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Monday, May 20, 2024

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Pension Gamesmanship

By Vince Conti

Pension gamesmanship has a long tradition in New Jersey. The Pew Charitable Trust regularly looks at the state of public pension plans. New Jersey does not fare well in any comparison.
A report issued Feb. 20 by the New Jersey Commission on Investigations (COI) reported to Gov. Phil Murphy on waste and abuse in local public employee compensation and benefits. 
The report states that “specific instances of abuse abound” and it calls for a systematic response by state lawmakers.
A Pew 2017 report looked at 230 state and local pension plans across all 50 states, including seven such plans in the Garden State. The most basic of the comparisons is the funded ratio of the plans, the ratio of the total assets at market value to the accrued pension liabilities. 
New Jersey came up next to last, 49th of 50 states, with a funded ratio of only 35.8%. Kentucky at 33.9% saved the Garden State the ignobility of last place.
On every other measure in the Pew comparison study, New Jersey remains at the bottom.
More recently Standard and Poor Global Ratings listed New Jersey dead last in pension funding in a report issued in September 2019.
Saying that the state has a pension problem is not news. With a calculated unfunded pension liability of over $142 billion, the state’s problem dwarfs that of the much smaller Kentucky.
The added problem is New Jersey is gamesmanship that does little to rein in overall pension liabilities and often results in the words of the COI in “extraordinary perks for public employees.”
The commission last issued a report on the topic in 2009 and found one decade later than many of the same practices are still in place. 
A number of the practices questioned in the commission’s report stem from the state’s strong tradition of home rule among its 565 municipalities coupled with a state Legislature and executive branch that frequently found it easier to “kick the can down the road” than engage in true pension reform.
In August 2018, a commission empaneled by Senate President Steve Sweeney issued its “Path to Progress Report” with recommendations for tackling the state’s long-standing fiscal problems. Not surprisingly the report looked hard at pension reform issues.
Calling “The fiscal future of New Jersey bleak,” the report concluded “both the pension and health benefit funding crisis must be addressed simultaneously.”
New Jersey residents are left with a state investigation report that proclaims that “abuse abounds” and an economic and fiscal policy workgroup report that calls the state’s fiscal future “bleak.”
The Pew study, with its ranking of New Jersey at the bottom of 50 states in terms of underfunding its pension programs, merely serves as external confirmation of the mess.
Local Pension Games
The local impact of pension payments, called statutory appropriations in municipal budgets, are often treated as charges that come from the state which are out of the control of local officials. 
Even the most attentive members of the public who attend governing body meetings would have difficulty understanding the impact of various practices at the local level on long-term pension payments the municipality will have to make in future budgets.
The Commission on Investigations lists several local actions that impact compensation and, in many cases, pensions, including sick time payouts, often uncapped; longevity payments often added to an employee’s base pay; retirement bonuses and terminal leave payments.
State data shows that the ranks of the state’s public officials who get $100,000 or more in pensions have doubled in the last five years.  
Many of the highest-paid pensioners are retired educators, but the Police and Firemen’s Retirement System (PFRS) leads all of the state’s pension systems in terms of the number of individuals receiving over $100,000.
Data shows that PFRS is the best-funded of the state’s various pension funds.
 The PFRS also has a special retirement provision that is not available to employees in any of the other state pension plans. The special retirement provision allows the employee to collect full benefits after 25 years of service regardless of age. 
The lack of an age restriction means a retiring police officer is eligible for 65% of final pay in his/her late 40s, extending the period for which the fund has liability.
Some members of the public have expressed concern that local government entities “bump up” compensation in the final year of employment in order to increase pension benefits.   
Examples of this practice are included in the COI report. Cape May County was not among the geographic areas for which the report cited specific cases.
Cape May County
A look at the retirement system data for Cape May County municipalities for all who retired from 1990 to 2019 saw seven individuals who retired with a total monthly pension allowance equal to or higher than $100,000 per year. 
A total of 35 other employees have a pension allowance that equals or is higher than $85,000 per year but less than $100,000.
Of the seven individuals with $100,000 or more four retired as police chiefs, one as a police captain, one as a school district superintendent and one as executive director of the county Municipal Utilities Authority.
At the start of 2016 state data suggests that there were just fewer than 2,300 retirees earning pensions of $100,000 or more. That was a 130% increase over the number five years prior.
Of the total 44 county and municipal retired individuals with pensions of $85,000 or more, 32 are enrolled in the Police and Firemen’s Pension System, 10 in the Teachers Pension Annuity Fund and two in the Public Employees Retirement System.
In 2019 county municipalities budgeted over $18 million for annual required payments to PERS and PFRS.
Where from Here?
Recommendations on reform abound coming from the groups mentioned above or from other committees charged with looking at the problem like the New Jersey Pension and Health Benefit Study Commission.
Most involve significant changes to pension policy and local government practices.
Recommendations include adopting a hybrid defined contribution system, lowering the level of coverage for health care from platinum to gold, increasing the retirement age, capping accumulated terminal leave payments in all future collective bargaining contracts, and more
What all seem to agree on is that action is required soon. The state is in a multiyear process to gradually lower the rate of return assumptions for state pension fund investments. 
Higher than realistic assumptions have been used in the past as a way of lowering the state payments into the pension funds.
The state is also ramping up to 100% funding of Actuarially Required Contribution (ARC). The state has made a practice of shorting the annual required contributions for years.  
A ramp-up schedule calls for 100% ARC payment by 2023.
Critics of the state’s pension practices say that without reform the amount the state is not only going to have to pay in 2023 but sustain afterward may be unreachable.
To contact Vince Conti, email vconti@cmcherald.com.

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