Starting next month, for the first time in over two decades, the state of New Jersey will be making the full payment it is supposed to provide to keep the pension systems for teachers, state employees and retirees afloat. It will be the first time since 2000 that the state has made its full actuarially required contribution, and it carries a hefty price tag — $6.5 billion a year or more every year for the next 30 years.
Local governments are paying another $2.3 billion a year to cover the pensions of police, firefighters and county and municipal employees, and that amount or more will be coming directly out of the pockets of property taxpayers for decades to come.
Taken together, New Jersey’s state and local pension systems have an unfunded liability of more than $60 billion — one of the worst pension problems in the country — and it affects everything from the level of taxes we pay to the bond ratings we receive, to the government services we can afford to provide.
Clearly, we need to do everything we can to cut the cost of our annual pension payments at both the state and local levels in order to continue to guarantee the retirement payments our retirees have earned and to reduce the unfunded liability that is such a burden to taxpayers.
That is why we have developed legislation to enable our state and local pension systems to add revenue-generating assets like water and sewage treatment systems, High Occupancy Toll (HOT) lanes, parking facilities and real estate to provide new, diversified sources of revenue for their investment portfolios.
The assets would continue to be owned by the public
Senate Bill 3637, which may be considered by the Senate Budget and Appropriations Committee this week, would create the Retirement Infrastructure Collateralized Holdings Fund — RICH, for short — as an infrastructure trust fund to hold and manage assets transferred to the public corporation by state and local governments for the benefit of New Jersey’s public employee pension funds.
This would not only bolster the pension system, but also give state and local governments powerful new tools for preserving public ownership, improving public stewardship, and maximizing public benefit. Local governments worried that privatization is their only option to fund necessary infrastructure improvements will now have a “public to public” option to transfer those assets to an infrastructure trust fund, with the state’s respected Infrastructure Bank serving as trust administrator safeguarding the interests of the public, the customers and the pension funds.
The assets would continue to be owned by the public, but in this case by a public entity that would provide the professional management and financial resources necessary to make the long-term investments needed to improve the quality of service, while realizing a fair return to meet pension obligations over a 30-year span.
State and local governments, and their taxpayers, would be able to lower their annual pension contributions based on the value of the asset transferred, which would be determined by third-party evaluators based on their current market value.
This is not a new idea. The Economic and Fiscal Policy Workgroup, a bipartisan blue-ribbon panel of economists, fiscal experts and legislators co-chaired by Senate Budget Chair Paul Sarlo (D-Bergen) and Sen. Steve Oroho (R-Sussex), recommended leveraging assets as a strategy to stabilize New Jersey’s underfunded pension system in its 2018 Path to Progress report.
The Economic and Fiscal Policy Workgroup noted that the Lottery Enterprise Contribution Act of 2017 dedicated New Jersey Lottery revenues to the state’s three largest pension funds. Often cited as a national model for asset transfers, the shift of Lottery revenues to the pension system served as a diversified revenue source that provided stability to the pension funds amid the market turbulence of 2020.
Good for job creation
Like President Biden’s proposed infrastructure plan, the increased investments in New Jersey infrastructure created through the RICH Fund will generate good-paying jobs that will boost the state’s economic recovery from the COVID-19 pandemic and bolster state revenues needed for future pension payments.
The Kroll Bond Rating Agency noted that “the ability to use public assets to finance public needs can be a credit positive” for state and local government bond ratings, as long as they generate positive cash flow and are used to finance long-term needs such as fixing infrastructure or reducing unfunded liabilities.
The RICH Fund could attract investment capital from other pension systems, which is a frequent occurrence with infrastructure assets. Leading pension funds like the California Public Employees Retirement System (CALPERS) have invested billions of dollars in water and wastewater infrastructure, toll roads and forests, and Canada’s Ontario Municipal Employees Retirement System has 20% of its holdings in infrastructure assets.
Forward-looking pension systems are increasingly looking to invest in revenue-generating infrastructure to diversify their portfolios in the face of high stock market volatility and minimal return on cash and bond funds due to historically low interest rates.
The state and local governments own water systems, reservoirs, real estate and parking lots that could generate stable revenue for pension systems in the same way that the Lottery system has for the past several years. Pension systems could also create new infrastructure by contracting for the construction and maintenance of High Occupancy Toll lanes like those in Maryland and Virginia.
New Jersey needs to continue to take the lead on innovation in pension reform and infrastructure financing by enacting this important legislation.