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3-15-10 'N.J. taxpayers owe pension fund $45.8 billion' The Record
The RECORD "New Jersey taxpayers face a decades-long continuation of six-figure annual pension payouts and other costly retirement benefits promised to public employees. The reason: State law guarantees that pensions for existing workers can't be altered. Even a package of pending legislation — hailed as the remedy for a system that's short $45.8 billion — would apply only to new employees and not to the current workforce of some 450,000..."
N.J. taxpayers owe pension fund $45.8 billionSunday, March 14, 2010 LAST UPDATED: MONDAY MARCH 15, 2010, ELISE YOUNG AND DAVE SHEINGOLDTHE RECORDSTAFF WRITERS
New Jersey taxpayers face a decades-long continuation of six-figure annual pension payouts and other costly retirement benefits promised to public employees.
The reason: State law guarantees that pensions for existing workers can't be altered. Even a package of pending legislation — hailed as the remedy for a system that's short $45.8 billion — would apply only to new employees and not to the current workforce of some 450,000.The guarantee, in a 1997 law signed by Republican Gov. Christie Whitman, has served to insulate public workers from wrenching economic realities that prevail in the private sector.
Amid the national recession, for instance, 21 percent of Garden State companies suspended payments to 401(k)s, according to a September survey by the New Jersey Chamber of Commerce. Those companies are not obliged to resume the contributions or make up the difference."In private industry, for those not in a union environment, employers are free to make changes as they see fit," said Jim O'Connor, managing director of Cbiz EAO benefits, a Manasquan consulting firm. "It's all business-driven."New Jersey's government workers have no such retirement uncertainty.
The trend in their pension system is ever-growing salaries and a surge in retirees. It's all underwritten by the country's highest-taxed property owners — whose elected officials accommodated labor unions, incorrectly counted on eternal pie-in-the-sky investment returns and took little action when a financial crisis was clear.A multiyear pension-data analysis by The Record shows that:Annual payments to retirees reached $5.50 billion in 2008, from $3.53 billion in 2002 — a 56 percent increase and more than triple the national inflation rate. The number of retirees, meanwhile, increased 21.4 percent, to 226,000. "Pensionable" salaries of existing public workers jumped 23.8 percent, to $23.98 billion in 2008 from $19.37 billion in 2002. In 2003, roughly one in eight public employees earned at least $75,000. That number more than doubled — to 98,300, from 49,800 — and now about one in five workers is paid at least $75,000. Estimated obligations to current retirees now stand at $72.08 billion.
Another $61.67 billion is due to current employees. The total outstanding obligation, $134.9 billion, is up 22.2 percent since 2006. The system is $45.8 billion in the hole. In other words, for every $3 it owes, the state is short nearly a buck. The shortage, known as an unfunded liability, has more than doubled from 2006, when it was $24.8 billion. Changes brewing With support from both parties and Governor Christie, legislative leaders are championing a pension-reform package that would tighten enrollment eligibility, raise retirement ages and make other cost-saving changes.One proposal would phase out the traditional pension plan, a move private industry started after a 1974 law encouraged 401(k)-type programs. In 1979, roughly six in 10 private-sector workers had a pension plan similar to what New Jersey runs today, according to the Employee Benefit Research Institute.
In 2008, the ratio stood at a mere one in 14.Such "defined-benefit" systems are costly to employers, both to administer and to keep solvent."Public employers are subject to union pressures and legislative restrictions," said O'Connor, the benefits consultant. "In New Jersey, you have very strong unions and you also require an act of the state Legislature to make changes to pension rules."Supporters of the reforms working through the Legislature say that eventually those changes would help shore up the system.But they would have no impact, by way of example, on a 21-year-old office worker hired before any of the proposed reforms are signed, and who could retire in 2049 and enjoy today's generous retirement benefits."For the current employees, we are bound, absolutely," said state Senate President Steve Sweeney, D-Gloucester. "But we're not bound for life. It's just a matter of us drawing the line. Current employees obviously keep what they have because they have it.
