Christie's Proposed 10-Year Pension Payment Ramp-Up Could Cost NJ Billions
Updated On: Jun 20, 2015
njspotlight.com - Governor’s own law gives him seven years to get pension payments in line, but he says he needs 10. What he’s not saying is how costs would balloon over time.
While lawmakers await a ruling from New Jersey’s Supreme Court on whether the state has to stay committed to a plan to prop up the public-employee pension system with a series of escalating payments over a seven-year term, Gov. Chris Christie’s state treasurer is continuing to make the case for stretching those payments over 10 years.
The goal of both plans is to get the state up to the full payment that actuaries calculate is needed on an annual basis to keep the pension system solvent.
Treasurer Andrew Sidamon-Eristoff told lawmakers last week that the 10-year ramp-up is more manageable and would still leave the pension system -- which is deep in debt after two decades of underfunding -- more than 70 percent funded at the end of a payment schedule that will stretch over the better part of the next three decades.
But an NJ Spotlight analysis of the payment schedules the Department of Treasury provided legislative staff for both the seven-year and 10-year ramp-up indicates that after 30 years the 10-year schedule would cost taxpayers an extra $14.35 billion.
That’s because after saving a combined $8.4 billion up front through the 2021 fiscal year, the payments required under the 10-year ramp-up plan are nearly $23 billion more expensive through the 2045 fiscal year. Senate Democrats say the actual difference would be higher: $17.25 billion through FY 2048
Senate President Stephen Sweeney, who has opposed the 10-year ramp-up idea since Christie first floated it along with sweeping new pension reforms in late February, said the two payment schedules demonstrate his concern.
“You’re pushing the state deeper into debt,” Sweeney (D-Gloucester) said in an interview with NJ Spotlight. “I don’t think we should be passing the buck to the next group coming in.”
“It’s leadership. You don’t punt,” he said.
"The actual difference between the seven-year phase-in required by law and the 3/10 payment schedule proposed by the governor is $17.25 billion. Every $1 we pay into the pension system over the next five budget years saves $3 in future payments for us and our children,” according to Mark Magyar, policy director for the NJ Senate Democratic Majority Office and a former reporter for NJ Spotlight.
Treasury Department figures provided to OLS for both the 5/7 and the 3/10 payment schedules show a $14.35 billion difference through FY 2045, but payments under the pension reform law actually continue through FY 2048, which makes the final differential between the two payment schedules $17.25 billion, Magyar added.
But Joseph Perone, a spokesman for Treasury, described the 10-year ramp-up plan as essentially a fallback position for the administration if Sweeney and other lawmakers ultimately reject the broader benefits reforms that were put forward with Christie’s endorsement by a nonpartisan panel of experts in February. That study commission recommended freezing the current pension system, moving workers into a new retirement plan with some features of a 401(k), shifting employees into less costly healthcare plans, and using the savings to help pay off the pension debt.
The commission estimated savings from those changes of nearly $3.5 billion in just the first year.
“The tenths model exists, as in the FY 2016 proposed budget, only if the Legislature does not advance that plan,” Perone said.
The treasurer also stressed the importance of Christie’s broader reform proposals during legislative hearings last week, saying the administration “is still very interested and intent on securing broad reforms of benefits.”
But with Sweeney and other Democrats who control the Legislature so far rejecting those proposals, he went on to make the case for the 10-year ramp-up plan.
Sidamon-Eristoff called the 10-year schedule a “responsible and feasible and sustainable strategy,” adding that if the administration’s plan is followed, after 30 years the pension system as a whole would be 74.4 percent funded, which is far above the current 54.5 percent.
“The analysis that we obtained from our actuaries shows that a one-tenth ramp up really offers a sustainable path and a credible path for moving forward,” the treasurer said. “We believe the incremental additions to the budget would be manageable and certainly attainable.”
“Mathematically over time obviously they become a smaller and smaller component of the overall budget assuming inflationary increases to the budget,” he said.
And Assemblyman Declan O’Scanlon (R-Monmouth) later stressed that following either payment scenario means “we’re not talking about failing to make pension payments to pensioners.”
“The only real impact to extending it is that our payment on the back end would be somewhat higher, which we accept. That’s a debt we have to pay,” he said. “But we are not talking about public workers not receiving their checks.”
Regardless of the outcome of the debate, the matter ultimately is in the hands of the state Supreme Court, thanks to lawsuits filed against the Christie administration by public-worker unions. A ruling could come down at any time even as lawmakers continue to evaluate the $33.8 billion budget that Christie has put forward for the fiscal year that begins July 1.
Lawyers for the unions have asked the high court to enforce a pension-reform law that Christie, a second-term Republican, enacted with help from Sweeney and other Democratic leaders in 2011. That law, known as Chapter 78, forced the workers to pay more toward their pensions, but also promised as a contractual right to the employees a series of escalating state pension payments over seven years starting with the 2012 fiscal year. Those payments were designed to ease the state back into making the full employer contribution calculated by the actuaries and Christie touted the payment plan as a model for other states struggling with pension date.
But Christie, who is now exploring a run for president in 2016, veered off the seven-year payment schedule after just two years, saying the rate of economic growth in New Jersey hadn’t kept pace with the escalating payments, rendering them unaffordable. He also refused to increase taxes on corporations and the wealthy, which was the plan advanced by Democrats last year to keep the state on the seven-year schedule.
Instead, Christie reduced the planned payments for each of the last two fiscal years, and his proposed budget for the fiscal year that begins July 1 would contribute $1.3 billion, which is less than half of the $3.1 billion that’s called for in the seven-year schedule.
The unions have also opposed the one-tenth payment schedule that Christie has proposed, saying the governor should instead abide by his prior funding promise.
Hetty Rosenstein, state director of the Communications Workers of America, said the union “wants and expects Gov. Christie to obey the law -- the very own law he touted -- and implement Chapter 78.”
Absent additional savings from the new benefits reforms backed by Christie, switching to the 10-year ramp-up plan would save the state roughly $1.8 billion during 2016 fiscal year. The savings would total $1.97 billion, $2.1 billion, and then $1.5 billion over the next three subsequent fiscal years.
But by the 2022 fiscal year – less than a decade from now -- the trend reverses, according to NJ Spotlight’s analysis.
The payments required under the 10-year ramp-up plan then start to outpace those called for under the seven-year schedule.
By the 2028 fiscal year, a string of 15 straight years would begin in which the payments owed under the 10-year schedule are nearly $1 billion higher in each year than those owed under the seven-year plan. And even after making all of those larger payments, the projected 74.4 percent funding trails the 77.8 percent funding that’s projected under the original seven-year ramp-up plan.
Sweeney, a private-sector labor official who has championed pension reform at the state level for about a decade, said the pension issue is one that demands taking a long view of at least 30 years.
He said the solution involves increasing revenue in the short-term -- partly by hiking the income-tax rate on earnings over $1 million -- until the economy improves enough to make the pension payments under the seven-year plan more affordable. That approach could also win new cost-cutting reforms from the unions, who have soured on Christie after he broke his 2011 promise, Sweeney said.
“They realize that we need a solution, but the solution just can’t be on them each time,” he said. “Now it really is the state’s turn to be a participant.”