Pension Payments: Good News for Local Governments Overshadowed by Latest State Data

John Reitmeyer | September 30, 2019 | Budget
Municipal pension contributions will hold steady into 2020, but local-government officials concerned about latest Wall Street report on state pension system
Credit: Township of West Orange
West Orange Town Hall

Although local-government pension bills will essentially hold flat in the current fiscal year, that good news has been tempered by the release of yet another report labeling the overall state pension system the worst-funded in the nation.

The rare positive news for local-government leaders came with the release of up-to-date figures by the state Department of Treasury at a meeting of the State Investment Council last week. The year-over-year stability marks a turnaround since the employer pension contribution rates for local governments have increased by as much as 8 percent in some recent years, Treasury officials said.

“It’s a good outcome in the short-term, but we can’t spike the ball,” said Michael Cerra, assistant executive director of the New Jersey State League of Municipalities.

Dampening any excessive satisfaction, the latest 50-state pension study issued on Friday by S&P Global Ratings, a top Wall Street credit-rating firm, listed New Jersey dead last in the category of pension funding. Moreover, local officials warn that the overall condition of the pension system remains a big area of concern despite the modest relief they are enjoying in FY2020.

Several factors are being credited with the improvement in the municipal numbers, including strong investment returns that state pension-fund managers generated in FY2018.

Required to make full contributions

In addition, local governments — which rely heavily on property taxes as a main revenue source — in recent years have been making the full actuarially-required pension contributions into the funds that cover their respective employees’ retirements. That record stands in stark contrast to the state itself, which has been underfunding full state pension payment for years, including throughout Gov. Phil Murphy’s tenure.

The $75.6 billion state pension system is made up of seven different retirement funds, representing employee groups like teachers, judges, police officers and firefighters. While the overall pension system is the nation’s worst-funded, some of the funds within the system are in better shape than others; among the better funded are those for local-government workers (PERS), and police officers and firefighters.

Public-worker pension benefits are funded in New Jersey with contributions made by both employees and their employers, along with revenue derived from long-term investments. Local-government contributions are required annually under a formula established in state law. And unlike the state government itself, the local governments generally aren’t allowed to short their annual payments. (During the Great Recession, a state law was passed to allow local governments to temporarily defer a portion of their pension contributions to help cushion the blow of the downturn and prevent massive property-tax hikes.)

For FY2020 (which covers parts of the 2019 and 2020 calendar years), the average employer-pension bill for PERS will drop slightly, from 14.1% this year to 13.7% in 2020, according to Treasury. The average bill for PFRS will inch up slightly, from 29.5% in 2019 to 29.8% in 2020, Treasury said. Local governments make the employer contributions for their respective workers’ retirement funds, and state government covers contributions for state workers. (The state is also on the hook for all public-school teacher employer-pension contributions.)

That year-over-year stability stands in contrast to the combined 8.4% increase that occurred between fiscal years 2018 and 2019; and the 6.8 percent increase that occurred between fiscal years 2017 and 2018, officials said. They’ve also suggested the flat pension-contribution rates combined with the recent announcement that health-insurance premium rates are scheduled to go down next year for many local-government workers should lead to some easing of the pressure on the state’s ever-rising property-tax bills.

“It shows up in lower property taxes as municipalities spend less money on pension and health benefits,” assistant state Treasurer Dini Ajmani said during last week’s meeting of the State Investment Council.

Good investment gains in 2018

Among the reasons for the stability are investment gains the pension system enjoyed during fiscal year 2018, when returns rose above 9%, easily beating the system’s assumed rate of return of 7.5 percent. The Murphy administration’s decision to raise the assumed rate after it had been aggressively lowered during the tenure of former Gov. Chris Christie also played a role, Ajmani said. Stronger investment gains generate more revenue for the pension funds, easing how much must come in from the employer contributions. Likewise, assuming higher returns will be generated over the long-term has the same effect on the actuarial calculations for the pension funds.

Another important factor is the better condition of PERS and PFRS as local governments have continued to make the full annual contributions required under state law. By contrast, governors and lawmakers have a long history of shorting the state’s annual employer pension obligation — which the state constitution allows — in order to maintain a balanced budget. The result is that the retirement funds that rely the most on state funding — including those for judges (JRS) and teachers (TPAF) — are in much worse shape than PERS and PFRS, according to the latest statements issued by Treasury for a recent bond sale.

Meanwhile, the New Jersey pension system’s overall funded ratio of 38.4%, measured at the end of FY2018, ranked dead last among peers in the 50-state study that S&P Global Rating issued on Friday. Illinois was the only other state to have a funded ratio below 40%.

Local-government officials continue to be concerned about the long-term health of both the state pension and employee health-benefits systems even though their own stable pension-contribution rates will “help the bottom line” for local budgets in the short-term, Cerra said.

“It doesn’t change the fact that we have a major structural problem that needs to be addressed,” he said.

Murphy has stuck with Christie’s incremental plan

While some lawmakers, including Senate President Steve Sweeney (D-Gloucester) have been calling for dramatic reform, Murphy, a first-term Democrat, has thus far stuck to an incremental state pension-funding ramp-up plan that Republican Christie first established. In fact, the current state budget calls for a pension contribution worth roughly 70% of what actuarial calculations suggest the state should be paying in FY2020 to eventually restore the retirement funds to good health. Under the current ramp-up, the state won’t fully fund the pension contribution until FY2023, meaning the hole will continue to get deeper.

Assemblyman Ned Thomson (R-Monmouth) said the pension system’s most recent investment returns are another cause for concern. Net gains totaled 6.27% during FY2019, falling below the 7.5% assumed rate. Thomson, who is an actuary, also faulted the Murphy administration for continuing to short the state’s required contribution.

“There comes a point in time in actuarial mathematics at which you can’t recover, and we’re getting real close,” Thomson said in a news release. “Unless we fully fund our pension liability immediately and grow our revenue streams to improve New Jersey’s economy, which neither are being done at this time, then we keep going down that rabbit hole and we will not be able to recover.”