Legislature Passes Landmark Pension and Benefit Reform Package

On June 23, the New Jersey General Assembly gave final legislative approval to a package of public employee pension and health benefit reforms designed to bring the pension system closer to solvency, and reduce the state’s unsustainable burden for health insurance. The measure will now be sent to Governor Christie. Reforms are clearly necessary, given that New Jersey currently has more than $110 billion in unfunded pension liabilities and health insurance obligations. A recent Mercatus Center study indicates the state actually owes more than $170 in pension costs alone when using private-sector accounting measures that, among other differences, do not assume an 8% rate of growth on investments. The $170 billion estimate represents a figure more than five times greater than the FY 2011 budget and equal to more than 40% of our Gross State Product.

What the Changes Mean

New Jersey’s public employees are actually divided into five different pension systems: The Teachers’ Pension and Annuity Fund (TPAF), the Public Employees’ Retirement System (PERS), the Police and Firemen’s Retirement System (PFRS) and the much smaller State Police Retirement System (SPRS) and Judicial Retirement System (JRS). The state will be required to make its full annual contribution to the pension systems, which will be phased in during a seven-year period. If the state were to make its full contribution in FY ’12, the total would be $3.5 billion, which is more than 10% of the proposed budget.

Among the changes to the pension system under S-2937/A-4133 are to:

• Create committees to manage each of the funds with equal representation appointed by the governor and public employee unions. Changes to the system, such as new contribution rates, can only be made once the systems reach 80% of the actuarial definition of “fully funded”.

• Phase-in increases in employee contribution rates in PERS and TPAF from 5.5% of annual salary to 7.5% and from 8.5% to 10% in PFRS

• Require new members of PERS and TPAF to accrue 30 years of service at age 65 to qualify for early retirement

• Eliminate automatic annual Cost-of-Living-Adjustments (COLAs) for current and future retirees, unless they are re-enacted by the legislature

• Prohibit retired members of PERS or PFRS to simultaneously hold elected offices that allow them to earn pension credits in those systems while also collecting full retirement benefits

Among the changes to health benefits under S-2937 are to:

• Increase contribution rates for benefits on a sliding scale that is related to income. Employees will pay at least 1.5% of their salary toward health benefits and up to 30% of the cost of their insurance. Similar increases will be required of retired workers, unless they have 20 or more years of service

• The creation of new, less-expensive insurance plans for public employees. This will give all public workers an alternative to the current “Cadillac plan” for health insurance that has become the standard, and give employees the option for a lower premium.

Fiscal Impact

The Department of the Treasury expects the bill to save the state and local governments a combined $3.9 billion in pension obligations in the first ten years and $120 billion over 30 years. The Department also expects the state and localities to save $3 billion by the tenth year in health care costs.

To read CSI-NJ President Jerry Cantrell’s message to members of the Institute following passage of the bill, click here.