In 1997, then-Republican Gov. Christine Todd Whitman pushed forward a plan that would capitalize on the bull market of the time as a way to fund New Jersey's public employee pension fund.
While in the midst of a re-election campaign, the Whitman administration proposed borrowing $2.7 billion over 28 years to fund the pension system in lieu of making an appropriation.
New Jersey was overfunding its pension fund, Whitman argued at the time, so she believed the time was right to become the first state to float bonds to cover its obligations.
Comparing the strategy to “redoing a mortgage,” Whitman set out to take advantage of the interest rates then available.
James DiEleuterio, the treasurer under Whitman, said the state was funding pensions at 110 percent their requirement, and under the bond deal, the administration was able to give state governments a holiday from their pension obligations.
“We repeatedly said to them, ‘don’t get used to having this money, because ultimately you’re going to have to start making payments into the pension system again’,” DiEleuterio said in a March 2017 interview with the Eagleton Institute of Politics at Rutgers University. “The subsequent administrations, for a variety of reasons, decided that they weren’t going to start making the regular contributions, and that’s largely how the pension system got into trouble.”
And, according to Senate President Stephen Sweeney, the “Whitman bond deal,” as he calls it, indeed was a key contributing factor for New Jersey’s current pension morass — a $151.5 billion deficit that has clipped the state’s credit rating 11 times over the past decade.
“When they did that, they lowered the contribution by 40 percent. If you lower your contribution, we’re overfunding,” Sweeney told NJBIZ in a wide-ranging discussion of a series of recommendations made by a panel he commissioned to address the state’s fiscal woes.
He was joined by Richard Keevey, senior policy fellow at Rutgers University’s Edward J. Bloustein School of Planning and Public Policy, and Michael Lahr, research professor at the Bloustein School.
According to Sweeney, the bonds Whitman floated constituted noncallable debt, meaning they could not be redeemed prior to maturity and are locked in at a particular interest rate, in this case 7.5 percent. So because the loan was back-loaded, “it’s really hitting us now,” he said.
“I got in an argument just recently with one of the union leaders,” Sweeney said. “I said ‘you know, you keep saying you paid your share into the pension.’ I said that wasn’t true. ‘You created a paper overfunding with the Whitman bond deal,’ which by the way, this year we had to put $458 million in the budget to make this year’s payment.
“ … So all the way around they just created this fantasy pension where things were healthy and things were great. And union leaders are no different than elected officials. You get elected to lead your union, and you can imagine how popular you are when you go back to your members and say ‘look what we just did, we reduced your contribution by 40 percent.”
Recommendations on fixing New Jersey’s budget travails were unveiled Aug. 9 by the bipartisan New Jersey Economic and Fiscal Policy Workgroup.
Sweeney, D-3rd District, announced the creation of the 25-member blue-ribbon panel shortly after Gov. Phil Murphy took office in January.
The workgroup chairs were Senate Budget Chair Paul Sarlo, D-36th District; Sen. Steven Oroho, R-24th District; and Assembly Majority Leader Lou Greenwald, D-6th District; and also included other lawmakers, business leaders and academics.
“If you look at the budget today and make any kind of normal projection for the next five years, we’re going to be short anywhere between $3.5 [billion] and $5 billion, assuming normal growth in revenue and normal program commitments,” Keevey said. “And of that growth, the pension goes from $3.3 [billion] to almost $7 billion.
“If nothing is done to change the situation we will actually run out of money — in the year 2022 for the judge’s [pension] fund, 2029 for the [Police and Firemen’s Retirement System and] the teacher’s fund, and 2034 for state employees. So that’s not a good pattern to look at.”
The fiscal 2019 budget includes $1.5 billion in tax increases, and another showdown could be in the offing next year over how to address funding pensions and health benefits.
“Look at the numbers in the budget,” Sweeney said. “Our pension payments should have been less than a billion dollars, compared to the fiscal year 2019’s $3.2 billion payment into the pension system.”
That’s well on the way to a $6.7 billion pension payment in four years, the senator argued.
“And we can’t get there,” he said. “With the way health care costs are escalating, we just can’t get there.”
The workgroup projected that by 2024, pensions and health care would clock in at 24 percent of budget appropriations. It was approved at 18 percent in the 2019 budget, or $6.6 billion of the current $37.3 billion in appropriations, and that’s slated to bump up by a percentage point next year.
“At some point when we stop funding education, if we stop funding New Jersey Transit and all we’re funding is pensions and health care, I think people in this state are going to get pretty pissed off,” Sweeney said.
The workgroup is calling for shifting certain employees to a 401 (k)-style retirement system. The cut-off would be anyone who’s been employed as a teacher or county, municipal or state worker for less than five years. A second proposed option suggests the first $40,000 of an employee’s salary be pensionable, with anything above that becoming a cash balance that would convert into a 401 (k)-style plan with a guaranteed minimum return of 4 percent.
Currently municipalities and counties fund their own pensions, but the workgroup is suggesting they be merged into the state workers’ retirement system and be subject to the same guidelines.
Sweeney said the biggest chunk of the state’s pension liability comes from teachers and nonuniformed state employees.
