For years, New Jersey had assumed its public pension fund would make more money on its investments than it could realistically expect. So, Christie went ahead and changed it.
Without notice, the outgoing governor cut how much the pension system should expect to earn on investments from 7.65 percent to 7 percent a year.
Doesn’t seem like much, right?
But Christie’s sudden move — and Murphy’s reaction to it — set into motion a complex and controversial budget quagmire that will soon become a ticking $1.2 billion time bomb for New Jersey.
When it will explode: 2022 (the year after the next gubernatorial election).
At stake: Benefits to nearly 800,000 active and retired state and local workers.
A likely result: Your state taxes could go up.
And how the state will manage to pay the bill when it comes due remains to be seen.
What Christie did
Midway through December 2017, about a month before Christie left office, the trustee boards overseeing the various state and local pension funds were summoned to adopt their annual audit reports, months earlier than they would typically meet.
There, they learned Christie’s administration had tweaked what’s called the assumed rate of return — how much money the pension system expects to get from its investments — one final time.
The change was praised by the pension fund actuaries, who say expecting a 7 percent return on investments is closer to what other large funds can reasonably figure they’ll get over the long term.
But there’s an impact to all of this, which means the decision sent ripples through the pension system.
When you assume you’ll reap more from investments, it makes the pension funds look healthier than they really are, even if it isn’t realistic. When you expect less, the system looks less healthy.
That all figures into the calculations that determine how much money state and local governments will need to pay for benefits to nearly 800,000 active and retired workers. In short, expecting less in investments means governments would have to pay more to keep the pension system afloat.
Christie’s move would have cost local governments, which by law have to pay the full contribution recommended by actuaries, an additional $422.5 million in Murphy’s first year, according to an NJ Advance Media analysis.
And it would have increased the state’s actuarially recommended pension contribution by $390.3 million that year.
Christie’s last-minute move would have had Murphy foot that bill in his first budget.
What Murphy did
While Christie’s parting gift was a surprise, Murphy’s reaction was no shocker.
Declaring that Christie’s fix placed an “undo stress” on the governments that would have to find more than $800 million in extra cash, Murphy reversed Christie’s order.
Christie’s move from 7.65 percent to 7 percent was done “precipitously,” state Treasurer Elizabeth Muoio said at the time. Instead, the Murphy administration announced it would embark on a more responsible path to 7 percent.
A Treasury Department spokesman, William Skaggs, said in a statement that Murphy’s administration “has made it abundantly clear, when it comes to the state’s pension responsibilities, the days of ‘kicking the can down the road’ are over.”
“Phasing down the assumed rate of return over several years will ease the impact on local government budgets as contribution requirements increase over time,” he said, adding that Murphy is sending a "clear signal that the old way of doing business is over.”
The rate was cut to 7.5 percent for Murphy’s first budget year, and after a phase-in, won’t drop to Christie’s suggested 7 percent until the fiscal year 2023 budget that is passed in June 2022, the first one after the next governor’s election.
From the state budget that will be enacted by July 2021 to the one that will take effect in July 2022, the rate will decrease from 7.3 percent to 7.0 percent. That’s considered a big dip for just one year.
And there’s a double-whammy that year.
It’s also the same budget that is supposed to finally make the state’s first full recommended pension contribution after governors and lawmakers shortchanged the system for decades.
All together, the payment will be about $6.6 billion, a year-over-year increase of more than $1.2 billion. The time bomb will detonate.
State Sen. Declan O’Scanlon, R-Monmouth, said the state is in store for a “devastating fiscal hit.”
He accused Murphy of “blatant political manipulation of our pension system that should outrage the very unions the governor continuously panders to and that continuously bow down to him.”
Christie’s move, he said, “regardless of the political motivation ... was sound policy because that’s a more realistic rate of return.”
Murphy’s solution "is a blatant way to kick the can down the road, the cost of which is the soundness of our pension,” he added.
Senate President Stephen Sweeney, D-Gloucester, says New Jersey can’t afford it.
“Christie lowered it to 7 percent when he was walking out the door, which created an enormous liability,” Sweeney said. “So they said we’re going to restructure it to put it back to 7.5 and we’ll bring it down over a period of time. But they’re doing it at a time when we really can’t afford them to do that.”
“Doing structural reforms to the pension would probably make it better, but you see how far we’re getting with that right now,” he added.
So, how will the state pay that bill when it comes due?
Sweeney, a Democrat who’s pushed for big changes to public workers’ retirement benefits, says Murphy’s action appears to set the stage for a tax increase.
“I think it’s great to reduce the assumption rate, but by increasing the liability at the same time when you don’t have the ability to pay and you’re refusing to do structural reforms, you’re already ... putting yourself in another hole for a tax increase, and saying you have to because of the pension system,” he said.
In a statement, a spokeswoman for the state treasurer said Murphy’s administration also is “acutely aware of our growing fiscal needs, particularly our pension costs as we continue down the path to the full actuarially recommended contribution.”
That’s one reason why the governor is pushing to grow the economy, find budget savings and increase such taxes as the millionaires tax, spokeswoman Jennifer Sciortino said.
What does she mean by economic growth?
Each year, state finances benefit from some degree of growth in the economy. This year, Murphy’s administration is projecting 3.5 percent growth in tax revenues. That’s more money the state will take in from corporations, gross income taxes, sales taxes and other revenue sources.
So natural economic growth will do some of the work. But spending all of that new tax revenue on pensions would leave no cash for new initiatives or the normal year-to-year increases in the cost of doing business.
And that’s if the economy keeps growing and tax revenues keep rising. Economists, however, are predicting the country could slip into a recession by 2020.
Wall Street rating agencies are already warning that a downturn will put New Jersey’s pension payment that year at risk.
“We believe that the record national economic expansion has helped New Jersey achieve its current contribution percentage, but reaching full … funding might prove difficult if a recession intercedes between now and (fiscal year) 2023,” S&P Global said in a July report.
What Sweeney wants to do
There’s a better way, Sweeney said.
His proposals to reduce the cost of government in New Jersey — he calls it the Path to Progress — have gotten a lot of attention, mostly for the headline-grabbing reforms to public-worker retirement and health care benefits.
But a much more technical and overlooked piece of his pension overhaul would change — again — the scheduled cuts to the assumed rate of return. He said a slower phase-in that would take an extra year to get to 7 percent can avoid the $1.2 billion cliff.
“We could fix this without raising taxes if it was done in a better way,” he said. “But they’re looking at it just to put themselves in a position for tax increases because, I think, that’s all this administration talks about is raising taxes.”