Governor-elect Phil Murphy’s spokesman criticized Gov. Chris Christie on Thursday for lowering the expected rate of return on New Jersey’s pension investments just before leaving office, a move that could force Murphy to pay more than he had planned into the ailing pension fund next year.
The Christie administration recently lowered its assumptions of what the state will earn on its pension investments from 7.65 percent to 7 percent, according to state actuarial reports released Tuesday. The pension system — one of the worst funded in the nation and the biggest financial problem facing Murphy’s administration — has $75 billion and the state invests the money it is not paying out to retirees.
The pension system is funded by workers’ contributions, quarterly payments from the state budget, and investment gains. On paper, by cutting the assumed rate of return to 7 percent, state Treasurer Ford Scudder is lowering the amount of money he expects will be going into the pension system from its investments. That theoretically sets off a chain reaction that would increase the pension’s unfunded liability by several hundred million dollars. Murphy and state lawmakers, in turn, would likely have to find a way to offset the lower investment returns.
The decision will likely increase what the state will have to pay into the pension system next year by $234 million, according to the Treasury Department. Instead of a $3 billion pension contribution in his first budget, Murphy would likely have to make a $3.2 billion contribution under that estimate.
A spokesman for Scudder said the state has been steadily reducing the assumed rate of return since Christie took office in 2010, from 8.25 percent, to 7.65 percent, to 7 percent now. That rate more accurately reflects what pension investments are generating, he said.
But for Murphy’s transition team, the move is an unwelcome surprise that accelerates the countdown on the biggest time bomb they’re facing in the budget.
“Governor Christie is playing politics with the pension fund by rushing this decision at the 11th hour,” Murphy spokesman Dan Bryan said in a statement. “At a time when our taxpayers are already taking a hit, our focus should be on lessening the burden of property taxes, not increasing it.”
Murphy’s transition team said that the reduced rate of return should be phased in and that it has requested an analysis from the Christie administration to justify the decision, but has not yet received a response.
Murphy campaigned on a promise to ramp up to full funding of the state’s cash-starved pension system, which is one of the most troubled in the nation with nearly $90 billion in unfunded liabilities, according to a report released this month by a Christie-appointed commission.
New Jersey contributed $2.5 billion to the pension system in fiscal 2018, half of the full actuarially-determined contribution of roughly $5 billion. Murphy plans to continue a 10-year ramp Christie and Democrats have been following to reach full pension payments in fiscal 2023, meaning he would pay only 60 percent of the actuarially determined contribution in his first year in office, and 70 percent in his second year, and so on.
The full state contribution would go up by $390 million as a result of the reduced assumed rate of return, but the state is expected to pay $234 million, or 60 percent, of that total increase, according to Treasury spokesman Willem Rijksen. Local governments would be on the hook for the other 40 percent.
In a statement, Rijksen said the Christie administration “remains focused on reality and not playing games with assumptions.” He noted that the move had been vetted by the board of trustees for each of the pension funds (those boards include labor-union representatives) and by the chairman of the State Investment Council, Tom Byrne, who is a Democrat.
“Given the current elevated level of asset values across the board, long-run expected returns have diminished, so it is appropriate to lower the assumed rate of return,” Rijksen said. “Our actuaries have suggested doing so, and it is the unmistakable trend in public pension plans across the country, with some other 20 state pension plans having adopted or being in the process of moving to an assumed rate of return at 7 percent or below.”
This pension issue is the latest spat between the incoming and outgoing governors. Murphy asked Christie in a letter this month to freeze discretionary spending before he takes office on Jan. 16. Christie disputed Murphy’s budget figures and mocked him in a reply letter dripping with sarcasm.
On Thursday, Rijksen took a shot at Murphy for not having a position on an expiring 2 percent cap on yearly salary hikes negotiated in arbitration for police and firefighters.
“If the incoming administration were truly focused on property tax relief, they would strongly and immediately support a permanent extension of the interest arbitration cap—a measure that actually, objectively and sustainably lowers costs,” he wrote.