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NJLM's Legislative Blog

Sep 19

Path to Progress’ Pension Hybrid Plan

Posted on September 19, 2019 at 4:54 PM by Ciara Bradley

This is the first a series of blog posts on recently introduced legislation designed to implement the recommendations of the “Path to Progress” report. 

As noted in the Path to Progress Report, “the State’s combined pension and retiree health benefit liabilities of $151.5 billion are four times the size of the State’s annual budget; and more than three times the size of the State’s bonded debt. That public employer debt represents $16,772 for every one of New Jersey’s nine million residents. It will continue to grow every year. Without changes to the pension and benefit structure, the cost of pensions and benefits will rise by $4.1billion over the next four years and eat up 26 percent of the state budget.”

To address the strain of rising pension and benefits cost, Senate President Sweeney and Senators Oroho and O’Scanlon have introduced S-3753, which establishes cash balance plans in PERS and TPAF for new public employees and employees with less than five years of service and makes various changes to PERS and TPAF retirement eligibility. The bill is part of the Path to Progress bill package. In announcing the bill package Senate President Sweeney noted that “without pension & benefits reform we cannot invest in higher education or improving infrastructure. We cannot invest in the future of our state until we make long overdue reforms.” S-3753 could lead to lower pension costs for local employers.

The bill makes various changes to the Public Employee Retirement System (PERS) and Teacher’s Pension Annuity Fund (TPAF) for employees hired on or after July 1, 2020 or for those employees with five years or less as of July 1, 2020. Employees who have more than five years of creditable service as of July 1, 2020 will not be impacted by the changes proposed in S-3753.

Besides increasing the retirement age to 67 years of age and increasing the years of creditable service from 25 years to 30 years, S-3753 would create a hybrid pension system for those employees hired on or after July 1, 2020 or for those with five years or less of creditable service as of July 1, 2020.

Under the bill, the first $40,000 of compensation will be in the defined benefit plan (the existing pension fund) while the remaining compensation will be in a defined contribution plan.  For the funds in the defined contribution plan, the member will have an account that will be credited with the member’s mandatory contributions, but not the employer’s contribution, plus a minimum interest credit, which is statutorily 4% on the contributions, as well as an alternate interest credit on those contributions. Statutorily the alternate interest credit is 75% of the rate of the return on the asset investments for a fiscal year, as that rate of return is certified by the actuary in the actuarial valuation when the valuation is adopted by the board of trustees.  To be eligible for an interest credit or alternate interest credit, the member must have an account balance at the time the interest is credited to the account. Please note the bill allows the legislature to change the minimum interest credit and alternate interest credit prospectively.

Unlike the defined benefit plan, a member is vested with the member’s mandatory contributions to the account from the date the member is enrolled in the plan. Upon employment termination, the cash balance account will remain active at the discretion of the employee and does not expire.  While the closing of the account and the withdrawal of funds is at the discretion of the member, the member will cease to be a member of the defined benefit plan. A member is not required to withdraw funds after any specified time period. If the member leaves with less than 10 years of service, the cash balance account will be credited with the minimum interest but not the alternate interest credit. If the member leaves with 10 plus years of service the cash balance account will be credited with the minimum interest and alternate interest credit.

If a member leaves with less than 10 years of creditable service and elects to take a refund of the member’s accumulated contributions to the account they will receive the member’s contributions. But the minimum and alternate interest credit added to members account for the first two years is forfeit. The minimum interest and alternate interest is recalculated for the third and each subsequent year. For year three, 30% of the minimum and alternate interest is added to the member’s account. For each subsequent year of membership an additional 10% is added until the 90%. The member will receive the greater of the members’ accumulated contributions with the recalculated minimum interest credit or the member’s accumulated contributions with the recalculated alternate interest credit.

If a member leaves with more than 10 years of creditable service and elects to take a refund of the member’s accumulated contributions to the account, then the member shall receive the greater of the accumulated contributions with the recalculated minimum interest credit or the accumulated contributions with the alternate interest credit.

The retirement payout will include the portion in the defined benefit plan plus the portion in the defined contribution plan. For the portion in the defined contribution plan it will be the greater of accumulated contributions with the minimum interest credit or the accumulated contributions with the alternate interest credit.   The member has options on how to take accumulated account balance for the defined contribution plan. They can take it as (1) a lump sum, (2) in the form of a direct rollover to a qualified plan, (3) as a payment directly to a qualified individual retirement account or (4) any other method permitted by Board of Trustees’ regulations and applicable federal and State laws.

Upon member’s death, their beneficiary or estate must receive the member’s accumulated contributions in the account with minimum interest credit or the accumulated contributions with alternate interest credit, whichever is greater, regardless of the member’s years of service and even if the beneficiary is eligible for accidental death pension.

The current Board of Trustees for PERS and TPAF will serve as trustees for the new defined contribution plan for their respective retirement system.  The Board must determine the manner and method of distribution by regulations ensuring they comply with federal and state laws. The Board may also specify minimum account balances for purposes of allowing benefit payment options and rollovers or transfers. The Division of Investments will be authorized to control the investments or reinvestments and to acquire for or on behalf of the TPAF and PERS cash balance plans.

S-3753 also requires that any savings realized by a local unit and school board as a result of the new hybrid pension system must be used solely and exclusively for the purpose of reducing the amount that is required to be raised by the local property tax levy by that local unit or school district. The bill authorizes the Department of Community Affairs and Department of Education to prescribe the calculations of the savings.

S-3753 would take effect the first day of the fifth month following enactment.  For members in PERS and TPAF with less than 5 years of service on July 1, 2020, the Board of Trustees and the Division of Pension must within 90 days following the establishment of a cash balance plan make adjustments to the member’s accounts and records to comply with the provisions for membership in the cash balance plan for the member for any year prior to July 1, 2020, provided that such retroactive membership and adjustment is permitted by law.

Contact: Lori Buckelew, Senior Legislative Analyst,
lbuckelew@njlm.org, 609-695-3481 x112.



Sep 13

CY 2019/SFY 2020 Best Practices Inventory Issued

Posted on September 13, 2019 at 11:36 AM by Amy Spiezio

The Division of Local Government Services has issued  Local Finance Notice 2019-12 providing guidance on the CY 2019/SFY 2020 Best Practices Inventory.  There have been numerous changes to this year’s Inventory including the same deadline of October 30 for all municipalities, new scoring, and a new submission process.

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Sep 10

Explore The Town Crier Archive, Sign Up for Notifications

Posted on September 10, 2019 at 10:29 AM by Amy Spiezio

The Town Crier Legislative Blog will have a new administrative home at www.njlm.org, which means you have a one-stop, seamless experience between the website and the blog. We hope you enjoy the new Town Crier and sign up for notifications at the Notify Me page. 

To explore previous Town Crier entries, please visit our archives

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