New Jersey League of Municipalities

A recent news article in the New York Times (April 4, 2007) correctly identified a particular funding problem with the Teachers Pension and Annuity Fund (TPAF). They reported that State government, through its budgetary process, has neglected to make actual contributions which represents employers contribution to fund system liabilities as required by State Law and Internal Revenue Service. In place of making contributions, the State used what one might call an accounting gimmick by taking assets placed in the “Excess Budget Trust Fund”, which is a journal entry, and shifted those assets over to general TPAF. The result is the State took credit for making a contribution, when in fact it was only a shifting of assets on the ledger.

In 2001, Chapter 133, the Pension Enhancement Law, changed the formula for TPAF and PERS from a base of sixty years as the denominator to fifty five years (N/55). This change reflected an approximate 9% enhancement granted to members. At the time the benefit was granted, assets were removed from the General Fund and placed in the “Excess Benefit Trust” which fully funded the enhanced benefit so it would not be a future burden to the tax paying public. Those assets were to be held in Trust to fund the enhanced benefit. State and local employers were obligated to fund normal benefits, which would be referred to as normal employer contributions developed upon an actuarial analysis. The State Legislature declared a “holiday”, mandating employers not to make contributions for TPAF, PERS and PFRS and called it property tax relief. This “holiday” was declared based upon the Actuarial Valuation Reports which the Treasurer had received. The assumptions used for developing Valuation Reports only took into account a partial reflection of the stock market collapse which occurred in March 2000. Because of what is referred to as a “smoothing process” only 20% of a decline in market value will be realized in any given year or 20% of growth realized in any given year. This smoothing method is designed to prevent fluctuations in employers contributions and provide stability to what is referred to as a mature pension system. Of course, everyone knew about the problem in the stock market.

The State Treasurer and Legislature, recognizing the reality of the stock market, continued to grant holidays, knowing the assets upon which their decisions were based, was not a full representation of facts. Therefore, for approximately seven years, the State made no employer contribution to pension systems. Meanwhile, employees continue to contribute at their required rate. In 2003, legislation was approved to mandate a phase -in of employer contribution to commence with 20% and increasing by intervals until five years, resulting in 100%. Local governments made their payments in accordance with the billings from the Divisions of Pensions, based on the Actuarial Reports. The Treasurer and Legislature determined to not make contributions but to shift the assets held in the “Employee Benefit Trust” to the General Pension Fund. This implied they were making cash contributions, when in fact, it was simply an accounting change.

It is significant to recognize the Excess Benefit Trust Funds held for local PERS was not shifted. Instead, local property tax payers, through their governmental units, made normal employer payments and funding for the enhanced benefit (N over 55) remains dedicated. The end result is Local PERS funding is in significantly better shape than the State’s, ie: funded in excess as 82% of Assets versus Liability. The State PERS and TPAF, for which less than normal contributions have been made in recent years through the State budget, is in very poor shape.

Recently (March 23, 2007) the League released an analysis of the 2006 Valuation Reports for PERS, PFRS and TPAF. The reports identified the similar situation reported by the New York Times, and further developed that the State is confronted with a significant unfunded liability for active and post retirement medical benefit costs. Local governments have been paying their required employer contributions. This year, the State is to budget 100% of its employer obligations and local governments, in their forthcoming budget will be funding at a ratio of 80% based upon the Law which adjusted local employers contributions to PERS and PFRS (Chapter 108 Public Laws of 2003).

The fact local PERS is funded in excess of 82% of Liability versus Assets does not mean local governments are not confronted with significant problems. More than 90% of the cost associated with funding of Police and Fire Retirement System (PFRS) falls upon the local property taxpayer. League analysis of the Valuation Report of March 23 identified the significant problem confronting local property taxpayers with regards to the PFRS. The benefits provided to uniform personnel are significantly greater than those provided to other rank and file public employees. The cost of funding PFRS is approximately 14 to 1 and growing. The League and Affiliated Organizations testified at the prior Governor’s Pension and the Benefit Review Committee and Joint Legislative Pension and Benefit Task Force about this particular problem. There has been no activity nor recognition by the Legislature to address the magnitude of the problem nor the devastating financial impact PFRS is having on local property taxpayers.

Our suggestion is the report by the New York Times is correct with regard to TPAF, but only the beginning of the problem. Further analysis should be undertaken if there is ever going to be true property tax relief. In doing so, the State must address its funding of obligations and at the same time where there are overly generous benefits granted or abuse of the pension rules and regulations, there is a need for correction and immediate action by the Governor and Legislature.