As reported by NJ.com, a new report from a Wall Street rating agency warns that Gov. Chris Christie’s seemingly dormant plan to overhaul government worker pension and health benefits to save the State billions of dollars could come at a risk to school districts if Christie’s proposed reforms don’t play out as envisioned.
Moody’s also raised questions about the plan as proposed, saying it doesn’t explain how reduced health costs for municipalities will be used to balance out new expenses for school districts picking up the tab for teachers’ retirements.
That proposal, devised by a special pension commission and unveiled in February, would freeze the existing pension plan and shift workers onto less generous retirement and health care plans. While the State, which pays for school employees pension and health benefits, would continue to pay for the current system’s existing debts, school districts would have to assume the costs of the new system and retirees’ health care.
Christie’s commission has held up the plan as an answer to the State’s growing unfunded pension and health benefits liabilities. Unchecked, the State’s actuarially required contribution could amount to more than 22 percent of the budget in 10 years, according to Moody’s.
Under that proposal, the districts’ new costs would be offset by the billions of dollars saved from reducing public employee health benefits paid by school districts and municipalities from “Cadillac” plans to plans on par with the private sector.
“A condition of the commission’s proposal is that costs will only be shifted to the extent they can be offset by local benefits savings,” Tom Healey, who heads Christie’s commission, has said. But the commission has yet to provide details on exactly how the health plan changes would save money.
If the savings doesn’t pan out, the proposal could burden school districts that have few options but to raise taxes, cut costs, borrow money or spend their reserves to pay the tab for teacher pensions, Moody’s said.
“According to the proposal, districts would not be financially affected because any tax increases necessary on their side would be more than offset by tax reductions at the local government level, thus making it at least cost neutral,” the report said. “There is, however, no mechanism currently in place or proposed to compel municipalities and counties to either share the savings or reduce their budgets in step with the savings.”
Moody’s said it’s also unclear “how the various local government entities would rebalance these shared savings over time as health care and pension costs rise.”
Healey responded to the report Tuesday, saying “Unless choices are made now to bend the cost curve down on benefits, both State and local governments in New Jersey will face far more difficult choices in the near future.”
Unlike some alternatives, Healey said, the commission’s solution would “remedy the State budget funding crisis without increasing property taxes.”
The new, hybrid defined-benefit, defined-contribution pension plan would work like a 401(k), where school districts contribute a share of an employees’ wages, which is invested along with the workers’ contribution.
The State League of Municipalities and School Boards Association released their own report in June of what it would cost school districts and taxpayers to pick up the tab. Based on a $9.3 billion payroll for 135,000 members of the Teachers Pension and Annuity Fund, a 1 percent match would cost districts statewide $93 million. The figure jumps to $372 million with a 4 percent match.
The study found the average homeowner would owe about $28 for every 1 percent contribution of a workers’ salary made by school districts to the new “cash balance” pension system.
At a 3 percent match, the cost per home is $84, on average, and at a 7.5 percent match, it’s $210.
Essex County homeowners faced an increase of $43.81 in property taxes, per 1 percent, while Cape May residents would owe $9.07.
Moody’s warned that school districts are at risk without reform.
“As the problem worsens and the State looks for ways to share this burden, the probability of the State needing to take alternative action, including reductions in State aid, increases.
The State’s $40.6 billion in pension debt — $80 billion under new accounting standards — built up from two decades contributing less than recommended by actuaries. In 2010 and 2011 the State adopted a host of reforms to reduce costs and increase payments into the system.
While Christie successfully dismantled the funding schedule, a group of retired pensioners is challenging a law freezing increases in their cost-of-living adjustments, which Moody’s called a “wild card” for the health of the system.
“Reversing the COLA freeze would materially increase the pension funds’ unfunded liabilities and the annual contribution needs. We estimate that overturning the COLA freeze could increase the reported unfunded actuarially accrued liability for (the teachers’ pension fund) by about 35 percent,” it said.
In an August credit outlook, Moody’s also warned a Supreme Court ruling restoring COLA’s could further damage the State’s credit rating.