The Local Take on the Governor's Benefit Review Task Force Recommendations    L. Mason Neely Chair, League Pension and Health Benefits Committee

On May 25, 2005 Acting Governor Codey created a Benefit Review Task Force by Executive Order #39. The Order directed the Task Force to examine the current laws, regulations, procedures and agreements governing the provisions of employee benefits to state and local workers. On November 21, 2005, the Benefit Review Task Force reported its findings to Acting Governor Richard J. Codey. The Task Force did tremendous work. However, we saw the need for a more thorough review of the impact of pensions and benefits on local governments. This report embodies that review and includes our own recommendations for system reforms.

Executive Summary of League Report The League recognizes that some elements are common, but there is a definite and distinct difference between the cost of benefit structure affecting local government and problems to be addressed by the state government. The purpose of this report, submitted by the League of Municipalities and its Affiliated Groups, is to identify the situation and supplement the work performed by the Governor’s Task Force. The process of supplementation is twofold. It is to augment the report prepared by the State Task Force and includes recommendations believed to be part of a workable solution to deal with funding problems.

• Governmental units at all levels should cease using funding gimmicks and recognize a responsibility for sound funding of contractual obligations. All of the pension systems are classified as “mature system” and have substantial assets. Through proper funding and structuring of payments, the deficit can be eliminated.
  
  
• Corrections must be made to the Police and Fire Retirement System to control costs. PFRS members receive a significant pension replacement ratio (50 percent after 20 years, 65 percent after 25 years, 70 percent after 30 years of service regardless of age) plus a majority also receive Social Security benefits, a cost which is matched by their local employer. PFRS is the most expensive local pension system and corrective action must be implemented.
  
  
• When the “years of service” (n) over age 55 (n/55) was approved by the Legislature in 2001, specific assets were earmarked to fully fund the benefit for PERS and TPAF. The funding was known as the Benefit Enhancement Fund. The accrued liability associated with n/55 was fully funded at the time of adoption. The assets in the local accounting of PERS for n/55 are still held in the Benefit Enhancement Fund, but the assets allocated to fund the state’s liability and TPAF have been reallocated as a method of lowering the state’s contribution on a temporary basis while increasing the overall accrued liability to be funded at a future date.
  
  
• The eligibility threshold for enrollment in PERS and TPAF should be increased to reflect the current economy and be adjusted over time based upon the Consumer Price Index. Those who qualify for enrollment while working part time hours should receive prorated annual pension credit in place of the full year’s credit currently granted. Those who work part time, unless they are certified individuals who work two or more part time jobs equal to one full time job, should receive prorated credit based upon the hours they work measured against what would be full time service.
  
  
• Proper enforcement of Administrative Rules and Regulations by the Division of Pensions must be expected and supported. Pension base should not include uniform pay; holiday pay and other add ons in direct violation of rules.
  
  
• Funding for Health Benefits and Normal Pension Costs has created an unfunded liability which confronts state and local governments. Such has been referred to as a “structural deficit,” which should be recognized by each unit of government. Such classification would differentiate between emergent problems by level of government and long term funding issues. For example:
  
  
• The State of New Jersey is confronted with a very large unfunded liability associated with post retirement health benefit costs. Such is not the same for local governments.
  
  
• The State of New Jersey is confronted with a major cash flow outlay to fund the Early Retirement Initiatives provided to state employees for a temporary savings. Some local governments and Boards of Education have the same issue.
  
  • The State of New Jersey is morally obligated to fund the employer’s normal pension obligation and end the use of gimmicks to mask the problem.
  
  
• Local governments face a long term funding deficit to be addressed as part of the accrued liabilities for the costly PFRS. The deficit for local government PERS is low compared to the other systems.
  
  
• Local governments are confronted with a PFRS funding problem resulting from legislative mandates which increased PFRS benefits. Legislative action at the cost of local property tax should stop.
  
  
• All levels of government are confronted with rapidly increasing medical, drug and dental costs which must be contained through a combination of legislative remedies and individual responsibility. Caps, co-pays, Medicare refunds, generic drug use and a moratorium on expanded benefits must be part of plans.
  
  
• The state should not take on additional obligations without establishing the appropriate reserves to fund the obligations or determine a revenue source to meet the pay-as-you-go requirements.
  
  
• Demographic realization mandates that eligibility age requirements for retirement for all systems must be addressed. This recognition applies to all pension systems equally and should be planned and implemented on a prospective basis.
  
  
• Proper investment of pension assets in order to maximize the return on investment is important. The below market mortgage program offered to PFRS members and the below market loan program offered to TPAF and PERS members should be eliminated.
  
  
• Early Retirement Initiatives have proven to be a fiscal fiasco for all levels of government and they should be discontinued permanently.

A complete copy of this report can be downloaded from www.njslom.com, or contact Donna Baltz at the League of Municipalities at 609-695-3481, ext. 14.

Article published in March 2006, New Jersey Municipalities