Senate President Stephen Sweeney, right talks to Senator Ronald Rice prior to the address. Governor Chris Christie will deliver his Fiscal Year 2016 Budget Address to the Legislature and the people of New Jersey while in the State House’s Assembly Chambers. Tuesday February 24, 2015. Trenton, NJ, USA (Aristide Economopoulos | NJ Advance Media for NJ.com)
March 29, 2015
Displayed with permission from NJ.com
TRENTON — When Gov. Chris Christie’s pension commission issued a highly anticipated report last month, it made one thing clear: no simple tweaking or flitting around the edges will do to fix New Jersey’s vastly underfunded public employee retirement system. To get the kind of payoff New Jersey needs, the panel proposed to reinvent pension and health benefits for hundreds of thousands of active and retired state and local workers.
The plan — which Christie has pitched in his town hall tour and some unions immediately dismissed — would move workers onto less costly health care plans, freeze the current public worker pension system and create a new hybrid of a traditional pension plan and one that resembles a 401(k).
Such big changes have already been enacted in other states with huge pension woes – such as Kentucky, which two years ago created a less generous “cash balance” plan like what’s proposed in New Jersey.
But leaders in Kentucky say it wasn’t easy – and that Christie is in for an even tougher fight if he wants to enact every big element of his pension commission’s plan.
“It was a battle,” said state Senate Majority Floor Leader Damon Thayer, a Kentucky Republican.
Kentucky moved to a cash balance pension plan for some public workers in its own quest to rein in rising retirement costs.
The cash balance plan works like this: Like a defined-contribution, or 401(k), plan, an employee’s benefits show up as a lump sum in a “hypothetical” personal account, which is funded by employer and employee contributions and investment returns. But unlike a 401(k), employees can receive their benefits in lifetime payments determined by their balance and other actuarial measurements.
Christie’s pension panel recommended this sweeping change as a possible answer to a $37 billion unfunded pension liability — which balloons to $83 billion under new accounting rules.
Since releasing the plan in late February to coincide with his proposed state budget, the Republican governor has taken the proposal on the road, saying pension and health benefits are on the verge of “making it impossible for the state to do much else to invest in a better New Jersey.”
Republicans in Kentucky made a similar case.
Without reform, the pension payment would consume payroll costs, Thayer said. In addition, the state and local pension contributions were set to more than double by 2020, according to a Pew Charitable Trusts report.
Kentucky’s retirement system, like New Jersey’s, consistently ranks among the most underfunded in the country. Past governors of both states made a habit of not making full pension payments.
To hear Thayer tell it, passing those reforms required considerable negotiations and cajoling among the Democratic governor, GOP-led Senate and Democratic-controlled House.
“The cash balance plan was a compromise here in Kentucky,” Thayer said. “Republicans did not want to stay with the full defined-benefit system, and we knew the Democrats would never agree to going to a full defined-contribution system.”
So in late March 2013, the Kentucky General Assembly passed a pension reform package that formed a cash balance pension plan, committed the state to fully funding its annual required contribution and came up with more than $100 million to pay for it.
But there was a big difference between what Kentucky did and what Christie’s panel wants New Jersey to do.
Kentucky’s new pension plan covers only employees hired after Jan. 1, 2014. Everyone else stays under the old plan. In New Jersey, Christie wants to also apply it to current workers and freeze their benefits under the current pension plan.
Building the plan around new workers alone “saves virtually nothing,” said Tom Healey, a former Goldman Sachs executive who chairs Christie’ pension commission.
“If you’re a politician you can say ‘we did something, we improved the pension plan going forward,’ but you haven’t saved any dollars,” he said.
Attempts to do that in Kentucky would almost certainly have wound up in court, Thayer said.
“Yes we would like to move everybody into a new plan, but there just isn’t the political will to litigate that right now,” he said. “At some point the fiscal situation we find ourselves in, somebody may choose to do that.”
Assembly Budget Committee Chairman Gary Schaer (D-Passaic) said Christie’s “extremely aggressive, if not radical” proposal is destined to fail.
“I think what the governor is doing is saying ‘I put out an idea. I’ve done my job, now (the legislature) should do theirs’,'” he said. “It’s great politics.”
Christie’s spokesman Kevin Roberts said the governor has “put forward a comprehensive plan and, in that regard, now need the Legislature to step up and be a part of the conversation and take action on solutions too.”
As of 2005, nearly a quarter of private sector workers with defined-benefit pension plans were enrolled in cash balance plans, according to the U.S. Bureau of Labor Statistics.
California, Nebraska, Texas and Kansas also operate cash balance plans for at least some state or local employees, according to a 2014 Pew report.
Models vary, but in Kentucky’s scheme, workers contribute 5 percent or 8 percent of their pay, depending on their job classification, and the state or municipality kicks in another 4 percent or 7.5 percent.
While 401(k) plans are vulnerable to markets, Kentucky guarantees at least a 4 percent investment return. If returns beat that, workers keep most of the excess and the state puts its share away for a rainy day.
Employees are vested after five years, and can leave with their entire balance.
But an Urban Institute study of Kentucky’s plan found that employees with fewer years of service would receive higher benefits, and more tenured employees would receive less.
For example, a worker earning the average salary and retiring after 35 years would get a $47,900 pension under the traditional plan, according to the Urban Institute. If that worker was in the cash balance plan, the pension would be no more than $33,200 a year.
However, that same worker would get a traditional pension of $3,200 if he or she retired after 15 years, as opposed to anywhere from $7,400 to $15,300 under the new plan.
Healey agreed that younger employees may be better off than mid-career employees under the new plan. Plans for the lowest tier of workers, hired after the 2011 reforms, receive little state money.
“This is equal and fair across both older and new workers,” Healey said. “If we were starting from scratch in New Jersey, this is the plan we would offer everybody. So let’s offer it.”
The combination of the frozen pension plans, new pension plan and Social Security will still provide “a solid basis for retirement” for the older workers, he said.
Schaer stressed there’s still the issue of fairness.
“It is a significant change from what we promised to employees when they joined government service,” he said. “We’re not just talking about someone who’s been in government service for 10, 15, or 20 years, but someone who’s on the verge of retirement.”
According to the governor’s pension commission, freezing the existing system would save the state and local governments more than $2 billion in a single year. The cash balance plan would cost the state and local governments $1.23 billion a year.
Jason Bailey, director of the Kentucky Center for Economic Policy, said the less generous pension benefits for longtime workers will spur faster turnover. And while Pew touts cash balance costs as more predictable than those of traditional pension plans, Bailey said that doesn’t necessarily mean they’ll be less expensive.
“The only thing that we did get out of it was they did make this commitment to pay the full (annual required contribution) going forward and created this little bit of revenue,” he said.
Kentucky’s 2013 reforms came just a few years after another retooling of the system in which the state agreed to gradually increase payments until reaching the annual required contribution in 2024.
New Jersey made a similar promise in a 2011 pension law that brought national attention to Christie, who is considering a run for president.
But the governor last year didn’t keep to the state’s promised contribution, slicing more than $2.5 billion in payments. He now says his initial reforms didn’t go far enough.
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