Christie's cuts dig pension hole deeper

As Gov. Christie travels the state trumpeting the urgency of tackling New Jersey's pension crisis - and warning that the effort will be painful - his own cuts to payments into the system are digging the hole deeper.

Christie, who slashed state contributions into the system by $2.4 billion over two years to fill a revenue shortfall, says the pension costs aren't sustainable - and changes, on top of a prior deal that required workers to pay more, are needed.

Democrats, who control the Legislature, say more changes aren't needed, and the problem is that the Republican governor is not making bigger pension payments, which would require him to do something he adamantly opposes - raising taxes on the state's wealthiest.

At a Haddon Heights town hall-style event recently, Christie tried to reassure a worried state retiree that despite the problems, her pension should remain intact.

But public-pension experts are warning that it is not unthinkable that the fund will be unable to pay what hundreds of thousands of future beneficiaries are expecting.

Reducing payments into the fund "is increasing the probability the fund runs out of money," says Joshua Rauh, a finance professor and senior fellow at the Hoover Institution, a conservative think tank at Stanford University. "That is going to mean that it is going to be infeasible to continue to pay benefits at their currently promised levels."

Pension changes that only applied to new workers wouldn't erase the bill for the 800,000 active and retired employees now in the system - an unfunded liability recently pegged at $51 billion by the state, with $37 billion of it to be paid by the state and the rest by local governments.

By contrast, the budget for fiscal year 2015 that Christie signed into law last week is $32.5 billion. It includes a $681 million payment into the pension system instead of the $2.25 billion he had said he would make.

Christie had pledged to abide by a schedule that ramped up payments over seven years - the product of a deal he struck with Democrats during his first term that also required public workers to contribute more into the system.

The deal, written into law, was meant to make the system solvent by shrinking a liability that had ballooned from years of inadequate payments by the state, along with increases in worker benefits.

But Christie's backtracking on that schedule - he also cut the fiscal year 2014 payment from $1.58 billion to $696 million - may signal trouble ahead.

"It seems very unlikely the money is going to be there to fully pay these benefits," Rauh said.

Unions, meanwhile, are likely to continue to challenge Christie's cuts in court. While a state judge upheld the cut for fiscal year 2014, she did not rule on the following year.

At an event last week in Essex County, Christie said he would release his pension overhaul plan later this summer. The plan will be "universally criticized, and the reason it will be is because it will inflict pain," he said.

Christie is unlikely to find Democratic allies.

"The pension system will be fine - if we fund it," said Senate President Stephen Sweeney (D., Gloucester), who worked with Christie to enact the 2010-2011 changes, taking a political risk in alienating unions, a key part of the Democratic base.

Democrats passed a budget this year with a $2.25 billion payment, paid for with tax increases. Christie vetoed the increases and reduced the payment.

"The governor's calling for more reform. You have to live up to the original reforms before you can do more," Sweeney said.

New Jersey dropped out of the top 10 states with the largest pension burdens in fiscal year 2012, following the changes, according to a January report from Moody's.

And in a recent court filing, state officials said the pension funds "are projected to continue providing benefits to retirees for at least the next 30 years."

Still, from 2010 through 2012, New Jersey paid a much smaller percentage of the contribution actuaries say it should be making than nearly all other states, except for Pennsylvania, according to a March report by the Pew Charitable Trusts.

"The concern is that there's not yet a credible plan the state is following through on to pay down that debt," said David Draine, a senior researcher at Pew.

Like most states, New Jersey offers public workers defined-benefit pensions, which promises that workers will receive a set amount of benefits every year after retirement.

Many states, New Jersey included, have suspended cost-of-living increases to curb costs, Draine said. A New Jersey appeals court has ruled, however, that retired public workers have a right to the increases, sending the issue back to a lower court.

Several states, including Rhode Island, have moved toward hybrid systems, offering less generous defined benefit plans along with defined contribution plans, in which the level of benefits after retirement is not guaranteed.

But if New Jersey switched new workers to a cheaper system, the state would still be facing a $51 billion unfunded liability.

"Every dollar of that is owed to either people currently working for the state or local governments or to the retirees," Draine said. "There's few, if any options the state might have to deal with its pension costs, outside of simply paying for it."

As for the funds Christie did not put into the system, Draine said, "it's not only the missed payments - 2.4 billion - but the fact that the funds can't invest those $2.4 billion and get the returns that will eventually be needed to make the payments."

Rauh and other economists say New Jersey's liability could be even higher, based on how its investments perform.

While New Jersey anticipates an annual rate of return of 7.9 percent from investing its pension assets, some economists say the state should use a lower rate such as that for treasuries.

In recent years, returns on state pension fund investments have ranged from negative 15.5 percent in 2009 to 17.8 percent in 2011.

"Relying on investment returns to bail New Jersey out of its pension problem is a risky and dubious strategy," Rauh said.

In recent years, most states have assumed returns of between 7 and 8 percent.

The future of the pension system has spurred concern among public workers like Judi Diepold, a retired judiciary employee who pressed Christie on the topic last month at a town-hall meeting in Haddon Heights.

"Do I need to start putting money aside now?" Diepold, 61, of Oaklyn, asked Christie.

"Anybody who tells you the problem is going to fix itself without sacrifice" is not being realistic, Christie said. "My best guess, is 10 or 15 years from now, between then and now, we're going to come up with a solution. But I think the sooner we do it, the better."

Afterward, Diepold said she was satisfied with Christie's answer. "He told me I would be receiving my pension check," she said.

mhanna@phillynews.com

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