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Gov. Christie Retroactively Cuts State Pension Payment

Christie's decision to change the actuarial formula that determines pension payments enables him to lower the record $1.676 billion pension payment that was included in the Fiscal Year 2014 budget he signed into law last June to $1.582 billion. It also let Christie cut the expected FY15 payment from $2.4 billion to $2.25 billion.

By FY18, Christie’s final budget and the last year of the seven-year phase-in, the pension formula change is expected to cut the state’s required contribution from about $4.2 billion to about $3.9 billion -- which is the payment the state would actually be making this year if Christie and Democratic leaders had not agreed to a seven-year phase-in to actuarially appropriate funding levels.

Sidamon-Eristoff will have to address the changes in the pension-funding formula when he and the OLS’s Rosen deliver their annual budget review and revenue forecasts to the Senate Budget Committee on April 1 and the Assembly Budget Committee on April 2.

Roberts noted that the new method of calculating pension obligations -- not the system that was in effect for FY2012, FY2013, and until it was changed, for FY14 – is the industry standard.

The change in the state's pension-funding formula can be seen in an NJ Spotlight review of the various 2012 actuarial reports that determine the state’s required pension contributions for FY2014 for the Teachers’ Pension and Annuity Fund, Public Employees’ Retirement System, Police and Firemen’s Retirement System and four other pension funds, along with five 2013 actuarial reports that calculate FY2015 state pension contributions.

Actuaries Richard L. Gordon and Scott F. Porter of Milliman, a Wayne, PA, firm, clearly laid out the changes in the pension formula and their implication for the future health of the pension system in their February 27, 2014 report on the Teachers’ Pension and Annuity Fund (TPAF), the state’s largest pension plan.

The 2011 pension law sponsored by Sweeney and signed into law by Christie “increased the employee contribution rate from 5.5 percent to 6.5 percent effective October 1, 2011 and by 1/7 of 1 percent each following July 1 over the next 7 years until 7.5 percent is attained effective July 1, 2018. Typically, all member contributions are used as an offset in developing an employer’s normal cost,” Gordon and Porter wrote.

However, the Division of Pension and Benefits told Milliman in 2011 that the Christie administration and the Legislature had agreed to calculate the state’s pension contribution as if employees were still making the old 5.5 percent contribution.

As the actuaries explained, “When Chapter 78 was passed, it was our understanding that the additional member contributions in excess of 5.5 percent would serve to reduce the unfunded actuarial accrued liability rather than serve as a direct offset to the State’s Normal Contribution.” In other words, as Rosen explained, the state agreed to make higher contributions in order to partially offset the fact that the decision to take seven years to ramp up to actuarially appropriate funding was deepening the state’s unfunded pension liability.

This year, however, Milliman was instructed by the Division of Pension and Benefits to change the formula. “This valuation reflects a change in the treatment of the contributions in excess of 5.5 percent to now serve as a direct offset to the State’s Normal Contribution for the fiscal year ending June 30, 2015,” the actuaries wrote.

Furthermore, “this change was also applied retroactive to the 2012 valuation for determining the State’s Normal Contribution for the fiscal year ending June 30, 2014,” they explained.

It is that retroactive cut that accounted for $49.5 million of the $62.823 million that Sidamon-Eristoff sliced from the state’s contribution to the Teachers’ Pension and Annuity Fund to fill a $694 million hole in this year’s budget; changes in salary assumptions accounted for the other $13.3 million retroactive cut. A similar mathematical formula applied to the $29.343 million cut in state payments to pensions for higher education and state government employees.

“The long-term impact of this change in treatment of member contributions in excess of 5.5 percent of pay is that fewer contributions will be made to TPAF each year in the future, resulting in an estimated decrease in the projected funded ratio in 30 years of approximately 10 percent, based on the current investment-return assumption and other assumptions and methods,” the actuaries warned.

Further, the Christie administration’s decision to put more than $900 million less into the pension system through FY18 -- which will be Christie’s last budget -- will result in higher contributions being required in future years, because the pension system not only loses the $900 million in contributions, but an expected annual return of 7.9 percent on that $900 million in additional pension investments -- the expected rate of return certified by Sidamon-Eristoff.

Christie warned during his February budget speech and more recently in town meetings that he would take “extreme measures” to cut the state’s long-term pension and retiree healthcare obligations unless the Democratic Legislature found other cost savings.

Presumably, he was referring to more extreme measures than the pension formula changes he had already enacted, but the OLS has already stated that the governor’s powers would not allow him to declare a fiscal state of emergency over the pension issue, and states are precluded from filing for bankruptcy to get out from under pension contracts, as the city of Detroit did.

Sweeney and Assembly Speaker Vincent Prieto (D-Hudson) already have called Christie’s bluff, stating that they would not ask public employees to contribute more when it was the state government -- not government workers -- that had skipped billions of dollars in pension payments and was not yet paying its full pension obligation.

Editor's note: This article is different from the version originally published. It includes comments and additions made by the Christie administration.

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