States Face Stalemate in Pension Reform

Last week, New Jersey Gov. Chris Christie vetoed two bills: one that would have set up a required quarterly schedule for the state to make payments into its public pension fund and another that would have required making a $300 million lump payment into the fund for fiscal year 2016.

Democrats argued that these measures were necessary to put the state’s pension fund on the right fiscal track. According to the Wall Street Journal, New Jersey’s pension system serves 773,000 current and retired state workers and is facing a funding shortfall of $37 billion. It also contributes to its fund at one of the lowest levels among all 50 states.

Assembly Speaker Vincent Prieto, a co-sponsor of A-4606—the vetoed bill that would have required a $300 million prepayment into the pension system using higher-than-expected tax revenues—said in a press release responding to the veto that the governor was being fiscally irresponsible.

“Gov. Christie's failure to make the required pension payment has put the state deeper [into] fiscal trouble, led to state credit rating downgrades and hurt New Jersey's economy,” Prieto said. “We proposed a balanced budget that fully funded our obligations, and this prepayment was part of our effort to move the state's economy in the right direction.”

Christie disagreed in his veto message, arguing that scheduling payments falls under the purview of his office and that the legislation was an accounting trick that would not address the funding problem long term.

“This bill represents an improper and unwarranted intrusion upon the longstanding executive prerogative to determine the appropriate timing of state payments in order to match properly the timing of large annual expenditures with the timing of the actual receipt of state revenues,” Christie said. “Enacting new laws to compel specific payments on specific dates does nothing at all to repair or reform the fundamentally unsustainable pension and health benefits systems currently in place.”

The situation New Jersey finds itself in is not unique. Other states facing funding shortfalls in their pension programs have struggled to find compromise in the pursuit of reform plans, leading to political stalemate, lengthy court battles and increasingly hostile rhetoric.  

In July, Pennsylvania Gov. Tom Wolf vetoed a bill that would have overhauled the state’s two major public employee pension systems.

“I understand the need for pension reform, but this legislation provides no immediate cost savings to taxpayers and does not maximize long-term savings for taxpayers,” said Wolf in a press release just after the veto. “We need pension reform that works.” 

The same month, Louisiana Gov. Bobby Jindal vetoed a measure that would have given the state’s public retirees a cost-of-living adjustment—an increase worth an average of $30 a month for the state’s 135,000 retirees—citing concerns over the state’s credit rating and setting off bitter protests from supporters of the bill. 
For many states, pension reform has been achieved only after long, and often contentious, battles across all three branches of government.

“It's been a long road since Rhode Island began the efforts to reform the state pension system with the R.I. General Assembly working with then general treasurer and now Gov. Gina Raimondo,” said Rhode Island Rep. Brian Patrick Kennedy.

After legislation to overhaul Rhode Island’s retirement system was signed into law by former Gov. Lincoln Chafee, it was challenged by various labor unions and retirees. The litigation finally ended in May following a five-day fairness hearing in which Judge Sarah Taft-Carter noted that the settlement “is not a perfect solution” but it is “fair, reasonable and adequate.” 

According to Kennedy, public employee unions and retiree coalitions sued to block the state’s 2011 pension overhaul that created a hybrid retirement plan, raised retirement ages and suspended cost-of-living increases for participants in the $8.3 billion Rhode Island Employees' Retirement System as a cost-saving measure. 

“The process involved in creating the legislation, defending the law and upholding the proposal with minor modifications at the court level involved extensive efforts on the part of many state government officials from all three branches of government,” Kennedy said. “The pension plan had an effect on so many of our constituents across the state, but in the end the ultimate goal of creating a stronger Rhode Island employee retirement system appears to have been achieved and stabilized with the adoption of the proposal.” 

Although a recent report by the Pew Charitable Trusts suggests that the financial picture for public pension systems may be improving, the aggressive debate over pension reform won’t abate anytime soon.

The Pew report found that pension debt is expected to remain at “historically high levels” as a percentage of U.S. gross domestic product—more than $1 trillion when state and local shortfalls are combined.  

“The good news from the 2014 data is an expected reduction in states’ unfunded pension liabilities and strong investment returns,” said Greg Mennis, director of Pew’s public sector retirement systems project, in a July press release. “But there’s still a high level of debt, and policymakers cannot count on uncertain returns to close the gap.”