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Analysis: Christie Administration Eyes Shift to ‘Hybrid’ Pension System

Christie is now promising to unveil a comprehensive plan to cut pension and retiree health benefits costs in mid-June, but his options are limited.

The governor already has eliminated cost-of-living increases for retirees, and while courts in other states have upheld such cuts, no court has upheld the elimination of pension benefits already accrued by retirees or current employees whose pensions are fully vested.

The only exceptions occurred when Detroit, Central Falls, RI, and Pritchard, AL, were allowed to cut benefits for both retirees and current employees when they went into bankruptcy, Norcross said. However, state governments are considered sovereign entities with the power to raise taxes and are not allowed to declare bankruptcy -- despite Christie’s repeated warnings that New Jersey’s pension liabilities threaten to make the state “the next Detroit.”

That leaves pension changes for current employees as Christie’s most logical target, whether through implementation of a hybrid pension system along the lines of Rhode Island, by requiring higher pension payments, or by further raising the retirement age, which is already 65.

“There’s an issue of intergenerational equity that comes into play,” Norcross said. “You have a cohort of retirees who get pretty decent benefits, current employees pay more and get less, and then there’s the question of what you offer the new hires. And to what extent do you expect current employees to pay for the generous benefits of retirees, knowing that they will never get the same benefits? It’s a difficult issue, and I don’t envy anyone who had to navigate all that.”

The transition to hybrid pension plans is likely to increase in popularity because it keeps some employee contributions flowing into the pension system to cover the liability of current retirees, while cutting the long-term unfunded liability by shifting a portion of the future pension liability for current employees or new hires to 401K-style defined-contribution plans that can be turned into fully funded annuities upon retirement.

The incentive for employees is that if their investments do better than expected, their ultimate pension payments could be higher than if they had remained in a traditional defined-benefit system, according to “Effects of Pension Plan Changes on Retirement Security” -- a study conducted by researchers from NASRA and the Center for State and Local Government Excellence.

Hybrid pension systems can be constructed in such a way that retirees have the possibility of receiving higher pension payouts, as is the case in Rhode Island, Tennessee, and Utah, or as part of a plan to drastically cut future pension payments, as was the case in Virginia and Georgia, the study found.

Since 2009, when state revenues plummeted nationwide in the wake of the Great Recession, 45 states have made changes to their pension systems by increasing employee contributions, reducing pension benefits, jacking up the retirement age, or expanding the number of salary years used in final pension calculations to lower the payout, the National Conference of State Legislatures reported.

Actual pension benefits were reduced in 23 states by a low of 1.2 percent in Massachusetts and Texas to a high of 20 percent in Pennsylvania and Alabama, with New Jersey posting a 10.9 percent reduction.

Pension payments are the product of a “final average salary” multiplied by years of employment multiplied by a set percentage. New Jersey’s pension cut resulted from a decision to base the final average salary on an average of the top five salary years -- rather than the top three -- and a reduction in the multiplier percentage from 1.818 percent to 1.66 percent.

Christie has been saying since January that he wants current employees to pay more toward their pensions. However, the 2011 law raised the percentage of income paid toward pensions by police and firefighters -- who are allowed to retire after 20 years under state law -- from 8.5 percent to 10 percent. It also boosted the pension payments of teachers and other state and local government workers from 5.5 percent to 6.5 percent; they will then rise steadily over seven years to 7.5 percent in FY18.

Sweeney, Assembly Speaker Vincent Prieto (D-Hudson), and other Democratic legislative leaders have said they do not want to ask public employees to pay more when the state once again is failing to meet its obligation to make the ramped-up pension payments required under the 2010 law.

Both the New Jersey Education Association and the Communications Workers of America have already threatened to file lawsuits to compel the state to make its required pension payments.

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