The Fate of New Jersey’s Pensions and Health Benefit Funds

Almost a year ago the New Jersey Pension and Health Benefit Study Commission issued their report "to discover a cure for the problems plaguing New Jersey's public employee pension and health benefits system". As one of my wealth management partners would say "Very simplistically", the State wishes to wash its hands of the mess that it created. The State wishes to do this by 1) merging the unfunded state plans with the well-funded local plans; 2) passing the cost of teachers' pensions to local school districts; 3) putting the risk of pension performance on government employees through "employee entities" generally meaning unions; 4) reducing health benefit costs by having government employees increase their cost of health care expenses; 5) "freezing" current pension benefits; and 6) implementing "cash balance" retirement programs. 

I will not attempt to go into detail trying to dissect the above listed "solutions". Instead, I think it makes more sense to take a step back and really look at the entire issue and ask the question – What really has to happen here?

My answer is not a favorable one – we need to compromise and agree on a long-term solution to the pension and health benefits issues.

Full disclosure – my wife works in a school district and is enrolled in the Public Employees Retirement System as part of the "other than state" plan. If she retires under the present system she and I would receive health benefits for life.

While I cannot emphasize how much I hate the idea of bailing the state out from decades of misuse of taxpayer dollars and incredibly poor decisions – I do not see an alternative that makes sense. However, I disagree with some of the basic conclusions in the report on the use of the "savings".

Bear in mind – I view this as a negotiation with the state and not a case of the state telling local governments; including local school districts and counties; and citizens how things are going to be in this situation. If the state wants local governments help, and they not only want that help they need the help of local governments, then the state needs to make concessions to local governments.

Below are a few of the items/issues that local governments could consider requiring as conditions for agreeing to the Commission's solutions:

  • Return local Energy Receipts Taxes to municipalities without strings attached. This means 100% of the Energy Receipts Taxes without an "administrative charge" of any kind. Also, no strings such as the funds must be used for tax relief. Local governments did not cause the state's pension crisis, they made their pension payments and are in the best position to determine what is best for their citizens.
  • Strengthen "State Mandate – State Pay". Too often legislation and rules and regulations place requirements on local governments without any real thought as to the cost of compliance. Legislators and state government then bemoan the increases in property taxes and point their fingers at mismanagement of local governments. In school districts, state aid is seen by state government as covering all costs of these mandates and yet they do not provide any additional funding to offset the increased cost.
  • Special education costs in local districts appear to be taking an increased percentage of total education dollars over the last decade or more. I constantly hear from school districts that special education costs are one of the most difficult issues they have to deal with in relation to budgets and use of available resources. Some educators believe that the non-special education students are at risk of not receiving the education they are entitled to as a result of spiraling special education costs. Education reform to place some perspective on these costs and the effect on non-special education students needs to occur.
  • Elimination of the caps on School Districts Superintendents' salaries and administrative costs. School Districts are already subject to a 2% cap on the increase in property taxes. Costs are contained when the revenue resources, property taxes, are controlled and additional caps only cause school administrators to waste time to try to become inventive and find ways to "work" the other caps. In addition, School Superintendents no longer stay in districts for an extended period of time. Instead, they must move to larger districts or out of state to increase their income. This lack of continuity with the districts is not a recipe for educational success. Allow school districts to manage their districts within the 2% property tax cap and make choices for their communities.
  • Eliminate the review and approval of municipal deferred compensation plans and products by the state Division of Local Government Services. If the state Department of Banking and Insurance approves a product for use in New Jersey that product should be available to municipal employees through their deferred compensation plans. An additional level of administrative requirements performed at another state department seems to be unnecessary.
  • Assist local governments in controlling costs by limiting the amount of payouts for accrued compensated absences. Vacations should be mandatory with a very limited carryover of unused vacation and sick days. Paying for significant unused compensated absences at the end of an employee's employment is a good use of taxpayer resources.

Finally, increased health benefit care costs to government employees and less beneficial retirement programs increases the need for effective financial planning for these employees. Governments are the gatekeepers for deferred compensation plans that are available to their employees. Governments have a fiduciary responsibility to provide a wide variety of products and plans to employees along with information regarding the features, benefits and performance of the products and plans to better assist employees in determining which products and plans best suits their needs.

Pensions and cash balance retirement programs alone will not be enough to allow employees to live successfully in their retirement without having other resources available to them. Education early in government employees' careers along with and a variety of deferred compensation programs and effective financial planning should help employees enjoy a successful retirement.

New Jersey's increasing pension and health benefit costs will swiftly become a crisis if effective reforms are not taken soon. We all will have to pay some part of the cost of fixing these systems for ourselves, our families, our current and future citizens. Why not reform these systems and at the same time make some needed reforms to improve local government operations.

For more information, contact Bud Jones, CPA, RMA, PSA at (973) 328-1825.