New Jersey Gov. Chris Christie recently vetoed a bill passed overwhelmingly by the legislature (60-4 in the General Assembly; 37-0 in the Senate). The bill (summary here) would have transferred the administrative and investment authority of the Police and Firemen’s Retirement System (PFRS) from the Treasury to the PFRS Board of Trustees.
The impetus for such a change was to give members of the 64% funded plan greater control over the investments of their defined benefit retirement plans. The PFRS board is comprised largely of current or active public safety officers and retirees.
Members of PFRS and union leaders don’t want to be tethered to other less-well funded plans in the New Jersey pension system — the state’s public employees’ plan is only 51% funded, the teachers’ plan is 41% funded, and the state police plan 54% funded. While this is an understandable goal, there are logistical difficulties that are worth considering when making this shift.
Had the board of trustees taken the reigns of the PFRS, they would have needed to find their own executive director, actuary, chief investment officer, and ombudsman (a public official responsible for making sure public funds aren’t mismanaged).
But it wasn’t the logistical difficulties that caused Christie to veto the bill. His conditional veto was an attempt to get the legislature to include more safeguards against growing liabilities by capping payments for unused sick days. He wanted more financial risk to be shifted to an independent PFRS as a way to ensure taxpayers weren’t left footing the bill for a plan they had less control over. He also wanted a PFRS board with even representation between taxpayers and members (the bill as passed would have tipped the balance of the PFRS board more towards labor — the current board is made up of six member representatives and four private citizens plus the state Treasurer, while the proposed board’s additional member would be a retiree elected by PFRS retirees).
The Legislation Wasn’t Enough Reform Anywayâ€¦
The management structure change was unlikely to improve the fiscal health of the system. Indeed, it would have been a net (though relatively small) drag to the system, as PFRS wouldn’t have benefited from the economies of scale that comes with the state managing a large number of public sector systems. The state would have paid for the administrative expenses, but these costs would have been be reimbursed by the plan’s employers.
What PFRS needs (along with the rest of New Jersey’s pension plans) is a lower assumed rate of return target that will minimize risk and reduce investment performance volatility. The shift in management of the assets — while taxpayers and members still make the contributions — does not materially improve the funding of the plan without this kind of change in the plan assumptions.
In addition to gaining authority over investments, the legislation granted PFRS the authority to adjust benefits prospectively (vested benefits are still guaranteed), as well as contribution rates and funding policies. The pension board would have been able to modify contribution rates, caps on creditable compensation, the benefit formula, and the method for calculating final average salary. Also cited in Christie’s veto, the bill would have allowed the system to reinstate cost-of-living adjustments (COLAs) for employees, which were suspended by Governor Christie in 2011. The suspension was upheld by the New Jersey Supreme Court in 2016.
One bright spot in this bill was the accountability mechanism built in for local governments to make their required contributions. The New Jersey Division of Local Government Services would have withheld state aid equal to the neglected contribution from employers who did not make the quarterly contributions within 30 days of a contribution’s due date. Though a marginal improvement to funding policy, it wouldn’t have been enough to right PFRS’s fiscal ship.
â€¦ But the Implementation of the Legislation Would Have Been Interesting
This would have been a major coup for employees and taxpayers — if it had been used to improve the funding of the plan (the stated intention) and not just provide increased control over benefits without accountability to ensure they are properly funded. If the PFRS board had been charged with guaranteeing the retirement security of its members, it would have been on them to make the changes necessary to bring the plan back from the brink.
The natural experiment would be fairly straightforward: If union leadership were directly responsible for the fiscal wellbeing of a pension system, it would be interesting to see what changes they might make to guarantee the funding is available for their members’ retirement benefits.
To their credit a few public sector union leaders have become critics of underfunding and risky investments now that it’s clear that pension solvency is becoming a full-blown crisis. Whether this attitude remains is yet to be seen, and it’s unclear resentment towards poor investment and funding policy will translate into demand for substantive reform.
Unfortunately, even had these management changes been made to good effect, PFRS may already be too far-gone. The system’s unfunded liability is over $11 billion, and the assumed return of the plan is 7.65%, a lofty goal in an economy that faces low levels of growth in the long run. The bill’s supporters say they’ll try again next year, so the future of the bill will likely depend on the outcome of this year’s gubernatorial race. With the ability to make substantial changes to policy without the responsibility to pay for these changes, however, this legislation could have become an exercise in moral hazard rather than innovative pension reform.