But for future employees, no.
"Employment experts say, however, that in the private sector, retirement rules can be changed in the middle of employees' careers. For example, pension plans are routinely "frozen" when business pressures demand — meaning that workers stop accumulating pension credits. Accrued benefits are sacrosanct, as are payments to those who have retired
Skipped payments - The crisis now is far from what the Whitman administration had pictured in 1997, when the governor successfully lobbied to skip pension payments, bond $2.75 billion and apply that loan plus investment earnings to patch a $4.2 billion hole in the pension funds. The idea, called the Pension Security Plan, was to lower taxes, relieve long-term debt and ensure the long-term health of the pension pool. But a key assumption of the plan — annual investment returns of 8.75 percent — faltered when the markets ended their run-up in 2001."These are mysterious things to most of the people most of the time," said Gordon MacInnes, a former Democratic state senator from Morristown who had tried to defeat the plan. "[Lawmakers] were just abandoning prudent conservative practices to make good on a political promise to reduce the income tax by 30 percent and at the same time balance the budget. This was the primary vehicle to do that."
James DeEleuterio, one of Whitman's treasurers, defended the governor's Pension Security Plan as fiscally sound. As for the related legislation — the "non-forfeitable" right to a pension — it merely formalized what had been practice all along, he said."Part of that was, frankly, a trade-off," DeEleuterio said. "At the time, the unions made several concessions to the state in terms of employees paying a part of their overall health-benefit costs and changing copays. They said if we're going to make these concessions, we want a guarantee that once an employee becomes vested, the state can't turn around and say, 'OK, we're taking that back.' "The pension-bond bill won narrow approval. The non-forfeiture measure received overwhelming support in both houses, with five Republicans — one in the Senate and four in the Assembly — casting no votes."Back in those times the stock market was doing pretty well," said Rep. Scott Garrett, R-Sussex, who as an assemblyman had voted against the 1997 pension bills. "But the question was, 'OK, what if that doesn't go on into perpetuity — will we face a problem in the future knowing that a good thing doesn't last forever?' A handful of us said we have to prepare ourselves for that day."When Whitman left office in 2000 to head the Environmental Protection Agency, the pension system continued to be flush — but the administration had warned that if the excess assets vanished, the state would have to resume making payments, DeEleuterio said.
Instead, later administrations continued to withhold payments, even as the markets contracted, tax revenue dried up and New Jersey's unfunded obligation — what it owed, compared to what was on hand — reached its current $45.8 billion. Recognizing mistakes In 2005, a pension-and-benefits review panel convened by Richard J. Codey, the Democratic acting governor, identified missteps — including the Pension Security Plan — and suggested corrections. A year later, a special legislative committee on property-tax reform identified an $18 billion unfunded pension liability and recommended 21 changes to strengthen the retirement system.
Few of those recommendations became law.Sen. Kevin J. O'Toole, R-Cedar Grove, who sat on the committee's benefits-reform panel, asked for legal opinions on non-forfeitable pension rights. Lawyers from the Office of Legislative Services and the Attorney General's Office said the clause from the 1997 law was akin to a contract and altering it would be unconstitutional. O'Toole, an attorney, wasn't satisfied."There's still deep exploration on what's a non-forfeitable right and what's not," he said last week. "We're going to get a briefing from the Governor's Office and the treasurer soon. Right now, everyone's holding their breath."
Sweeney, the state Senate president — and an ironworker with heavy backing from trade unions — has had one-on-one discussions with members of public-safety and other employee unions. He said he told them that the state will fulfill its promise of a sound pension, but stressed that long-term reform — however slow — is necessary."Pensions are long term," he said. "Shocking the system would force people to leave, run out the door. By doing it in a very responsible way, which we are, you're gradually correcting the pension system. It's not about fixing it overnight. It didn't break overnight."One of the reform proposals under consideration would ask voters to approve a constitutional change, ordering the state to make good on the pension contributions it has skipped for years, even as the workforce dutifully paid its share.
