criticism: The original bill gave the 12-member board’s seven union appointees the power to increase pension benefits by simple majority, while leaving local government employers (hence local taxpayers) effectively on the hook for any funding shortfalls.
Although subsequent amendments required a supermajority of at least eight votes to increase employer contributions or enhance benefits, including a restoration of suspended cost-of-living adjustments (COLAs) for retirees, many observers were still concerned. Given New Jersey’s transactional and strongly pro-union political culture, it is not inconceivable that one of the five ostensibly nonunion appointees (one gubernatorial and four representing local government) might join the uniformed unions in reaching eight votes.
As the centerpiece of his supposed efforts to protect taxpayers, Murphy’s CV conditions the PFRS board’s authority to enhance benefits on obtaining an “actuarial certification” that “demonstrates that such change will not result in an increased employer contribution in the current year and that such change will not impact the long term (sic) viability of the (pension) fund.”
Does this actuarial certification really provide meaningful protection for taxpayers? Not so much. Here’s why:
First, a certification that an increase in benefits “will not result in an increased employer contribution in the current year” is at best vague and at worst utterly meaningless. What about the following and subsequent years? What’s to stop the PFRS board from voting in the current year to increase benefits beginning in the next year? In the real world, pension funding is measured across decades, not year by year. It’s also not entirely clear what the “current year” is for this purpose.
Second, notwithstanding the CV’s assertion that certifying long-term viability is a “statutory safeguard required in every other State pension system,” I was unable find a definition of “long-term viability” anywhere in New Jersey law or, indeed, anything via a Google search that suggests this is a standard recognized or used by the actuarial profession. Presumably, Murphy’s Treasury Department will issue regulations defining this new standard.
Third, it’s worth noting that the CV’s as-yet undefined long-term viability standard replaces the current law’s explicitly defined actuarial funding standard. Current law conditions any increase in benefits, including the restoration of COLAs, on an actuary’s determination that the change will not cause the pension fund to fall below a “target funding ratio” — defined in statute as 80 percent — at any time over the next 30 years. Borrowed from standards developed under the federal Employment Retirement Income Security Act (ERISA), the 80 percent funding ratio is widely regarded as a bare minimum for sound pension funding. The CV’s replacement of the 80 percent target funded ratio with the vague notion of long-term viability begs a series of questions: Will it be possible to define “long-term viability” responsibly without referencing a specific funded ratio? I have my doubts. Would a truly independent actuary be prepared to certify that a funded ratio of less than 80 percent is “viable” over the long term? Again, I have my doubts. Let’s get real: Why bother changing the law unless the motive is to weaken, rather than strengthen, existing pension-funding standards?
Fourth, the CV’s actuarial certification requirement doesn’t remove or override the bill’s critically important “trapdoor,” namely that it gives eight members of the 12-member PFRS board the power to increase required employer contributions to the system. Of course, increasing employer contributions will always be one way of ensuring long-term viability (regardless of how it is ultimately defined). Thus, so long as just one nonunion appointee goes along, the bill does nothing to prevent the PFRS board from using an increase in employer contributions to fund higher employee benefits. Taxpayers beware.
Finally, and not insignificantly, the CV does not alter a separate provision in the bill that gives the PFRS board the authority to hire its own actuary. Although actuaries are subject to professional standards for independence and objectivity, there must be a reason why the unions pushing the bill have insisted on hiring their own actuary. Use your imagination.
In sum, Gov. Murphy’s much-hyped taxpayer protections amount to little more than a leap of faith: that all five nonunion appointees to the PFRS board will always defend the interests of public employers; that the PFRS board will not vote to increase benefits prospectively; that the Murphy administration will produce a credible and objective definition of “long term viability”; that removing the current law’s 80 percent target funded ratio won’t weaken pension-funding standards; that the PFRS board will not use future employer-contribution increases to fund future benefit increases; or that the PFRS’s actuaries will always act independent of their client paymasters.
That’s a lot of faith to place in one “terrible” piece of legislation.