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Gov. Christie Retroactively Cuts State Pension Payment

Governor’s fiscal maneuver helps plug current budget gap, but putting $900 million less into pensions over next four years will make unfunded liability worse

Credit: Governor's Office/Tim Larsen

Facing another year of fiscal problems, Gov. Chris Christie changed the funding formula for the state’s pension contribution so that he could cancel $93.7 million in previously budgeted pension payments due in June, cut next year’s pension bill by $150 million, and put $900 million less into the underfunded pension system by the end of his term.

Christie’s decision to change the pension calculation formula will further add to New Jersey’s $51 billion unfunded pension liability -- which was one of the main reasons Fitch’s Ratings cited last Friday when it followed Moody’s and Standard & Poor’s in downgrading the state’s credit outlook from “stable” to “negative.” Over a 30-year period, Christie’s formula change would swell the state’s unfunded pension liability by 10 percent, actuaries for the state’s pension funds reported.

Christie complained during his annual Budget Message on February 25 that the rising costs of pensions, retiree health benefits, and debt service were crowding out other budget priorities. The governor threatened to take unilateral action unless the Democratic-controlled Legislature took further steps to reduce the state’s retiree liabilities, presumably by requiring public employees to pay more toward their pensions.

What Christie didn’t tell the Legislature or the public that day was that his Treasury Department had already instructed the actuaries responsible for calculating the state’s required pension payment to change the formula not only to cut the state’s pension payment for the upcoming year, but to do so retroactively for the current year.

Christie’s decision to change the pension calculation formulas came as a surprise to Democratic legislative analysts, who wondered why Christie was putting only $2.25 billion -- instead of the expected $2.4 billion into the pension system in the Fiscal Year 2015 budget. The change in the funding formula was buried in the actuarial reports on the state’s pension systems that were issued on February 27 -- two days after Christie’s speech.

Retroactive Cuts

But it wasn’t until Treasurer Andrew Sidamon-Eristoff provided a list last week of the $694 million in current-year spending cuts used to plug the hole in this year’s budget that the nonpartisan Office of Legislative Services and Democratic experts knew for sure that Christie was retroactively cutting the size of the pension payment that had been approved in the Fiscal Year 2014 budget he had signed into law last June.

Ironically, the current-year pension cuts were listed on Sidamon-Eristoff’s spreadsheet as a $62.823 million “Teachers’ Pension and Annuity Fund Surplus,” a $29.349 million “State and Higher Education Pension Surplus,” and a $1.569 million “Local Employee Pension Surplus” -- even though New Jersey’s unfunded pension liability is $51 billion and growing because the state is contributing just 43 percent of its true actuarial obligation to the pension system this year.

If Christie did not change the formula, he would have had to find another $93.7 million in cuts to balance this year’s budget and $150 million in reductions in next year’s budget. That would have required cuts to existing programs because pensions, retiree health benefits, and debt service are already eating up 94 percent of the increase in state spending, as Christie pointed out in his budget speech.

Kevin Roberts, Christie’s press spokesman, said in response to an emailed question Sunday that pension “assumptions are set by the actuaries not by the administration,” and that “the state’s payment is 4/7 of what is recommended by the actuaries. So your entire premise is flawed to begin with.” Roberts and Treasury Department spokesman Christopher Santarelli failed to respond to detailed followup questions on Monday.

After this article appeared, Roberts pointed out that the Christie administration does not have the unilateral authority to make changes in the pension calculation methodology, and that the changes in methodology in the actuarial reports went to the employer-employee governing boards for the various pension funds for approval.

However, those meetings took place in early March -- after the governor had already included the cuts in the pension contribution both in his budget for FY2015 and in the list of $694 million in budget-balancing cuts for FY2014.

PBA President Anthony Wieners complained vociferously that the changes in pension methodology, which also enabled local governments to lower their pension contributions by a total of $135 million, would further weaken a pension system that Christie had already categorized as “unsustainable” and that the cost would ultimately be borne by public employees. Roberts noted that Wieners nevertheless voted for the methodology change,

Questioned about the methodology changes, David Rosen, the OLS’s budget and finance officer, confirmed that the Christie administration had changed the pension contribution formula, and that the lower contributions “will have a downward effect” on the pension system’s balance sheet in future years. So did Democratic analysts, and the state’s actuarial reports indicate clearly that the methodological change was made at the direction of the Treasury Department’s Division of Pensions and Benefits.

Christie’s decision needs to be understood in the context of the negotiations between Christie and Democratic legislative leaders, notably Senate President Stephen Sweeney (D-Gloucester), over the controversial 2011 pension and health benefits overhaul, which was needed because the pension system was in danger of collapse after 15 years of Democratic and Republican governors and legislatures skipping tens of billions of dollars in annual pension payments.

The law, which passed over the opposition of the New Jersey AFL-CIO and the state’s public employee unions, eliminated cost-of-living increases for pension recipients, raised the retirement age from 62 to 65, and required teachers, police, firefighters, and state and local government employees to contribute more toward their pensions.

Seven-Year Ramp-up

The law gave the state seven years to ramp up to the full actuarially required pension contribution needed to make the pension system solvent -- a decision that meant that New Jersey’s unfunded pension liability would continue to grow over that period. In the first year after passage of the new pension law, for example, New Jersey’s unfunded pension liability for state and local governments grew almost $5 billion to $47.2 billion, and Christie projected it would hit $54 billion by FY2018, the year the phase-in to full actuarial funding is complete.

Therefore, Christie and Democratic legislative leaders agreed that the state’s actuarial payment would be determined as if public employees were still contributing to their pensions at the old rate of 5.5 percent for teachers and state and local government workers and 8.5 percent for uniformed public safety personnel -- rather than the new contribution rates of 6.5 percent that would increase to 7.5 percent by FY2018 for most government workers and the 10 percent contribution rate that kicked in for uniformed personnel in FY2011.

“The effect was to make the system a little healthier,” Rosen said.

It was that agreement on how to calculate the “actuarially appropriate” phase-in of pension contributions that Christie broke.

“When the governor said on 101.5, ‘I will make the actuarially appropriate contribution’ to the pension system, he did not say he was going to change the assumptions so he could contribute less,” one state fiscal expert said, explaining why OLS and Democratic pension experts were surprised “He wouldn’t be changing the formula after three years of making pension contributions at the higher rate if he wasn’t hundreds of millions of dollars short on his revenue forecasts.”

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