If You Were Away This Summer, You Missed All the Pension Fun (?)It is the end of August and the heat of summer will continue until September 21, the official beginning of autumn. However, issues affecting active and retired educators have been on fire, and their heat will continue to be felt long after the summer ends.So for those of you who have been enjoying the summer and not paying much attention to the news, let’s bring you back to the realities of the pension problems affecting your current or future retirement.Since early June, the New Jersey Supreme Court has rendered a decision negatively affecting the funding of the pension plans covering educators and, by extension, negatively affecting those educators covered by those pension plans; it has not acted on an appeal affecting the COLA payments of all retirees, although it has agreed to review and issue a decision in the case; and the New Jersey Public Employees Relations Commission (PERC) has rendered a decision affecting health benefit payments by active educators. Both Senator Steve Sweeney, Senate President, and Assemblyman Vincent Prieto, Assembly Speaker, have floated plans to deal with the on-going pension funding crises. Sweeney has suggested the federal government provide low-interest loans to those states, like New Jersey, which are faced with large pension deficits, while Prieto has quietly discussed a plan with employee union leaders that would increase funding over the next five years to help defuse the crises.Court Backs State in Funding IssueIn a setback for all members of the State’s public pension systems, the New Jersey Supreme Court ruled 5-2 that the Governor had the legal right to slash the required contribution to the systems this year by $1.8 billion because of the debt clause in the State Constitution. That contribution was to have been made by June 30, 2015. The decision reversed a lower court ruling that the Governor was bound by Chapter 78, passed in 2011, in which he agreed to increase the annual contribution to the retirement systems each year for the next seven years until the amount contributed annually met the full funding required by the actuaries of the system. In each year after 2011, the State was to increase its contribution by 1/7 of the actual amount required by the actuaries. In the 2015 fiscal year, that meant that the contribution was to be 3/7 of the full contribution ($3.1 billion). Slashing $1.8 billion of the amount continued the under-funding of the pension systems, exacerbating an already poor funding picture.
Under Chapter 78, employees are required to increase their contributions to the pension system each year of the seven years that the State was to increase its contributions, and they are to pay a portion of the cost of their health benefits as their part of the effort to fund the retirement system and to stabilize the cost of health insurance. While the Court said that the law did not constitutionally require the State to meet its funding obligation, it said nothing about the requirement that the employees continue to pay the increased contribution to the retirement system and the requirement that they contribute to their health insurance.Chapter 78 Sunset Provision ClarifiedA second decision relating to Chapter 78 was rendered by the Public Employees Relations Commission (PERC) in mid-August which interpreted a section of the law, called the “sunset” provision. This provision allows for the modification of another section of the act which blocks collective bargaining of the amount employees are required to pay for their health benefits. Under the law, employees are to pay a percentage of the cost of their health benefits for a period of at least four years. That percentage is to range from 5% to 35% of the cost of their health benefits, but can be no less than 1.5% of salary. The section of the law containing this contribution requirement was to “sunset” four years after the date of the passage of the legislation (June 28, 2015) or four years after any collectively bargained contract that began after the original date of the legislation (June 28, 2011). Thus, a newly effective collectively bargained contract (1) that takes effect after June 28, 2015 and replaced a contract that became effective on July 1, 2011 or (2) that takes effect four years after its effective date if that date was after July 1, 2011 may have different contribution rates than those in Chapter 78. However, without any contract modification, the contribution rates remain the same as those in Chapter 78.
The PERC decision reiterated that (1) the contribution levels required under the original law remain in effect until after the four year “sunset” requirement has been met and (2) they remain the same in future contracts until a new collectively bargained contract changes those rates.
FUTURE COLUMNS WILL EXPLORE THE OTHER TWO ISSUES THAT HAVE MADE THIS SUMMER A HOT ONE FOR PENSIONS: THE SUPREME COURT DECISION, WHEN IT IS MADE, REGARDING THE STATUS OF THE COST-OF-LIVING FOR CURRENT AND FUTURE RETIREES AND THE ON-GOING ISSUE OF FUNDING THE RETIREMENT SYSTEMS.