• May 2015
  • Mort Reinhart
  • The Pension Commission Report:
    Slash Benefits, Cure State’s Ills

    This month’s column is about magicians who are able to solve all the State’s budgetary problems with a series of magical tricks that are reminiscent of the trick used by the great magicians of history: watch my right hand closely and never notice what I am doing with my left hand. Our magicians are the Great Christo and his assistants, the “nonpartisan” committee he appointed to find a “cure for the problems plaguing New Jersey’s pubic employee pension and health benefits system.” Their solution would make all the State’s budgetary problems disappear, much the way all magicians are able to make people or objects disappear while the viewer is mesmerized by the distractions that the magician uses.  

    The solution, which the Great Christo has trumpeted around the State and across the nation, is a plan in which the public employees agree to major changes, while the State balances its budget through the employees forced reduction in benefits.  This solution is presented as a roadmap in which the employees give up (freeze) the pension system which has existed for 60 years (starting in 1955); accept a new retirement plan with significantly reduced future benefits; “transfer the assets, liabilities and RISKS of the existing pension and the new retirement plans to employee entities” who will assume the risk of managing the plans and “ensure that the available funds are sufficient to pay for the provided benefits,” which would, in effect, eliminate the State’s involvement in overseeing and funding retirement programs for teachers, in particular, which it has done for those 60 years; and cut public employee health benefit plans for active workers and retirees from their current benefit structure to a lesser benefit structure that will “align” them with “private sector levels.”

    Nowhere in the magical cure is there any mention of any new obligation that the State assumes. Its contributions to the existing frozen plan, which will continue until all current and past liabilities are met, will be significantly LESS than its current obligations, as measured by the plans’ actuaries. The State will be relieved of its retirement obligations to the educators of the State in the future, since the plan calls for the employer’s retirement obligations for teachers to be funded by the local school district. (More about this shift from State funding to local funding later.)

    Oh yes, the Commission report calls for a constitutional amendment that will “lock in fixed and certain pension funding” to protect employees and retirees from the vagaries of politics and the annual budget process, improve the State’s financial condition and to make clear to all that the people of New Jersey have taken ownership of the problem and the solution.” This appears to be the only step the State has to take as part of this roadmap. (For the Committee’s edification, we have several laws that already require that the State makes its annual contribution to the pension funds of the State: NJSA 18A:66 - 33; NJSA 18A:66-18; NJSA 18A:66-18-1, as well as several sections in Title 52., and we have the agreed upon contribution schedule between the Governor and public employees found in Chapter 78, P.L. 2011.)  It seems that the State chooses to ignore the statutes, including the law signed by the current Governor requiring specific State contributions to the various pension systems, which he widely praised in 2011. Several past governors, going back to the late ‘90s, also chose to ignore the statutes requiring contributions by the State. Thus, any constitutional amendment would merely add another requirement to those existing statutes that have been ignored for over fifteen years.  It does not seem like the State is providing much that is new in return for the all the sacrifices being asked of the public workers.   

    So the magicians get and keep your attention by conjuring up a picture that freezes the pension systems, starts a new retirement plan, cuts the health benefit values and gives the employee entities control of and responsibility for retirement benefits. 

    What they do not tell you is the real dollars and cents effects on employees and retirees of these changes.  They use such vagaries as “private sector levels,” which could mean either the benefit levels for laborers or for highly paid executives or some other “private sector” group. 

    They do not tell you how these changes will be implemented.  The report calls for an Implementation Task Force, a separate group from the Pension and Health Benefit Study Commission which, is supposed to work out all the details for accomplishing the overhaul.  It was thought that this task force would provide an opportunity for “stakeholders,” who, one would assume, are the people who would be affected by the proposed changes to provide input during the process. However, on April 12th, it was announced that the Commission would have the job originally envisioned for the Implementation Task Force: designing the details of the proposed plan.  No other information has been released since that day, no schedule has been announced, and no indication of hearings or sessions providing stakeholders with the opportunity to appear before the group has been released.    

    They do not tell you what the new retirement benefit levels will be or compare them to the current pension levels.  (They will be considerably less.)  

    They aren’t sure whether transferring the assets, liabilities and risks to an employee entity will be legal or whether federal and state laws will provide obstacles to this action.

    Just focus on the magician’s right hand.  Don’t be distracted by trying to understand the ramifications of the magical trick.

    In addition to the reduction of pension and health benefits for the active employees and the health benefits for retirees, there are several behind the scenes issues that can be gleaned by reading the Report (which is 34 pages long) and the 126 footnotes. Among those issues:

    The State rids itself of the pension obligations for the Teachers’ Pension and Annuity Fund by transferring those obligations to the local school district.  (This has been a goal of the State for more than 25 years.)  Although not specifically stated, it is assumed that the employer Social Security obligation for TPAF members, which has been provided by the State since the entry into the Social Security system in the mid-1950s, will also become the obligation of the local district. 

    Two mechanisms are offered for any local district which generates a surplus from the change in the retirement plan and the reduction in the health benefit cost. One mechanism is for the “State to draw, from income tax revenues prior to the distribution of these dedicated revenues to local governments, an amount equal to the difference between what local governments would spend on employee benefits absent reform...and what they would spend ...under the proposed reforms.”  Is this suggesting a reduction in State aid to local entities, which then provides additional relief to the State budget?

    The cost-of-living adjustment, suspended under Chapter 78, P.L. 2011, would be eliminated forever under the proposed pension changes.  This announcement, in keeping with the magician’s slight of hand, is buried in end note 46, which states “The cost of living adjustments...are not funded by the existing plan and would not be preserved or restored under the Commission’s proposal.”

    The Commission very strongly urges the elimination of the “nonforfeitable rights” statute, which was enacted in 1997 to provide protection for employees from attempts to reduce currently legislated pension benefits. The Commission recommends that part of the proposed constitutional amendment “expressly authorize the State...to modify existing benefits to the extent necessary to effect the Commission’s proposed reforms.”     

    By now, the Great Christo is ready for the final trick of the evening, pulling a rabbit out of a hat, and, when he does, it turns out to be a politician’s dream: a balanced State budget without pension obligations. He thanks his assistants for their help in deflecting the audience’s focus on him.

    You politely applaud the show, not realizing, until you are on the way out, that he has stolen your wallet with his left hand.