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News & Press: Pension

Christie pension commission recommends plan for huge savings, fewer benefits

Friday, February 27, 2015   (0 Comments)
Share | 02/24/15

Gov. Chris Christie's high-powered pension commission has proposed a sweeping plan that would save the state billions in retirement and health care costs while reducing benefits for hundreds of thousands of public workers. The commission says New Jersey needs to drastically change its pension and health plans. Christie's budget address will launch the complex proposal, which he'll hold up as the answer to a $37 billion unfunded pension liability — which balloons to $83 billion under new accounting rules — and $53 billion in unfunded health care liability.

That change is part of a scheme that calls for less expensive health care plans and for employees to pick up a larger share of their health insurance costs. The state's health care savings would be recycled into closing the gap in pension funding. Perhaps the report's biggest bombshell is the proposal to freeze the existing state and local pension plans and move workers onto a so-called "cash balance" defined-pension plan. Freezing the existing pension system would save the state and local government more than $2 billion in a single year. The cash balance plan would cost the state and local governments $1.23 billion a year, based on $26.6 billion in combined payroll. Employees who are now under the traditional pension plan would not be able to accrue more benefits, their existing benefits are protected, and the state must continue to make payments on it.

Like a defined-contribution, or 401(k), plan, an employee's benefits would show 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. 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. The cash balance plan could be a boon to younger, newer employees who currently receive the lowest tier of benefits offered by the state. It would be less attractive to more tenured workers.

The commission also suggests that local school districts should absorb the cost of local education retiree health benefits and the new pension plan. It says the changes in pension plans would generate enough money to absorb the cost. Paying those bills without the help of local districts would require the state to find $1.53 billion in additional revenue.

For their sacrifice, employees would be rewarded with a constitutional amendment guaranteeing that the state make required pension payments. At the same time, the proposed constitutional amendment would strip a group of employees of the "nonforfeitable right" to receive certain benefits that has exempted them from previous reforms.

Those changes demand brisk action by the Democratic-controlled Legislature, which would need to approve a proposed amendment by Aug. 3 to get it on the November ballot. The commission paints a grim picture of New Jersey finances in laying the groundwork for the proposal. By the fiscal year beginning July 2016, the state's pension contribution is expected to rise to $4.3 billion. The price tag for state employee health benefits — which ranks third-highest in the nation — will increase to $3.7 billion. At the local level, that bill could reach $10 billion. The state portions of funding pension and health care that year combine for total of $8.05 billion, or nearly a quarter of an annual budget. The alternatives to its recommendations, the commission cautioned, are extreme tax increases: it would take raising the sales tax from 7 percent to 10 percent or increasing the income tax by 29 percent to generate $3.6 billion a year.

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