A new report proposes radical changes to the state’s $73 billion pension plan endorsed by top state Republicans but sure to draw fire from Democrats, unions and others.
The report was commissioned by the New Jersey State Investment Council and co-authored by Steve Malanga, a fellow at the Manhattan Institute, and Josh McGee, vice president of public accountability at the Laura and John Arnold Foundation. It urges the state to:
- Replace the state’s defined-benefit pension plan with a new, less costly, cash-balance pension plan that is a hybrid of defined benefits and individual retirement accounts;
- Reduce the cost of health-benefit plans provided to government workers to the same levels as those being offered to private-sector workers at New Jersey’s largest companies; and
- Redirect some of the resulting savings toward paying off the state’s retirement debt.
Enacting the recommendations would ultimately result in state workers getting fewer retirement and health benefits, largely because a cash balance plan is a hybrid pension/401(k) plan. In such a plan, the investments and structure of the defined benefit pension plan would remain intact, but public workers would get individual retirement accounts and benefits based on years served, salary and their own contributions to the plan – much like a 401(k) plan. Under the defined benefit pension plan, workers are guaranteed an annual salary for life after a predetermined number of years of employment.
Enacting a new health benefits plan that mimics that of the state’s largest companies could result in fewer health benefits, as corporations typically seek the cheapest option for health insurance for their employees.
Republicans are quick to point out the well-documented enormity of the pension plan crisis New Jersey has faced for years, despite contributions made under the Christie administration. The state’s pension system is just 30 percent funded, meaning it owes $124 billion in excess of its assets over the next decade. That makes it the most underfunded pension system among all 50 states.
The report also predicts that by 2023, the state’s required annual pension payments could equal 12 percent to 15 percent of its entire budget. Comparatively, the state contributed $2.5 billion to the pension fund in fiscal year 2017, or 7.2 percent of its $34.6 billion total budget in 2017. The report also points out that enacting the recommendations would reduce combined pension and health costs for New Jersey by $2 billion a year.
Assemblyman Declan O’Scanlon, R-13th District, said that he will back the proposal “with his last political breath,” adding pension reform is the most important economic issue the state faces.
“I expect blowback from everyone who can’t do basic math, I expect it from anyone who is for short-term gain over fiscal responsibility, and I expect it from anyone who is willing to sacrifice the financial security off the state,” O’Scanlon told NJBIZ.
“Without these reforms, our state will become financially insolvent over the course of the next 10 years,” he said. “The report is bipartisan, and anyone who is arguing against these reforms is arguing against public workers.”
Tom Byrne, president of Byrne Asset Management and chairman of the New Jersey State Investment Council, which oversees the pension plan’s investments, agreed with O’Scanlon.
“There is no denying the statements made in the report,” Byrne said in an email. “It’s plain and simple math. …The report is an articulate warning and call to arms that we cannot afford to wait to deal with this. I hope every legislator takes the time to read this report.
Tom Byrne, president of Byrne Asset Management and chairman of the New Jersey State Investment Council
“Without getting into too much detail about specific numbers cited, I would say that the key takeaways form the report are that New Jersey will not be able to make a full contribution into the pension system, as recommended by its actuaries, until 2023 — at the earliest,” he said. “Thus, for the next five years, the system will continue to take on new unfunded debt even if New Jersey sticks to its plan to gradually increase contributions and even if the pension system hits its investment targets.
“The report says that we’ve now reached the point where neglecting to construct an adequate and lasting fix pushes the pension system on a path toward failure, a catastrophic scenario for New Jersey’s public employees and taxpayers.”
Assembly Republican Leader Jon Bramnick, who represents the 21st District, urged the Democratic majority to make fixing the state’s pension and health benefits system a priority.
“This report speaks for itself,” Bramnick said in an email. “Obviously we need to get to work to enact further reforms to make these benefits more realistic.”
All three said that while the Democrats do have the majority in all branches of state government, they expect them to work on a bipartisan deal fix, as Gov. Phil Murphy repeatedly promised during his campaign and the transition period. Murphy pledged he would bring the state plan to fully funded status, but did not specify how, only saying that his proposed “millionaires tax” would go toward fixing it.
A spokesman for the New Jersey Education Association, the state’s largest union representing public school years, said the organization is willing to work with Murphy on pension reform, but would not say whether it agrees with the reforms proposed in the paper.
“Gov. Murphy understands the magnitude of the challenge he has inherited, and he’s been clear in his commitment to making sure that the state lives up to its end of the
pension bargain,” said the spokesman in an emailed statement. “We look forward to working with the Murphy administration to ensure that the state finally begins to follow responsible and sustained pension funding practices that allow New Jersey to meet its obligations.”
Murphy’s office did not return calls and emails requesting comment on this issue. Emails and calls to Democratic state Senate leader Steve Sweeney and New Jersey State’s Police Benevolence Society were also not returned by press time.