Supporters say such a clause, with a seven-year payment plan for $17.5 billion in overdue funds, would set up New Jersey for fiscal responsibility.
Critics say it would require up to 10 percent in immediate and disastrous budget cuts to cover what's owed."How many colleges are you going to close?" said Michael Riccards, executive director of the non-partisan Hall Institute of Public Policy, which has studied pension issues. "How many mental institutions are you going to close? How many jails are you going to close?"
E-mail: younge@northjersey.com and sheingold@northjersey.com
Big salaries, big pensions - New Jersey has seen dramatic increases since 2003 in the number of people receiving annual government pensions of at least $75,000 or earning government salaries of at least $100,000.
Retired employeesAnnual pension 2003 2009At least $100,000 26 377At least $75,000 500 3,391Active employees(Salary of at least $100,000)Employees 2003 Percent of employees 2008 Percent of employeesAll employees 8,538 2.0 24,836 5.4State police fund 15 0.6 1,536 51.6Police and firefighters fund 2,618 6.3 8,374 19.4Source: New Jersey Treasury Department/staff analysis by Dave SheingoldThree scenariosNew Jersey’s government employee pension system covers 463,000 current workers and 226,000 retirees. Here are three scenarios for how much will be owed to three typical current employees if they stay on the public payroll until retirement. Teacher Police officer Office workerAverage 2008 salary $52,810 $71,333 $42,388Estimated final salary $124,486 $121,440 $99,919Annual pension $82,991 $78,936 $67,218Lifetime pension $1,576,829 $2,447,016 $1,277,142Note — Estimates use the following assumptions: starting with average 2008 salaries of 30-year-old workers with at least five years’ experience; building in 3-percent annual raises until reaching the retirement age for each fund; living until age 79.Source: New Jersey Treasury Department/staff analysis by Dave Sheingold
The RECORD "New Jersey taxpayers face a decades-long continuation of six-figure annual pension payouts and other costly retirement benefits promised to public employees. The reason: State law guarantees that pensions for existing workers can't be altered. Even a package of pending legislation — hailed as the remedy for a system that's short $45.8 billion — would apply only to new employees and not to the current workforce of some 450,000..."
N.J. taxpayers owe pension fund $45.8 billionSunday, March 14, 2010 LAST UPDATED: MONDAY MARCH 15, 2010, ELISE YOUNG AND DAVE SHEINGOLDTHE RECORDSTAFF WRITERS
New Jersey taxpayers face a decades-long continuation of six-figure annual pension payouts and other costly retirement benefits promised to public employees.
The reason: State law guarantees that pensions for existing workers can't be altered. Even a package of pending legislation — hailed as the remedy for a system that's short $45.8 billion — would apply only to new employees and not to the current workforce of some 450,000.The guarantee, in a 1997 law signed by Republican Gov. Christie Whitman, has served to insulate public workers from wrenching economic realities that prevail in the private sector.
Amid the national recession, for instance, 21 percent of Garden State companies suspended payments to 401(k)s, according to a September survey by the New Jersey Chamber of Commerce. Those companies are not obliged to resume the contributions or make up the difference."In private industry, for those not in a union environment, employers are free to make changes as they see fit," said Jim O'Connor, managing director of Cbiz EAO benefits, a Manasquan consulting firm. "It's all business-driven."New Jersey's government workers have no such retirement uncertainty.
