State Budget - Ledger - Pension underfunded over a decade

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Published in the Star-Ledger, Monday, June 19, 2006

State's budget headaches took shape over a decade
Workers will rally for Corzine plan today

BY DUNSTAN McNICHOL
Star-Ledger Staff

Thousands of public employees will stage a Statehouse rally today to support Gov. Jon Corzine's plan to contribute more than $1 billion to the long underfunded state pension system as part of his controversial $30.9 billion budget.

At the same time, several lawmakers want Corzine to push for cutting state worker pay and pension benefits as a way to scrap his plan to increase the sales tax a penny on the dollar.

The fiscal mess that prompted this heated budget debate has been 15 years in the making.

Governors consistently have used the pension funds as a source of relief for state budget shortfalls. At the same time, lawmakers currying favor with the state's powerful public employees and teachers unions dramatically have boosted the retirement benefits bankrolled by the funds.

"It's fairly easy to understand," former Gov. Jim Florio said. "If you're putting no contributions in and you're increasing payments out, at some point you have to pay the piper."

In the midst of a recession in 1992, Florio realized a $600 million budget savings by restating the value of the pension funds to reflect then-robust stock market earnings. Then a parade of Democratic and Republican governors sidestepped scheduled contributions no matter how good the economy got. They skipped more than $10 billion in total.

For a time in the 1990s, soaring stock market returns compensated for the state's skipped payments. But that didn't last. And in 2001, pension benefits were boosted 9 percent across the board, prompting soaring payouts from the funds.

Since 1992, when the total tab for benefits first hit $1 billion, the annual bill for pension payouts has increased nearly six times. The pension funds are now at least $18 billion behind the amount actuaries say they need.

In his March budget address, Corzine said the bill has come due.

"Make no mistake -- our unfunded pension obligation is a real bill," Corzine told lawmakers. "It has been deferred far too long."

Corzine's proposed $1.5 billion contribution would exceed the total payments governors made to the retirement funds over the preceding nine years. But it would total only 70 percent of the amount actuaries say the state should have put into the fund to meet its mounting long-term obligations this year.

Lawmakers looking for a way to dodge a proposed hike in the state sales tax are eyeing the huge pension contribution as a ripe source of savings.

State Sen. Stephen Sweeney (D-Gloucester) wants Corzine to ask state workers to voluntarily give up some of their pension benefits, which he says have grown too generous. Sweeney has proposed cutting them in several ways, including increasing the retirement age basing pensions on an employee's highest five years of salary rather than three.

But Corzine administration officials say they can't cut benefits because of changes made during one of the past pension maneuvers: a 1997 pension bond sale by then-Gov. Christie Whitman that freed nearly $600 million for her budget.

In that deal, state workers quietly received a major concession when lawmakers granted them a "non-forfeitable right to receive benefits" except for post-retirement health insurance. What this means, Corzine administration officials say privately, is that after an employee reaches five years of service and becomes vested in the pension system, the state cannot alter their benefits. Any changes, they said, would apply only to new workers who are not vested.

Carla Katz, president of Communications Workers of America Local 1034, the largest state workers union, said public employees are fighting for pensions that were "promised at the beginning of a career" and should not be yanked or reduced "because the system has been so underfunded."

She said the pensions help retirees "live a middle-class lifestyle. They're not living high on the hog."

Staff writers Jeff Whelan and Joe Donohue contributed to this report. Dunstan McNichol covers state government. He may be reached at (609) 989-0341 or dmcnichol@starledger.com.

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