In the lead-up to his 2017 re-election campaign, Sweeney lost the support of the New Jersey Education Association, the state’s largest teachers union, over his refusal to commit to fully funding teachers’ pensions.
That led to the costliest legislative race at the state level in U.S. history, $18.7 million in total spending. The NJEA backed Sweeney’s Republican opponent, Fran Grenier, whom he beat by nearly 18 points.
Hours after the workgroup released its recommendations Aug. 9, the NJEA unveiled a statement attacking the panel’s suggestions and a photo depicting an angry Sweeney superimposed over an urban neighborhood and holding a fistful of hundred dollar bills.
“Sweeney chooses millionaires over the middle class, again,” read the statement, which called the recommendations “rehashed and rejected proposals that target middle-class public employees for deep cuts while glossing over the state’s responsibility to live up to its long-neglected obligations.”
Rutgers’ Lahr indicated that kind of criticism is unfair.
“At this point the school districts don’t have any skin in the game, the state’s paying the bill,” he said. “Districts don’t need to worry about the pension or the health benefits.”
Under the workgroup’s proposals, the retirement age for state employees would be raised to 67 for those born after 1959, and require anyone who wants to return to a full-time or high-paid role in government to suspend their pension and health benefits payments.
In addressing health care, the panel suggests shifting the insurance plans of all state and local government employees and retirees from the current platinum coverage to gold.
Under the platinum plan, the state pays 97 cents on every dollar spent on health care coverage. The gold plan would see the state pay 80 cents on every dollar.
“It’s not like we’re giving them a bad program.” Sweeney said. “Platinum down to gold is pretty good.”
A shift among plans would save $587 million a year on employee and retiree health care premiums, the workgroup’s report states.
The state will save an additional $69 million for current workers on their premium cost-sharing payments in the 2020 fiscal year, the report says.
And going into 2020, the savings on employee and retiree health care premiums would rise to $675 million for the state, and $79.9 million for just employees in 2023.
For school employees, the move from platinum to gold would shave $600 million a year off the state budget, on top of over $100 million for employees by shifting them to the gold plan as their contracts come up for renewal, according to the report.
Retirees would be required to contribute the same health care premium costs as when they were working, the report recommends.
Sweeney also noted the report’s suggestion to use current state assets to further fund the pensions in a way similar to how funds have been diverted from the state lottery. No such comprehensive list of assets currently exists, he said.
The report initially recommended funneling toll revenue from the New Jersey Turnpike Authority toward pension funding. It was also suggested tolls could be added to roadways that currently don’t have them.
Later, Sweeney dropped the latter proposal in favor of a dedicated high occupancy toll (HOT) lane, also known as an express lane, that would allow motorists to pay a certain fee to bypass slowdowns on federal highways such as interstates 78 and 80.
“We’re talking about letting someone build them, letting someone maintain them, and just give me a piece,” Sweeney said.
Other assets could include water and sewer authorities, real estate, reservoirs, cell towers and intellectual property, according to the report.
In the weeks following the unveiling of the recommendations, Sweeney said he has been on a weekslong campaign across the state to drum up support. In addition to meeting with media outlets, he and members of the workgroup plan to soon begin speaking with county and local officials.
Ideally, Sweeney said he’d like have legislation based on the recommendations for Murphy to sign prior to next year’s budget season.
“What I would like to do is get as much buy-in as I can [and] draft legislation before the end of the year,” Sweeney said.
Murphy has been cautiously optimistic about the proposals. Following the Aug. 9 press conference, Murphy indicated in a lengthy statement that he remains “committed to finding savings and cost efficiencies across state government.”
“Over the next few months, we welcome the conversation about how best to jump-start the economy and secure a better future for New Jersey’s middle class and working families,” Murphy said.
Assembly Speaker Craig Coughlin, D-19th District, in his own statement, said he’s looking forward to reviewing the panel’s recommendations.
“Affordability is a real issue for New Jerseyans,” Coughlin said. “I commend the panel for their commitment and contributing their time and expertise towards this noble effort to address property taxes and other critical issues facing our state.”
And Coughlin has since indicated he wouldn’t want any tax increases in the 2020 budget, a move supported by Sweeney.
“No one wants to come forward with a solution besides just raising taxes,” he said.
In response to the panel’s suggestions, Murphy pointed to a handful of actions his administration has already taken to tackle similar issues.
Two examples he gave were the recently established State Health Benefits Quality and Value Task Force, and the reconvening of the Plan Design Committee, both of which will “find efficiencies in the state health care benefits system to provide the best value for both consumers and taxpayers and reduce the overall cost of health care,” Murphy said.
Murphy also pointed to the “historic pension payment” of $3.2 billion for the fiscal year, which he said will meet the state’s “long overdue obligations.” But Sweeney reiterated he believes the payments shouldn’t have totaled any more than $1 billion for the current fiscal year.
“If we’re going to do the things as far as Murphy wants us to do with school funding and transit and all these other things — all these other investments that are worthy investments — we have to address the problem we have, and that’s pension and health care right now,” Sweeney said.