(Bloomberg) -- The massive shortfalls in public pension funds are the single biggest financial challenge for American’s states and cities. So allowing government workers to determine their own benefits -- as New Jersey may soon do -- seems a clear recipe for disaster.
The New Jersey Legislature on Monday passed a bill allowing the police and firefighters to control "how their retirement funds are invested and their levels of contributions and benefits,” according to NJ.com. It passed the Senate by 34-2 and the Assembly by 67-2, giving it broad bipartisan support, and now goes to Governor Phil Murphy, a Democrat, for his signature.
The state hasn’t done a particularly good job running public pensions. According to S&P Global Ratings, New Jersey’s pension funding ratio is the worst in the nation, having saved enough to cover about 31 percent of the benefits that have been promised. The police and fire system is relatively strong by comparison, with about 65 cents for every dollar it’s on the hook for down the road, according to NJ.com.
So as the newspaper quotes the president of the State Policemen’s Benevolent Association, "We want to control our own destiny.”
Fair enough. It’s the police and firefighters’ pensions. But it’s still the taxpayers’ bill.
The Senate Budget and Appropriations Committee said that the bill "may increase employer pension costs because it allows the board to reinstate cost of living adjustments for retirees and to alter any benefit set forth in statute for the Police and Firemen’s Retirement System.”
A new 12-member board replacing the state Treasury Department’s Division of Pensions and Benefits will consist of three active policemen, three active firemen and one retiree. Governor Murphy will appoint five trustees and a super-majority vote of at least eight would be required to change member benefits, with the exception of cost-of-living increases.
The big risk of benefit increases is that they’re promises that don’t go away, even if the projections that once made them look affordable don’t pan out. States and municipalities from coast to coast are now living with the consequences of the 1990s tech boom, which brought public pension funding levels to 100 percent and allowed politicians to sweeten the pot for union members.
The subsequent bust -- and the Great Recession a few years after that -- took its toll on the funds backing those promised benefits. The aggregate state and local government pension funding ratio is now 73 percent, up from 67 percent at year-end 2016, according to Patrick Luby of CreditSights, who cites Federal Reserve data.
"In most cases,” Luby said, "liabilities are continuing to grow and will exert increasing stress in the years ahead.”
Keeping pension funds healthy and solvent drives up taxes and crowds out spending for everything else, including education and infrastructure. Allowing beneficiaries to determine their own benefits can only make things worse.
(This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.)
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