New Jersey Pension System Needs ‘Serious Restructuring’: Governor

Published February 1, 2007

Soaring government pension costs have prompted New Jersey Gov. Jon Corzine (D) to call for “serious restructuring” of the state’s government employee pension system.

In a December 19 interview with reporter David W. Chen of the New York Times, Corzine said, “It’s impossible for us to stay on the course that we are on today, and deliver what people are asking for.”

He also said the state’s estimate of an unfunded pension liability of $18 billion may be too low.

State Rep. Gordon M. Johnson (D-Bergen) said he believes Corzine is serious about pushing for pension reform in 2007.

‘Going to be Difficult’

Johnson said Corzine “understands business, as opposed to politicians trying to negotiate without a background to do this,” Johnson said. “But the way I see this, it’s going to be difficult to do.”

Corzine’s business career includes a stint as chief executive officer at Goldman Sachs, one of the world’s leading investment banking firms.

Corzine was not specific about changes he’d like to see, but Johnson said he would not be surprised if Corzine proposes a “two-tier” pension system.

Separate Systems?

“Those not employed yet would enter a pension system that’s different from the one their colleagues who are already employed have,” Johnson said.

That second system likely would have a higher retirement age and other features to make it less costly than the existing system. Johnson also said it’s possible some lawmakers may push to put new hires into a defined contribution plan, such as a 401(k), rather than a defined benefit system.

Either reform would take years, perhaps decades, to have any appreciable impact on the state’s pension costs, Johnson noted, because benefits to current employees and retirees may not be cut.

Generous retirement benefits are one factor in the state’s rising pension expenses, according to Johnson. Another big factor is that for five years, under former governors Christine Todd Whitman (R) and James McGreevey (D), local governments were not required to fund their share of pension contributions.

“Some towns socked the money away, knowing the bill would come due. Many others didn’t do that,” Johnson said. “They spent the money. Now we have this huge unfunded liability.”

Other Issues in Play

Johnson said he expects government employee unions to balk at attempts to hold down pensions. In addition, the state has other financial issues that may divert attention away from pension reform, including soaring government debt loads and a simmering tax revolt over having the nation’s highest property taxes, Johnson said.

“We have bonded for a lot of things for which the bill is now due,” Johnson said. “When the bubble burst, we ended up with this bond liability that’s astronomical and this pension system that’s just about bankrupt.”

Gregg Edwards, president of the Center for Policy Research of New Jersey, credits Corzine for requiring local governments and the state to resume funding pension contributions, but he questions the governor’s commitment to reform.

Edwards pointed out that in late 2006 the New Jersey legislature appeared ready to consider recommendations of a state-appointed group that studied ways to provide tax relief and improve the state’s fiscal situation.

Corzine told legislative leaders, including members of his own party, to pull back. He said he would directly negotiate with government employee unions.

Edwards doubts that will work.

Legislature’s Involvement Needed

“He can’t change the pension system without the legislature being directly involved,” Edwards said.

“First of all,” Edwards noted, “there’s no history [in New Jersey] of dealing with pensions in collective bargaining. Whenever unions get an enhancement in pensions, it’s because they lobby and pledge political support in return. That’s the way it goes. The other thing is, if the governor had let the legislature proceed with a bill, he could have said, ‘I have the legislature with me.’ It would have made him look stronger.”

Edwards pointed out the governor would be dealing only with state workers, not with teachers, police, firefighters, and other local government workers.

“How does he plan to extract concessions from them?” Edwards asked.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.