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Murphy’s Budget Reflects Change In How Pension Obligation Is Calculated

Tweak to actuarial policy provides $100M in breathing room over previous estimate of payment needed to fully fund ailing system

Phil Murphy
Credit: Edwin J. Torres/Governor's Office
Gov. Phil Murphy delivering his budget plan for fiscal year 2020

A little-noticed change to the way New Jersey calculates its long-term obligation to the troubled public-worker pension system has created some breathing room for Gov. Phil Murphy even as he continues to ramp up the state’s annual payments.

Department of Treasury officials outlined the revised math during a recent budget-committee hearing, saying their new approach brings the state more in line with what’s called for by law and the longstanding payment practices of the Division of Pension and Benefits.

The change affects the calculation of what’s known as the “net pension liability,” and it slightly reduces an overall increase in the state’s total pension payment that Murphy is planning to make in the fiscal year that begins in July. It’s also allowing the governor — a Democrat who is a strong ally of public-worker unions — to pay less while still being able to say he is sticking to a strict pension-funding ramp-up schedule that was begun several years ago by former Gov. Chris Christie.

In response, some lawmakers have questioned the policy change over concerns that it could add to the state’s overall unfunded pension liability, which remains among the worst in the country.

New Jersey’s pension problem has been long in the making as governors and lawmakers from both parties have for two decades consistently underfunded the annual contribution to uphold the state’s obligation to retired workers. While some improvements have been made in recent years — including the establishment of the payment ramp-up plan — the unfunded liability has soared to over $100 billion by some estimates.

The funding hole is one of the major reasons why Wall Street credit-rating firms have given New Jersey one of the lowest debt grades of any U.S. state.

$100 million difference

Murphy emphasized the need to shore up the pension system repeatedly during the 2017 gubernatorial campaign, and he boosted the state’s total pension payment to $3.21 billion in the first budget he signed into law last summer. That marked a 28-percent increase over the contribution that the Republican Christie had budgeted during his last year in office. It also kept the state on the eight-year ramp-up plan started by Christie, which calls for the annual payment to rise incrementally each year until hitting the full amount called for by actuaries in FY2023.

Under Murphy’s proposed budget for FY2020, the state will make a payment equal to 70 percent of the full pension contribution calculated by actuaries, staying on course to make the full payment in FY2023. But Murphy’s spending plan also reflects the change in the way the state assesses the net pension liability, which reduces the size of the overall payment he is budgeting.

Steve Oroho
Sen. Steve Oroho (R-Sussex)

Some lawmakers picked up on the change during a budget committee hearing in Trenton earlier this month, including Sen. Steve Oroho (R-Sussex). He noted Murphy’s FY2020 spending proposal listed the pension payment at $3.792 billion even though prior spending projections had assumed the total contribution would have to rise to near $3.89 billion to stay on the ramp-up schedule.

In response, Treasurer Elizabeth Maher Muoio said actuaries had calculated a slightly lower net overall pension liability for the state after getting an opinion from the state Attorney General’s Office, and that resulted in the size of the planned increase in the contribution for FY2020 going down slightly. Oroho asked for more details and Muoio promised to provide them, but the lawmaker said in an interview Friday that his office has yet to receive a further explanation from Treasury.

Help from Wall Street, too

NJ Spotlight also requested a copy of the advisory opinion through the state’s Open Public Records Act, but both Treasury and the Attorney General’s Office rejected the request, citing the law’s exception for matters of attorney-client privilege. However, Treasury did respond to questions sent by NJ Spotlight.

During the normal actuarial review process, Treasury said, it was determined the state had been using a higher benefit than is required when calculating its long-term cost estimates, so the policy change brings the state more in line with state statute and the practices of the Division of Pension and Benefits.

A strong year on Wall Street also influenced the latest projections, Treasury further explained.

“The state’s contribution will be slightly lower than anticipated because our overall net pension liability has decreased,” said Jennifer Sciortino, an agency spokeswoman. “The administration will still be contributing 70% of the Actuarially Recommended Contribution (ARC) for FY2020, staying true to the path that will help us reach the full ARC funding by 2023.”

Oroho, who is the top-ranking Republican on the Senate budget committee, said he’s still hoping to get a copy of the advisory opinion from the Attorney General’s Office to see if the change in methodology will have any long-term implications for the pension system.

Math-based policy changes, including an increase of the assumed rate of return for pension-fund investments, can add to the unfunded liability when the state misses its mark, he said.

“It just demonstrates how just a small tweak can have a big impact,” Oroho said.

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