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PENSION AND BENEFIT REFORM

USHERING IN
A new Era

stack of currency with a stethascope

Governor Chris Christie
By Chris Christie
Governor

Thanks to the support of local officials like you, June 28 began a new era of effective and responsible government. On that day, comprehensive pension and benefit reforms became law.

This legislation not only achieves more than $125 billion in savings—it shows how strong leadership and bipartisan cooperation can position our state for renewed progress and prosperity. These reforms will strengthen state and local budgets for decades to come.

Before the historic spring of 2011, pensions and benefits were viewed as the untouchable third rail of politics. Taxpayers were asked to absorb staggering increases in the cost of health benefits, and pension deficits ballooned by billions of dollars each year.

At the same time, public workers were left to worry whether the pensions they had worked so long to secure would be there when they needed them. And many local officials had grown tired of stating the obvious—that property tax relief could not happen unless employee compensation and benefit costs were brought under control.

Yet progress was blocked for years. So many of our political leaders were intimidated by skeptics who said that a state like ours—with strong public employee unions—would never be able to fix this seemingly intractable problem.

The skeptics were wrong, as they often are about our state. We came together across party lines to do the responsible thing, and by doing so, showed that New Jersey is ready to do big things again.

The pension and benefit reform law proved to the nation and the world that we can tackle whatever problems our state may face in the uncertain months ahead. I can assure you that people are already seeing our state in a new light. Companies that are considering creating jobs in your towns and investors we rely on to finance long-term projects are expressing new confidence.

No one knows better than I that local government officials were vital to bringing about this sea change in attitude. That’s why, when I signed this law, I was flanked by mayors from every part of New Jersey, and it’s why I sincerely thank you again now.

Already, the citizens of your communities have begun to reap the dividends of reform. In the first year this law will save local governments $43 million in pension costs. Those savings will grow exponentially over the next few years.

One of the greatest areas of savings will come from providing a larger selection of health benefit packages. Employers and workers will both benefit from the ability to tailor coverage and costs to their actual health care needs. These new choices are being developed now by committees with equal numbers of worker and employer representatives.

The pension and benefits reform law created two new committees to oversee the design of benefits packages for the State Health Benefits Program and the School Employees Health Benefit Plan. These committees of public worker and public employer representatives will present employees with at least three choices of coverage plans for singles, couples, families and singles with children along with a health savings account option. Because workers will be responsible for a larger share of health care premiums, they will have a greater incentive to make fiscally responsible health care choices.

For the first time the interests of government employers will be directly aligned with those of employees when it comes to controlling health care costs. We’re counting on this shared responsibility to help control costs, now and in the future.

To help workers get the maximum cost benefit from program changes, local governments that haven’t already set up flexible spending accounts will have to create them. You will have the option of designing your own health benefit plans, if you can achieve bigger savings than the state’s basic framework provides.

Through this period of change, I urge you to work with the Treasury Department’s Division of Pensions and Benefits and the Department of Community Affairs to keep abreast of what’s ahead. Information is already on their websites.

Like all good compromises, this one required something of everyone. As local government leaders, you’ll face some new administrative challenges, but you’ll also realize significant savings. Public workers will be paying more into their pension plans, but they’ll also have the security of knowing those payments will help ensure that their pensions will be there when they need them.

Because the state will spend an estimated $79 billion less over the next 30 years on pension fund contributions and an estimated $1.4 billion less on health benefits over the next 10 years, it will have more flexibility to balance future budgets without severe cuts in aid to schools or municipalities and without tax increases.

Because municipalities will have to spend $43 billion less on pension fund contributions over the next 30 years and $1.6 billion less on health benefits over the next decade, they will have another tool to control their own operating budgets and prevent property taxes from driving away residents.

As part of these reforms, the state has agreed to recognize a contractual right of beneficiaries to receive promised pensions. In addition, public workers will have a greater voice in adjusting pension benefits through the management committees created for each fund.

These new committees will have the authority to consider a wide range of adjustments to pension benefits outside of the legislative process. And they will be able to make these adjustments as economic conditions and the financial health of the individual funds permit.

They can consider whether it is appropriate to resume cost of living adjustments. They can modify member contribution rates, the formula for the calculation of final compensation, the eligibility age for early retirement and other important parameters of pension benefits.


But their discretion is subject to a very important limit. They cannot make any changes that would interfere with their fund’s maintaining an overall assets to liabilities funding ratio of 80 percent—the level at which actuaries consider a plan to be adequately funded. No one will be able to make changes to the pension plans that put the retirements of thousands at risk.

By eliminating automatic cost of living adjustments until the funds are sound and increasing required contributions for pension plan participants, we ensured that the state’s pension plans for public workers will return to acceptable funding levels over time. We’ve also prevented contributions from crowding out other critical demands on the State Budget.

This is a fair and flexible approach to addressing the future needs of pension beneficiaries. The new premium cost sharing requirement for health care benefits will gradually raise the share of premiums paid by workers to 20 percent. It will also apply to many retirees. But it is being introduced in a way that will limit its impact on employees who had 20 years or more of service at the time of the new law’s enactment.

Once they are retired, those workers will be able to pay the same 1.5 percent share of their pensions towards health care coverage that retirees with 25 years or more of services are now required to pay. There are 7,000 local government employees who will benefit from this provision of the law.

As a package, our pension and benefit reforms have taken a nagging issue off the table. Our past inability to deal with this problem damaged New Jersey’s fiscal reputation and hurt our credit rating.

More importantly, for nearly 20 years, our failure to address the rising cost of pensions and health benefits has limited efforts at dealing with other vital issues such as education, property taxes and job creation.

Now we have removed this roadblock to progress.

As we go forward, I hope whatever challenges we take up together as public servants of the people of New Jersey, you’ll look back at this spring of historic pension and benefit reform and take heart. If we can do this task once thought impossible, why can’t we also reform our education system, revive our urban areas and help the private sector create jobs?

I look forward to working with you for a better New Jersey, and I thank you again for your strong support on pension and health benefits reform.

 

Originally published in New Jersey Municipalities, Volume 88, Number 7, October 2011

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