Rising pension payments put a strain on county, local governments

Will service cuts, higher property taxes be needed to offset the added financial stress?
Credit: Doug Kerr from Flickr (CC BY-SA 2.0)
File photo: The Town Hall in Cranbury

County and local governments across New Jersey are being hit with as much as a 10% increase in their mandatory employer pension costs even as most are still reeling from the effects of the coronavirus pandemic.

Department of Treasury officials said the increase in annual pension contributions for fiscal year 2021 that are due early next year reflect technical changes that account for things like longer life expectancies and recent revisions to projected returns from long-term investments.

Still, while the impact will vary by location, it’s just the latest financial strain for county and local governments as many have seen overall revenues decline during the pandemic.

These same governments already rely heavily on local property taxes as a major source of funding, meaning cuts in services or even higher property levies could be needed to offset the increased pension costs.

“For this bill to come at this time, it’s certainly concerning to say the least,” said John Donnadio, executive director of the New Jersey Association of Counties.

“It’s another stress on the budget at a time you can ill-afford stresses,” said Lori Buckelew, assistant executive director of the New Jersey League of Municipalities.

Policy changes ahead?

The increased pension bills have also helped to fuel discussions of future policy changes that could eventually help cushion the blow for county and local governments. One proposal that’s drawing particular interest calls for separating the assets and management of the pension fund that covers the retirements of thousands of county and local government workers in New Jersey from the fund for state workers, the officials said.

Public-worker pension benefits are funded in New Jersey with contributions made by both employees and their taxpayer-supported government employers. Revenue for pension funding is also generated from long-term pension fund investments.

The overall pension system itself is made up of seven different retirement funds, representing employee groups like teachers, judges, police officers, firefighters and other state, county and local government workers. Employee contributions are fixed in state law but employer payment requirements are subject to adjustment to maintain the overall health of the pension funds.

County, local pensions in better shape than state funds

State government has a long history of skipping its full employer pension contributions, and the overall New Jersey pension system has been ranked as the nation’s worst-funded. But some of the individual funds within the system are in much better shape than others, including those that cover the retirements of county and local government workers.

That’s because unlike the state government itself, the county and local governments generally aren’t allowed to short their annual employer pension payments. Instead, their contributions into funds like the Public Employees’ Retirement System, or PERS, are required to be paid annually under a formula established in state law.

Last year, county and local governments enjoyed a slight decrease in the year-over-year contribution rate for PERS, something Treasury officials promoted in a news release that cited several factors, including strong investment returns the prior fiscal year.

But under the latest calculations for the 2021 fiscal year, which covers parts of the 2020 and 2021 calendar years, the employer-pension contribution rate for PERS has gone up, from 13.7% to 15.1%, according to the latest data from Treasury. That amounts to a more than 10% year-over-year increase in bills that must be paid by April 1, 2021.

Police, firefighter retirements

The contribution rate is also rising for the fund that covers the retirements of police officers and firefighters, known as PFRS, by roughly 8.6% year-over-year, according to Treasury’s data.

The increased bills for fiscal year 2021, which include PERS and PFRS contributions, reflect a recent “experience study” that was approved by the boards of the individual retirement funds to update assumptions for factors like projected life expectancies, according to Treasury officials, who have not issued a news release this year. The increases also account for a recent reduction in the pension system’s assumed rate of return for its long-term investments, they said.

The overall pension system’s assumed rate of return for investments dropped from 7.5% to 7.3% on July 1 under a plan that Gov. Phil Murphy put in place in early 2018. The adjustment is intended to better align expectations with actual returns but it also means less funds are expected to be generated from the investments.

Murphy’s plan calls for another rate reduction in fiscal year 2023. But it actually smoothed out a more dramatic rate reduction that former Gov. Chris Christie enacted just before he left office that drew the concern of local government employers at the time.

“While the previous administration attempted to foist a precipitous (rate of return) decrease on employers all at once, we chose to pursue a responsible, gradual pathway to bring the rate in line with long-term expectations without immediately overburdening local governments,” said Treasury spokeswoman Jennifer Sciortino.

“We intentionally laid out a five-year pathway in order to provide local government with the ability to plan accordingly, knowing increases would eventually occur,” she said.

Easing property owners’ burden

Still, county and local government officials believe that eventually separating the portion of PERS that funds their workers’ retirements from the portion that funds the retirements of state workers could help ease the burden on the property owners who ultimately foot the bill, thus ensuring they don’t get punished for the state’s long history of underfunding its own pension obligations.

To back up those concerns, they point to recent actuarial reports that indicate the county and local portion of PERS is nearly 70% funded, while the state portion of PERS is just 31% funded.

The League of Municipalities and the Association of Counties have already engaged actuaries to study the issue, and one concept for a future reform is based on a series of changes enacted by Murphy and lawmakers several years ago that gave New Jersey police officers and firefighters more say in how their own pension funds are managed.

While arguing for similar changes for PERS, Donnadio contrasted a long record of county and local government leaders making their full employer pension contributions, with few exceptions, against the state’s history of shirking some or even all of its required pensions payments for at least the last two decades.

“We’ve been doing the right thing, by law, and the state has not,” Donnadio said.

We’re in this together
For a better-informed future. Support our nonprofit newsroom.
Donate to NJ Spotlight