The trend in their pension system is ever-growing salaries and a surge in retirees. It's all underwritten by the country's highest-taxed property owners — whose elected officials accommodated labor unions, incorrectly counted on eternal pie-in-the-sky investment returns and took little action when a financial crisis was clear.A multiyear pension-data analysis by The Record shows that:Annual payments to retirees reached $5.50 billion in 2008, from $3.53 billion in 2002 — a 56 percent increase and more than triple the national inflation rate. The number of retirees, meanwhile, increased 21.4 percent, to 226,000. "Pensionable" salaries of existing public workers jumped 23.8 percent, to $23.98 billion in 2008 from $19.37 billion in 2002. In 2003, roughly one in eight public employees earned at least $75,000. That number more than doubled — to 98,300, from 49,800 — and now about one in five workers is paid at least $75,000. Estimated obligations to current retirees now stand at $72.08 billion.
Another $61.67 billion is due to current employees. The total outstanding obligation, $134.9 billion, is up 22.2 percent since 2006. The system is $45.8 billion in the hole. In other words, for every $3 it owes, the state is short nearly a buck. The shortage, known as an unfunded liability, has more than doubled from 2006, when it was $24.8 billion. Changes brewing With support from both parties and Governor Christie, legislative leaders are championing a pension-reform package that would tighten enrollment eligibility, raise retirement ages and make other cost-saving changes.One proposal would phase out the traditional pension plan, a move private industry started after a 1974 law encouraged 401(k)-type programs. In 1979, roughly six in 10 private-sector workers had a pension plan similar to what New Jersey runs today, according to the Employee Benefit Research Institute.
In 2008, the ratio stood at a mere one in 14.Such "defined-benefit" systems are costly to employers, both to administer and to keep solvent."Public employers are subject to union pressures and legislative restrictions," said O'Connor, the benefits consultant. "In New Jersey, you have very strong unions and you also require an act of the state Legislature to make changes to pension rules."Supporters of the reforms working through the Legislature say that eventually those changes would help shore up the system.But they would have no impact, by way of example, on a 21-year-old office worker hired before any of the proposed reforms are signed, and who could retire in 2049 and enjoy today's generous retirement benefits."For the current employees, we are bound, absolutely," said state Senate President Steve Sweeney, D-Gloucester. "But we're not bound for life. It's just a matter of us drawing the line. Current employees obviously keep what they have because they have it.
But for future employees, no.
"Employment experts say, however, that in the private sector, retirement rules can be changed in the middle of employees' careers. For example, pension plans are routinely "frozen" when business pressures demand — meaning that workers stop accumulating pension credits. Accrued benefits are sacrosanct, as are payments to those who have retired
Skipped payments - The crisis now is far from what the Whitman administration had pictured in 1997, when the governor successfully lobbied to skip pension payments, bond $2.75 billion and apply that loan plus investment earnings to patch a $4.2 billion hole in the pension funds. The idea, called the Pension Security Plan, was to lower taxes, relieve long-term debt and ensure the long-term health of the pension pool. But a key assumption of the plan — annual investment returns of 8.75 percent — faltered when the markets ended their run-up in 2001."These are mysterious things to most of the people most of the time," said Gordon MacInnes, a former Democratic state senator from Morristown who had tried to defeat the plan. "[Lawmakers] were just abandoning prudent conservative practices to make good on a political promise to reduce the income tax by 30 percent and at the same time balance the budget. This was the primary vehicle to do that."
James DeEleuterio, one of Whitman's treasurers, defended the governor's Pension Security Plan as fiscally sound. As for the related legislation — the "non-forfeitable" right to a pension — it merely formalized what had been practice all along, he said."Part of that was, frankly, a trade-off," DeEleuterio said. "At the time, the unions made several concessions to the state in terms of employees paying a part of their overall health-benefit costs and changing copays. They said if we're going to make these concessions, we want a guarantee that once an employee becomes vested, the state can't turn around and say, 'OK, we're taking that back.' "The pension-bond bill won narrow approval. The non-forfeiture measure received overwhelming support in both houses, with five Republicans — one in the Senate and four in the Assembly — casting no votes."Back in those times the stock market was doing pretty well," said Rep. Scott Garrett, R-Sussex, who as an assemblyman had voted against the 1997 pension bills. "But the question was, 'OK, what if that doesn't go on into perpetuity — will we face a problem in the future knowing that a good thing doesn't last forever?' A handful of us said we have to prepare ourselves for that day."When Whitman left office in 2000 to head the Environmental Protection Agency, the pension system continued to be flush — but the administration had warned that if the excess assets vanished, the state would have to resume making payments, DeEleuterio said.
