Testimony of L. Mason Neely
Co-Chair, League of Municipalities’ Pension & Health Study Committee Before the
Joint Committee on Public Employee Benefits
Thursday, October 12, 2006
State House Annex
10:00 A.M. Room 11
Good Day. Co-Chairs Senator Scutari, Assemblywoman Pou and Members:
Prior Hearings focused on pension systems which relate to State costs. We welcome this opportunity to speak on local PERS & PFRS.
Municipalities are facing a $650 million plus challenge for pension benefit costs. These costs result from State mandated benefit enhancements for PFRS, arbitration awards and assets decline.
In January the League issued its COPE (Correction of Pension Errors) report presenting the local perspective and today we will summarize recommendations to reform the systems and lower property taxes.
- The most costly system confronting property tax dollars is PFRS. On April 1, 2007 more than 65% of the $650 million billing represents PFRS costs. This is significant because while the cost is 65% of the $650,000,000, the individuals covered by Police and Fire represent only 14% of the local government workforce. The local employers’ cost for Police and Fire is at risk of going higher because of legislative mandates. Chapter 108 Public Laws of 2003 will significantly increase local government costs once funding for PFRS reaches 104%. This special retirement benefit would be devastating on property taxpayers. Therefore, the first action recommended is to rescind the special retirement benefit portion of Chapter 108 Public Laws of 2003 before it has any impact or individual employees are affected.
- We request the legislature stop mandating enhanced benefits to the pension system at the cost of the local property taxpayer. One mandate which has affected the pension systems and costs associated therewith on a significant basis is binding arbitration. Local employers must have relief from the binding arbitration provisions to lower property taxes.
- Newspapers, the Governor’s Pension and Benefit Task Force, and the League’s COPE report all have recognized problems associated with “gaming” the system. Such must be eliminated in order to help the property taxpayer. Pensions should be based upon “credible salaries” as defined by N.J.A.C. 17:4-4.1(a)2vi found under Item #10 in the COPE report. Gaming the system also results from part time employment receiving full time credit. Part time positions which work less than 1,820 hours (35 hours a week x 52 weeks) should receive prorated pension credits based upon the 1,820 hours. The current system permits those who work part time for 20 or 25 years to receive full credit for part time work. Corrective action taken immediately will result in taxpayer savings.
- Pension assets should be invested to maximize return on investment. Currently, members of PFRS are permitted to receive $417,000 mortgages at a below market yield. PFRS, TPAF and PERS employees are permitted to receive below market loans at 4%. All of this at the expense of the local property taxpayer. The funding of mortgages through PFRS and low interest loans through TPAF and PERS should be eliminated immediately. By arbitrarily permitting below market returns, the legislature has undercut the solvency of the system.
- The enrollment threshold for TPAF is $500 and PERS is $1,500 on an annual basis. These enrollment threshold levels are a product of the 1940s. The Governor’s Task Force suggested a threshold of $5,000 but the League believes that level is inadequate. The threshold for entry level should be based upon the full time service working 1,820 hours for those who work less than 1,820 hours, they would receive prorated credits based upon the concept fulltime work equals a full time pension and part time work equals part time pension credits. The unrealistically low threshold should be changed or eliminated. This will end professional service contracts run through the payroll in an arbitrary fashion. If a professional is to serve a municipality and be listed as an employee for purposes of pension, then it must be mandatory that the principal named as the professional also is the responsible person performing the work. This would eliminate well connected politicians being listed as the person receiving pension credits while having junior associates perform the work for the reporting districts.
- No longer should Early Retirement Initiatives (ERIs), which have proven to be very expensive, be permitted. ERIs may be something to consider when an industry is constricting its workforce and size. That definition or set of circumstances does not and has not applied to state, county, or local governments. Therefore, ERIs as structured have simply been gifts to various individuals at the expense of the taxpaying public. This form of gimmick should be eliminated in the future.
- Every publication, report and actuarial analysis has recognized the reality associated with changing demographics. People are living longer. Therefore, the legislature should begin to change prospectively the following:
- The age which one may collect a pension and this should be across the board for PFRS, PERS, TPAF and all other systems.
- Special retirement provisions should be modified to recognize the longevity of life and move early retirement regardless of system to age 60.
- Normal retirement as part of the defined benefit system should be based upon age 65 instead of age 60. By making this change prospectively for all who are non tenured employees, it will affect immediately 20%+ of the workforce and permit those individuals to plan appropriately. Action taken immediately will have significant impact on the actuarial valuation and will result in immediate savings to the property taxpayers. Such a concept is not without recognizing that every local government and state government worker is eligible to participate in a deferred compensation program offered under Internal Revenue Code Section 457. When employees know in advance they can plan appropriately for retirement.
- The role of the Division of Pensions and Benefits should be strengthened. The role they can plan when evaluating salary changes during the final years of employment is key. The Division has recognized situations where individuals who are well connected have gamed the system, but without the appropriate administrative procedures they are unable to stop the abuse. Increase clarification and responsibility should be given to the Division of Pensions in this regard.
- The area of disability retirement requires significant work and must be redefined. The current workforce is the result of constriction in the private sector and has shifted a number of older employees into government positions as a form of second careers. But those shifts, while providing valid workers for a limited period of time, have also exposed local government and state government to abuse of the disability retirement provisions. In fact, it is well recognized that many people game the system through disability retirement at the expense of local property taxpayers. The disability retirement system needs to be addressed immediately recognizing the results of demographics and healthcare.
Chapter 42 P.L. 2002 permitted local governments to issue refunding notes on bonds to retire an unfunded accrued liability resulting from early retirement benefits. This resulted in local units paying a lower interest rate on unfunded liabilities. This option should be explored again as a method to “smooth” the cost of the unfunded accrued liability which confronts local government.