Four and a half years ago, the governor and the Legislature passed bipartisan legislation in New Jersey designed to fix the pension system for teachers and state employees, which had developed a $50 billion unfunded liability due to the failure of both Republican and Democratic administrations to make the required pension payments over the previous 14 years.
The plan called for shared sacrifice. Retirees gave up cost-of-living increases, and public employees paid thousands of dollars more out of their salaries every year for pensions and healthcare — all of which would save the pension system $121 billion over a 30-year period.
In return, the law required the state to ramp up from making no contributions the year before to full actuarially required funding of the pension system by 2018. It wasn’t going to be easy, but the $650 million a year annual increase could have been handled through normal growth in state revenues.
Sticking to the plan would have fixed the pension system, stabilized the state’s finances, and ended the cycle of bond downgrades that is ruining the state’s credit.
Gov. Chris Christie’s failure to make the agreed-upon payments will cost New Jersey taxpayers $30 billion more in future pension costs. And while there is plenty of blame to go around, the governor has now underfunded the pension system by $17.5 billion over his first six budgets — twice as much as Democratic governors did in the preceding six years.
Every year we don’t properly fund the pension system, the future cost goes up exponentially.
That’s why I introduced legislation asking voters to approve a constitutional amendment requiring the state to ramp up to full actuarially required funding of the pension system by 2022 — four years later than required under the original law.
We have no choice, and I believe voters will agree when this proposal goes on the ballot in November.
New Jersey’s courts have already ruled that public employees are entitled to receive the vested pension benefits they have earned.
The only question is how and when we pay for it — and how long New Jersey taxpayers are going to let their state government leaders kick the can down the road while the bill grows bigger and bigger.
This constitutional amendment would require the state to ramp up to full funding of the pension system by 2022 — a burden that will fall mostly on the next governor, not this one. No ifs, ands, or buts. By doing so, we would fix the pension system once and for all.
The payment schedule called for under the constitutional amendment is not much different from the new seven-year phase-in Christie laid out in Treasury documents six months ago that would have gotten the pension system to full funding by 2023.
We are simply requiring the governor to make the phase-in payment in 2018 that he has already promised to make; that payment is projected at $2.414 billion.
If additional revenue is needed by the next governor to complete the remaining four-year ramp-up to full funding, it can be made up entirely by a millionaire’s tax — a tax on the one percent of New Jerseyans that is the only group whose real income has been rising.
What is important is that the constitutional amendment would require the governor to actually make the payment, whether he wants to or not.
New York does not have a pension crisis because its constitution already requires full pension payments. The pensions of New Jersey’s police, firefighters, and local government workers are solvent because county and municipal governments have made their pension payments.
Furthermore, this constitutional amendment requires the state to make its pension payments on a quarterly basis, rather than on the last day of the budget year, to ensure that the state’s pension contribution earns investment income throughout the year.
Making payments on a quarterly basis would save taxpayers $8.5 billion over the next 30 years and cut the unfunded pension liability by an additional $4.9 billion, based on the current 7.9 percent projected rate of return. Even under the most conservative investment earnings projections, the net savings are likely to be $10 billion.
Quarterly pension payments are sound public policy, which is why the federal Employment Retirement Income Security Act requires quarterly payments for private pensions that are less than 90 percent funded and added a requirement for accelerated quarterly payments for pensions considered “at risk” because they have funding ratios below 80 percent.
It’s not a question of whether we can afford to make the payments. It is a question of whether we can afford not to.
New Jersey’s state pensions are just 54 percent funded, and Moody’s projected they could go bankrupt as early as 2027 if we don’t act quickly. That’s unthinkable: If that happens, future taxpayers will be on the hook for $9 billion to $11 billion in annual benefit payments out of the state budget.
We can’t let that happen. This constitutional amendment will save taxpayers billions of dollars. We can wait no longer to restore fiscal sanity to New Jersey.
This commentary originally was published on Dec 17, 2015 at NJ Spotlight, an independent online news service on issues critical to New Jersey, makes its in-depth reporting available to NewsWorks.