April 29, 2011
Re: Pew Report on State and Local Pensions Raises New Jersey Concerns
On Monday, April 25, the highly-respected Pew Center on the States released it latest study, The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs. The gap between the promises states have made for public employees’ retirement benefits and the money they have set aside grew to at least $1.26 trillion in fiscal year 2009, resulting in a 26 percent increase in one year, according to the report. The report’s figures are likely conservative estimates because they reflect the states’ own assumptions about the average investment returns they will achieve. The most comprehensive analysis to date finds state pension plans represented slightly more than half of this shortfall, with $2.28 trillion stowed away to cover $2.94 trillion in long-term liabilities—leaving about a $660 billion gap. Retiree health care and other non-pension benefits accounted for the remaining $604 billion. States have amassed $635 billion in non-pension liabilities but saved just $31 billion to pay for them—slightly less than 5 percent of the total cost.
The State of New Jersey and the problems of the New Jersey pension systems played a prominent part in the study. The Pew Center reported at least nineteen states have no reserve (savings) for their post-retirement healthcare costs and are going on a “pay as you go” basis. New Jersey is one those nineteen. New Jersey has promised $66.7 billion in medical payments to future and current retirees but has set aside nothing – zero, in the form of a reserve to meet this obligation. Healthcare and pension sustainability is a measure that compares benefit flow relative to asset levels and contributions (budget appropriations) made.
As the Pew Center reported, the recession, which occurred in 2008-09, resulted in a shrinking of assets held to support future benefits. The shrinking assets, coupled with the diminished contributions by employers resulted in a significant unfunded liability. In 2003, the State Legislature mandated a phased in funding program and local governments have complied with the funding obligations. Thus, there is a significant difference between the obligations confronting the State of New Jersey and their requirements to fund pension and healthcare costs and those which confront local government. Not only is the difference significant, the gap continues to grow. Earlier this month, you paid your contributions to the Division of Pensions funding the current and future liability billing. The payment made statewide by local governments is close to $1.8 billion which is in contrast to a $0 appropriated in the state budget.
Discussions regarding pension and benefits reforms need to recognize the differences between the local employee and the State employee components of the plans. In the upcoming May issue of the League’s New Jersey Municipalities magazine, a part of the question of pension sustainability will be addressed in an article written by East Brunswick Director of Finance L. Mason Neely, who serves on our Pension and Benefits Reform Committee.
We urge you to read the article. And we will keep you posted on the latest developments on this and other matters.
Very truly yours,
William G. Dressel, Jr.