New projections from Gov. Mikie Sherrill’s administration show the significant taxpayer investments in recent years are beginning to make a difference in the health of New Jersey’s public-worker pension system.
But those projections also reveal a significant funding challenge remains for a retirement system relied upon by hundreds of thousands of employees.
And the administration’s current pension math also assumes the continued suspension of annual cost-of-living adjustments, or COLAs.
The prolonged COLAs hold is required under a 2011 state law that made several major changes to pension and health benefits for government workers and retirees. Years of underfunding by New Jersey governors from both parties eroded the pension system’s fiscal health.
The ongoing COLA suspension saves the state money, though it’s also coincided with the rise in inflation’s straining the personal finances of many government retirees living in New Jersey.
Over just the last year, the rate of annual inflation was 3.3%, as of the end of March, according to data released Friday by the federal Bureau of Labor Statistics. That marked the highest annual increase in the last two years.
During recent hearings on Sherrill’s proposed budget for the fiscal year that begins July 1, lawmakers said the lack of COLAs remains a major source of complaints from constituents.
“I get, and I’m sure my colleagues around the table, get this question, every day, all day,” said Assemblywoman Verlina Reynolds-Jackson (D-Mercer) as she asked about the COLA freeze during a budget hearing last week.
“We very much understand the concern,” responded state Treasurer Aaron Binder.
If lawmakers go along with Sherrill’s budget plan, more than $7 billion will be earmarked to cover the state’s annual employer pension obligation. That sum, which includes dedicated revenues from the New Jersey Lottery, is the full payment calculated by actuaries for state government for fiscal year 2027, and would consume a significant share of Sherrill’s overall $60.7 billion budget.
However, the latest projections from the Department of the Treasury indicate it will take three decades of elevated allocations before the pension system is considered by actuaries to be fully funded.
Making the full payments puts the state on a “path to eventually achieve full funding and ensure the state is able to meet the commitment made to people who worked a lifetime,” Binder told lawmakers during the budget hearing last week.
“Currently, the funded ratio for state pension funds is just below 56%.” — State Treasurer Aaron Binder
He reminded lawmakers that a significant share of the state’s annual pension payment is making up for more than two decades of underfunding that helped create a wide — and costly — gap between the estimated value of pension fund assets and liabilities.
The practice of shorting state pension contributions was halted during former Gov. Phil Murphy’s second term, when a major uptick in tax collections coming out of the COVID-19 pandemic significantly improved the state’s fiscal condition.
“If payments had been consistently made by previous administrations, the full payment this year would be just over $1 billion, which means the proposed budget essentially includes a $6 billion penalty for the decisions made in the past,” Binder said.
Despite the system’s longstanding financial troubles, no retiree has been in danger of not receiving a pension check.
Pension funding concerns, though, have resulted in a number of benefits changes for a workforce that includes police officers and firefighters, office staff, teachers and judges.
The suspension of COLAs was among the public-worker benefits changes enacted in 2011, amid major concerns about the pension funds’ long-term solvency. Those same changes, adopted on a bipartisan basis, also resulted in an increase in employee contributions and adjustments to the retirement age.
At the time, the state was planning to resume full funding of the employer pension obligations, but that didn’t happen until roughly a decade later.
While the pension system’s health may appear to be a concern for only government workers and retirees, it affects all residents.
That’s because major Wall Street rating companies routinely evaluate New Jersey’s creditworthiness, and their analysts look at how well state government is managing its long-term obligations, including pension liabilities, when assigning the state a credit rating relative to its borrowing. Poor credit drives higher borrowing costs that are passed to New Jersey taxpayers.
The $7.3 billion that Sherrill, a first-term Democrat, is budgeting for the pension system will add to the nearly $50 billion that Murphy deposited during his two terms. If lawmakers are under the impression the state’s pension-funding issues are now resolved, though, Binder offered a much different take.
“Currently, the funded ratio for state pension funds is just below 56%,” Binder said. “This means if we continue to make the full pension payment, it will still take us until FY 2042 before we reach the target of 80%, and until approximately FY 2056 until we reach 100% funding.”
The 80% benchmark is a key figure for retirees. The 2011 benefit-reform law says a pension fund must reach that level before COLA reinstatement can be considered. Reinstating COLAs, though, would heap on more liabilities, and Binder suggested during the exchange with Reynolds-Jackson that the administration’s main goal is protecting the pension system’s stability.
“We know, without a COLA, for some pensioners, it creates a challenge. Their pensions are not increasing as inflation increases,” Binder said. “However, the top priority for us, right now, is to get the pension system well-funded.”
This story is made possible in part by the Corporation for Public Broadcasting, a private corporation funded by the American people.
