Gov. Phil Murphy’s administration reversed a change made by Chris Christie to New Jersey’s pension system that would have forced state and local governments to pay hundreds of millions of dollars more into the ailing pension system next year.
Acting Treasurer Elizabeth Muoio announced Thursday that she would roll back the Christie administration’s decision to lower the expected rate of return on the state’s pension investments from 7.65 percent to seven percent. Muoio said Christie’s rate cut, announced weeks before he left office, caused “undue stress” on local governments that would have had to pay roughly $400 million more in pension contributions in the next fiscal year.
Muoio said she will instead phase in the rate cut over five years.
Muoio’s accounting move also saves the state from paying an additional $234 million into the pension fund for the fiscal year starting in July. Murphy is set to unveil his first proposed state budget on March 13.
“The path we’ve laid out takes into account the alarms that were sounded late last year when the state took the widely unprecedented step of lowering the rate so precipitously,” Muoio said in a statement.
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, payments from state and local governments and investment gains. On paper, cutting the assumed rate of return lowers the amount of money expected to go into the pension system from its investments. That theoretically sets off a chain reaction that would have increased the pension’s unfunded liability by several hundred million dollars.
Murphy’s campaign said he would continue the 10-year ramp Christie and Democrats have been following to reach full pension payments by fiscal year 2023, meaning he would pay only 60 percent of the actuarially determined contribution in his first year in office. The full state contribution would have gone up by $390 million as a result of Christie’s rate cut, but the state was expected to pay $234 million, or 60 percent, of that total increase before Muoio’s accounting change.
In December, a spokesman for Murphy accused Christie of “playing politics with the pension fund by rushing this decision at the 11th hour,” when the rate cut was announced.
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 in December by a Christie-appointed commission.
“It’s incredibly hypocritical for the Murphy administration to say it will fully fund the pension system and then lower the bar with rosy predictions on its health,” Assemblyman Edward Thomson (R-Monmouth) said in a statement Friday. “The goal is to fully fund the pension system as quickly as possible, not kick the can farther down the road.”
Under Muoio’s changes, the assumed rate will be 7.5 percent for the fiscal year 2019, which starts in July, and fiscal year 2020. The drop from 7.65 percent to 7.5 percent will cost the state an additional $52 million and local employers $91 million, Treasury spokeswoman Jennifer Sciortino said.
The rate will then drop to 7.3 percent in fiscal years 2021 and 2022, before reaching seven percent in fiscal year 2023.
Mike Cerra, the assistant executive director of the New Jersey League of Municipalities, said local governments would have struggled to find the estimated $400 million in 2019 if the rate fell from 7.65 percent to seven percent all at once.
“It would have led to significant service cuts across the board,” he said Friday. “To phase it in over five years is a responsible thing.”