Just the announcement that New Jersey wants to make a full public-worker pension payment during the state’s next fiscal year has thrilled labor union officials.
For more than two decades they’ve watched the state routinely short pension payments, allowing a huge unfunded liability to pile up.
“It is a stunning accomplishment and we’ve waited a really long time for someone to do it,” said Hetty Rosenstein, state director for the Communications Workers of America labor organization.
But for Gov. Phil Murphy — and the governors who will serve after him — the task only begins with that first full payment, which Murphy has promised the state will make during the fiscal year that begins July 1.
From there, the challenge becomes figuring out how to continue funding full payments for years to come, or risk falling behind again, and looking like a homeowner who did a victory lap after making the first mortgage payment instead of the last.
“You can think of the unfunded liability as a mortgage,” said Charles Steindel, a former Department of Treasury official who now serves as resident scholar at Ramapo College’s Ansfield School of Business.
“It’s a debt owed by the state,” and it will take decades of level payments to, “pay off all the principal and interest,” Steindel said.
A history of underfunding
Governors and lawmakers from both parties have been passing budgets that have underfunded the state pension system to varying degrees since 1996. That means they’ve effectively chosen to put other spending priorities or tax-cut initiatives ahead of fully securing the retirements of hundreds of thousands of government workers and retirees.
As a result, the pension system has become one of the nation’s worst-funded state retirement plans, with an unfunded liability that was allowed to soar to over $100 billion according to some estimates. New Jersey is able to make payments to current retirees, and can do so for some time. But that unfunded liability raises questions about its ability to make good on the benefits for employees in the decades to come.
Despite sincere efforts to change course, the state’s recent history is filled with governors who’ve made big promises about pension funding in budget addresses and other major speeches that they ultimately couldn’t stick to during ensuing fiscal years.
More than a decade ago, former Gov. Jon Corzine, a Democrat, pledged in a budget speech that his administration would “contribute at least $1 billion to the pension fund for the next three years.” That promise came around the same time he secured new contribution rates for workers and other changes at the bargaining table with unions.
But when the 2007-2009 Great Recession hit the state budget, Corzine was forced to retreat from his plan to ramp up pension funding over the long term.
Christie took shot at full funding
After taking office in early 2010, Republican Gov. Chris Christie put forward an ambitious plan to get up to full funding of the pension system. Christie also worked with Democrats in the Legislature to make other changes to benefits for public employees through legislation, including increased rates for workers’ contributions and a halt in cost-of-living adjustments.
“The pensions of every state worker, of every teacher, and of every retired municipal employee are more secure today,” Christie told lawmakers in 2012. “By the tough choices we made together, we saved their pensions.”
However, a slow recovery from the Great Recession and an unexpected revenue dip forced Christie to move off a seven-year state pension funding ramp-up. It was eventually replaced with a more modest, 10-year ramp-up that put off full payments until after Christie was due to leave office.
Murphy, a Democrat who took office in early 2018, has followed Christie’s 10-year schedule of escalating payments throughout his first three years in office. That means, like his predecessors, Murphy has also yet to make a full pension payment, although he’s come the closest.
But in a nearly $45 billion budget proposal released last month, Murphy — who faces reelection in November — said he now plans to make the full payment during the 2022 fiscal year. The estimated cost of the full payment is $6.4 billion, according to the state’s actuaries.
“Making the payment is keeping our word to hundreds of thousands of retirees who depend on their pensions,” Murphy said during a budget address.
“It means keeping our word to families all over our state who were made promises by governors who then turned their back on them,” he said.
Dems on board with full payment
For their part, fellow Democrats who control the Legislature are also indicating they are on board with funding the full payment in the next fiscal year, which would be one year ahead of schedule.
Assembly Speaker Craig Coughlin (D-Middlesex) said in a statement issued in response to Murphy’s budget address that making a full payment would be “honoring the state’s commitment to our current and past workforce and demonstrating sound fiscal policy.”
Senate President Steve Sweeney (D-Gloucester) also praised Murphy in a recent interview with NJ Spotlight News in which he also looked back at his own nearly two decades worth of work on pension issues. And at times, he noted some of those efforts put him in conflict with labor leaders, including his collaboration across party lines with Christie.
“I’m just really proud that we got to this point, and thankful that Gov. Murphy made the decision to get to this a year sooner,” Sweeney said.
“It’s an absolutely great outcome and was worth every fight that I had,” he added.
For Rosenstein, the CWA union leader who has long pushed for full pension funding, the accomplishment comes just as she is readying for her own retirement. But she said a full pension payment will mean a lot for rank-and-file government workers who’ve been putting in long hours serving on the front lines during the ongoing health crisis.
“The importance just can’t be understated,” Rosenstein said. “It means that people will actually see their pensions.”
Budget savings tied to full payment
In addition to helping improve the long-term health of the pension system, Treasury officials are also projecting some significant budget savings can be generated by getting to full funding a year ahead of schedule.
Those savings, which will total an estimated $860 million over the next three decades, are based on the way the state’s unfunded liability accrues over the long term, the officials said.
Murphy’s administration should also be in a good position to manage the initial step up to full pension funding, thanks to a combination of factors, including money the state borrowed last year when it was expecting significant revenue losses would be triggered by the pandemic.
In all, the governor is planning to open the 2022 fiscal year with more than $6 billion in reserve, and his administration is also projecting modest year-over-year revenue growth during the state’s expected long-term recovery from the pandemic.
New Jersey has been making pension payments on a quarterly basis since a 2016 policy change was enacted by Christie. While the size of those quarterly payments is also now due to grow, Treasury officials say they anticipate having enough cash on hand to cover each payment throughout the 2022 fiscal year.
Unclear future for full pension payments
But New Jersey doesn’t do multiyear budgeting, so just like his predecessors, Murphy has not clearly demonstrated exactly how the state can maintain full pension funding in future years. Thanks to another reform enacted by Christie, dedicated revenues from the state Lottery will pick up at least some of the tab.
Asked about the long-term funding concerns, Treasury officials pointed to the millions of dollars in projected savings from making a full payment a year ahead of schedule. They also recently announced plans to make several pay-as-you-go capital appropriations during the 2022 fiscal year instead of taking on the costs of financing that spending with more long-term debt.
“We are taking a number of responsible steps with the proposed fiscal year 2022 budget that will help us manage expenditures into the fiscal year 2023 budget and beyond,” said Treasury spokeswoman Jennifer Sciortino.
Some help in the near term could also come from the federal government since New Jersey and other states are about to receive significant aid from the recently approved American Rescue Plan Act that could help free up state resources or further pad the surplus.
Steindel, who served as Treasury’s chief economist during Christie’s tenure, also noted the state’s initial step up to full pension funding will be the “big pill to swallow,” and that the cost of a full pension payment as a percentage of overall spending will eventually shrink as revenues grow over time.
“The achievement of full funding is sustainable, barring another economic crisis in the near term,” Steindel said. “I think it’s reasonably sustainable.”
While other governors have shown there’s no guarantee the state will make its full pension contributions long into the future — even after promising to do so — Murphy underscored the cumulative pain caused by chronic underfunding during a keynote address he delivered virtually last week to a leadership conference organized by the Penn Institute for Urban Research and the Volcker Alliance.
“Had we paid our full pension (payment) every year between ’96 and this budget, the number I would have put up this year would have been $800 million,” Murphy said. “If you do the math, we are, in our (fiscal year 2022) budget, paying $5.6 billion, in one year’s budget, for the delinquency of the past 25 years.”
“But I’ll be damned if I’m going to kick the can down the road anymore,” he said.