Op-Ed: Consider a Tax Increase to Fix NJ’s Underfunded Public-Worker Pension Systems

Fred Beaver | November 22, 2019 | Opinion
Several other approaches have been suggested — and largely ignored — over the past two decades
Fred Beaver

Over the past 20 years, there have been numerous calls for reforms of New Jersey’s public employees’ pension systems. From Gov. Richard Codey’s reform commission in 2004 chaired by now Gov. Phil Murphy, to Gov. Jon Corzines’s commission in 2006 chaired by Sen. Nick Scutari and Assemblywoman Nellie Pou. And let’s not forget Gov. Chris Christie’s reform commission chaired by Messrs. Tom Byrne and Thomas Healey.

The common theme for those commissions was that their findings were largely ignored by their sponsors.

Since then there have been any number of newspaper articles decrying the state of the pension systems and editorials calling for an end to the “unsustainable” defined-benefit programs, which have allowed public employees to retire with dignity and an assurance that the deferred compensation (pensions) they were promised would be there when needed.

The latest move to radically revamp public-employee benefits is described as the “Path to Progress,” which some would describe as a race to the bottom.

So maybe it’s time for a reality check on these “unsustainable” pension systems and how New Jersey has arrived at the bottom of the “pension barrel” among the 50 states.

For purposes of this discussion, I will focus only on the state’s failures in meeting its obligations to the major systems: public employees (PERS), teachers (TPAF) and police and firefighters (PFRS). There are several smaller systems that have experienced similar underfunding but on a far smaller level.

Dramatic drop

In 2001, PERS was funded at 115.6% of projected obligations, TPAF at 108.% and PFRS at 108.9%. Today these same funds are at 31.7%, 40.7%, and 33.8% respectively. And please note that I have removed the sham value of the Lottery “asset,” which, while directing annual earnings to the pension systems, is not a true asset since the period dedicated to the pension systems is limited to 30 years. As such, the actuaries don’t recognize it as they do other assets and now report two sets of numbers. One set has all true system assets and the second records the “special Lottery asset.”

During this same period, the state’s normal costs, that is, the annual additional accrued cost for another year of service for covered active employees (which are the same whether or not there is a surplus or shortfall) for these same funds changed as shown in the accompanying table:

A quick note: TPAF in 2001 included the cost of retiree health benefits and PFRS does not reflect the fact that the state does not pay employer Social Security and Medicare contributions of 7.65% for those enrolled in PFRS.

So, what exactly is the problem? Is the rate of 2.116% “unsustainable” when the average private employer is contributing 3% to their employees’ 401(k) plans? Both figures reflect only direct contributions. All administrative costs are typically derived from total plan assets.

What caused such a dramatic drop in plan assets? While the plans have failed to meet earning performance goals in many years since 2001, the bigger problem has been the failure of the state to make its required contributions.

Since 2001, PFRS received state contributions of only $1.03 billion against Annual Required Contributions (ARC) of $3.42 billion. Contributions to PERS were $1.5 billion against an ARC of more than $7.6 billion. The TPAF shortfall is even more egregious!

Monies that are ‘due and payable’

How would the state have paid into an employee’s 401(k) — one of the suggested replacements for the current system — when it could not make even the most basic payments into defined benefit plans, which are not overly generous to those fortunate enough to make it to retirement?

The tax payers of New Jersey, and the public employees covered by these pension systems, also need to be aware that none of the proposed solutions address the billions of dollars of Unfunded Accrued Liability (UAL) — the current plan deficits or shortages — representing the difference between plan assets and plan obligations. These balances do not just disappear if changes are made. These are monies due and payable to the funds regardless of state finances or whatever solutions might be implemented.

What’s the answer? If the state can impose an increase in the gas tax to pay for infrastructure improvements, then maybe we need to consider the real infrastructure that keeps New Jersey running on a day-to-day, year-in, year-out basis — its public employees, teachers, police officers and firefighters — and fund their promised pension plans accordingly.

And before we hear the call that the pensions should be eliminated as they have been in the private sector, the public should be reminded that those did not disappear because they were too rich and unaffordable. They disappeared when corporate raiders learned they could close the plans and scoop up the excess assets to help finance their acquisitions and doomed private-sector employees to uncertainty over stable retirement expectations.