A proposal to move some state and local employees to a new 401(k)-like pension system is gaining support because it has the potential to save billions of dollars. But long before anything is adopted, it’s likely to draw strenuous pushback from the public workers’ powerful unions.
The recommendation is to move new hires and employees with less than five years of service out of the troubled defined-benefit pension system. It’s one of the many outcomes of a Legislature-led working group of fiscal policy experts gathered by Senate President Steve Sweeney last summer. Out of all its proposals, the panel singled out this move as the one to save the most dollars.
Such a move would substantially change the way public workers earn pension benefits and would find money to increase spending on education and infrastructure. It could also provide relief at the local level, where the retirement benefits of municipal-government employees are primarily funded through property taxes.
The last major effort at reform was launched in 2011 and drew mass protests from public employees. Still, Senate President Steve Sweeney — who is now the leading proponent of the panel’s findings — is trying to tap into public frustration with high taxes to get the new pension proposal to the finish line.
‘We have to convince the public’
“The way we’re going to accomplish this is by getting the public engaged,” Sweeney (D-Gloucester) said during a forum on pension funding that was held at Monmouth University on Friday.
“We have to convince the public that there’s hope that you can fix this,” he said.
In all, the pension system covers the retirements of nearly 800,000 current and retired public employees in New Jersey. While some of the individual funds for different worker groups are in better shape than others, the system itself has an unfunded liability estimated at $115 billion, making it one of the worst-funded state-retirement plans in the country. The size of the unfunded liability also dwarfs the current state budget, which totals $37.4 billion.
While some benefits changes were enacted in 2011 after Sweeney worked with then-Republican Gov. Chris Christie to adopt bipartisan reforms, that effort was not as effective as originally designed because Christie did not follow an aggressive schedule of state pension payments. Instead he opted for a more gradual ramp up that is now being followed by Gov. Phil Murphy, who took office earlier this year. The result is it will take several years before a full state pension contribution is made, meaning the hole will keep getting deeper even as contributions are increased.
“This year, we did appropriate $3.2 billion for pensions, (but) it should have been much higher. By the year 2023, not too long from now, we’ll need to put $7.1 billion into the budget,” said Richard Keevey, one of the experts who served on the fiscal policy panel. (Keevey, a former state budget official, is also an NJ Spotlight columnist and contributor.)
Looking for breathing room
In order to provide some breathing room, a major recommendation included in the fiscal-policy report, released in August, calls for diverting younger workers out of the traditional pension plan and into a proposed defined-contribution retirement system. While prior reform initiatives called for a freezing of the existing pension system altogether for all workers, Keevey called the group’s final recommendation a “more benign option” that keeps pension benefits for existing, vested workers unchanged.
The group’s recommendation still provides a way to change the curve instead of digging the pension deficit deeper, with the added benefit of helping local governments that pay for the pension benefits of their own retired workers — including police officers and firefighters — largely via property taxes, Keevey said.
But, just as worker unions loudly opposed Christie when he sought to adopt benefits changes in 2015, the proposals are already getting pushback from labor. For example, the New Jersey Education Association, the state’s largest teachers union, has labeled the group’s findings — which include plans to reduce the quality of public workers’ healthcare coverage to save more taxpayer money — “unfair, unreasonable and unconscionable.”
During the panel discussion at Monmouth, Gordon MacInnes, president and chief executive of New Jersey Policy Perspective, a progressive think tank, suggested public workers have good reason to be upset when politicians like Sweeney propose cutting their pension and health benefits. He said the main source of the pension-funding problem is the state’s long history under governors of both parties of not making a full, actuarially-required pension contribution even as the workers themselves have been making legally-mandated employee contributions the whole time.
The employees didn’t cause this problem
“The problem was not caused by the half of the funding stream that comes from the employees,” MacInnes said. “It was created exclusively from the portion funded by the employer.”
Not mentioned at all in the discussion were the tax cuts, enacted during Christie’s tenure, that have taken billions of dollars out of the state’s revenue stream. Those cuts, including a reduced sales tax and the elimination of the estate tax, were supposed to jumpstart the state economy and boost revenue. But gross domestic-product growth remains sluggish, and the latest state budget envisages the revenue base increasing by only about 1 percent outside of tax increases and other fiscal-policy changes that were enacted by Murphy in July.
Still, Peter Reinhart, another member of the fiscal-policy group, suggested the state must strike a balance on taxes or it risks chasing away the types of businesses that are needed to maintain a strong state economy.
“We’ve got to become the state where businesses say, ‘You know, that state is getting its acting together. They’re addressing their fiscal-health issues,’” said Reinhart, who serves as director of Monmouth’s Kislak Real Estate Institute. (Reinhart is also a member of NJ Spotlight’s governing board.)
Sweeney said the pension-funding problem has become too large for a “one-sided fix” involving only tax increases.
“We do not have a money problem, we have a spending problem, and it has to be addressed now,” Sweeney said.