Instead, later administrations continued to withhold payments, even as the markets contracted, tax revenue dried up and New Jersey's unfunded obligation — what it owed, compared to what was on hand — reached its current $45.8 billion. Recognizing mistakes In 2005, a pension-and-benefits review panel convened by Richard J. Codey, the Democratic acting governor, identified missteps — including the Pension Security Plan — and suggested corrections. A year later, a special legislative committee on property-tax reform identified an $18 billion unfunded pension liability and recommended 21 changes to strengthen the retirement system.
Few of those recommendations became law.Sen. Kevin J. O'Toole, R-Cedar Grove, who sat on the committee's benefits-reform panel, asked for legal opinions on non-forfeitable pension rights. Lawyers from the Office of Legislative Services and the Attorney General's Office said the clause from the 1997 law was akin to a contract and altering it would be unconstitutional. O'Toole, an attorney, wasn't satisfied."There's still deep exploration on what's a non-forfeitable right and what's not," he said last week. "We're going to get a briefing from the Governor's Office and the treasurer soon. Right now, everyone's holding their breath."
Sweeney, the state Senate president — and an ironworker with heavy backing from trade unions — has had one-on-one discussions with members of public-safety and other employee unions. He said he told them that the state will fulfill its promise of a sound pension, but stressed that long-term reform — however slow — is necessary."Pensions are long term," he said. "Shocking the system would force people to leave, run out the door. By doing it in a very responsible way, which we are, you're gradually correcting the pension system. It's not about fixing it overnight. It didn't break overnight."One of the reform proposals under consideration would ask voters to approve a constitutional change, ordering the state to make good on the pension contributions it has skipped for years, even as the workforce dutifully paid its share.
Supporters say such a clause, with a seven-year payment plan for $17.5 billion in overdue funds, would set up New Jersey for fiscal responsibility.
Critics say it would require up to 10 percent in immediate and disastrous budget cuts to cover what's owed."How many colleges are you going to close?" said Michael Riccards, executive director of the non-partisan Hall Institute of Public Policy, which has studied pension issues. "How many mental institutions are you going to close? How many jails are you going to close?"
E-mail: younge@northjersey.com and sheingold@northjersey.com
Big salaries, big pensions - New Jersey has seen dramatic increases since 2003 in the number of people receiving annual government pensions of at least $75,000 or earning government salaries of at least $100,000.
Retired employeesAnnual pension 2003 2009At least $100,000 26 377At least $75,000 500 3,391Active employees(Salary of at least $100,000)Employees 2003 Percent of employees 2008 Percent of employeesAll employees 8,538 2.0 24,836 5.4State police fund 15 0.6 1,536 51.6Police and firefighters fund 2,618 6.3 8,374 19.4Source: New Jersey Treasury Department/staff analysis by Dave SheingoldThree scenariosNew Jersey’s government employee pension system covers 463,000 current workers and 226,000 retirees. Here are three scenarios for how much will be owed to three typical current employees if they stay on the public payroll until retirement. Teacher Police officer Office workerAverage 2008 salary $52,810 $71,333 $42,388Estimated final salary $124,486 $121,440 $99,919Annual pension $82,991 $78,936 $67,218Lifetime pension $1,576,829 $2,447,016 $1,277,142Note — Estimates use the following assumptions: starting with average 2008 salaries of 30-year-old workers with at least five years’ experience; building in 3-percent annual raises until reaching the retirement age for each fund; living until age 79.Source: New Jersey Treasury Department/staff analysis by Dave Sheingold
