Gubernatorial Candidates Differ on Retirement Plan Solution
Now that the gubernatorial primaries are over and the parties have chosen their candidates, it is a good time to review their positions on solving the State’s pension funding problems. As one would expect, the two candidates, Democratic nominee Phil Murphy and Republican nominee Kim Guadagno differ on their approaches to easing this seemingly never-ending issue.
Murphy, who was ambassador to Germany during the Obama administration and who chaired the 2005 Benefits Review Task Force, a pension commission established by then-Governor Richard Codey, wants to preserve the current defined benefit pension system. He says that the State has a “moral obligation” to fund the retirement systems and that it must meet its obligations to its current and future retirees. He believes that the investments in alternative investments and hedge funds during the past eight years of the Christie administration have not produced enough additional revenue to justify their high management fees and that lower cost mutual funds would have produced higher returns.
Guadagno, who has been Lieutenant Governor during the two Christie administrations, is a former Assistant United States attorney and was elected as sheriff of Monmouth County before becoming Lieutenant Governor. She has called for the current defined benefit system to be frozen and replaced by a hybrid pension plan, a plan which combines features of both a defined contribution retirement plan and a defined benefit pension plan. This type of plan is less costly than a full defined benefit plan and produces smaller retirement benefits. She also favors a reduction in the health benefit plans covering educators and other public employees.
How We Got There
The major problem that the next Governor faces began around eighteen years ago, before state leaders, legislators and Governors, faced with budget shortfalls in many years, found it convenient to contribute less money to the pension system than was recommended by the plan actuaries. Prior to that, the system was “fully funded.” Efforts to catch up proved fruitless, as the budget deficits that needed to be closed grew, siphoning more money from pension contributions. Other efforts to slow down the rising pension costs, such as suspending cost-of-living increases for retirees and reducing the retirement benefits on five occasions for new and future enrollees, also proved inadequate.
A major effort to close the funding gap was made in 2011, when Chapter 78, P.L. 2011, was passed. That law called for increased employee contributions to the pension system and a requirement that all public employees pay a portion of their health insurance benefits in return for gradually increasing pension contributions by the State. It was intended to eventually eliminate the funding shortfall. It was supposed to bring the annual contribution by the State up to full actuarial funding through a multi-year plan which increased the annual contribution each year for seven years. While the employees wound up (1) contributing more to their pensions and (2) paying a portion of their health benefits, the Governor reneged on funding the seven-year increasing State obligation, leaving the system still far short of adequate funding status.
As anyone can see, the new Governor will face a daunting challenge when it comes to finding a solution to the retirement dilemma.