NJEA Pres. Beatty Wants NJ to Forget History and Keep Funding Teachers’ Broken Pension Plan with $4+ Billion a Year Until 2049.

NJEA President Steve Beatty took to the pages of NJ.com to argue his case for keeping the teachers’ pension plan — the Teachers Pension & Annuity Fund (TPAF) — just the way it is, adding new members to the existing plan every year. But there are some big disconnects in Beatty’s argument. He spends much of his op-ed berating “governors and legislatures from both parties” for their “reckless choices” that led to the severe underfunding of TPAF but neglects to admit the NJEA’s own culpability in the political deals of the 1990s and 2000s that severely underfunded TPAF. As a result of this systematic underfunding, Beatty notes that 85% of the state’s annual contribution to TPAF goes to pay off accumulated pension debt. But he neglects to mention that on a stand-alone basis, TPAF is a mere 48.6%-funded (about 49 cents set aside for every dollar owed) — despite the $28.1 billion that Gov. Murphy pumped into TPAF, which was 60% of the $47 billion put into the state pension system as a whole. None of these datapoints indicate a sound pension plan that should take on additional members and liabilities, or that taxpayers should keep funding the system with $4+ billion a year until 2049. Moreover, if TPAF continues as currently structured, all new teachers would be placed in inferior, Tier 5 pensions, which have onerous employment requirements and inadequate benefits with little prospect of improvement. Beatty wants the state to keep adding to and paying for a lousy pension plan, but New Jersey citizens, taxpayers, and teachers should understand what that requires.

Beatty ignores the NJEA’s role in underfunding TPAF in the 1990s and 2000s. Beatty correctly states TPAF’s pension debt accumulated over 30 years, which takes us back to … 1997. Beatty wants to place all of the blame on “governors and legislatures from both parties.” It is true that these politicians short-changed state pensions in the 1990s and 2000s, but what Beatty conveniently leaves out is that NJEA leadership willingly cut political deals with these same politicians that undermined pension funding.

The NJEA supported the disastrous 1997 POB deal that allowed underfunding.* Elected in 1993, Republican Gov. Whitman short-changed pensions to fund her tax cuts and the NJEA sued. But in 1997, as part of Whitman’s disastrous pension obligation bond (POB) deal, the NJEA gained the “non-forfeitable right” to teachers’ pensions (meaning pensions benefits could not be reduced once they were earned) in exchange for supporting the POB deal and dropping the funding lawsuit. Importantly, the deal also changed state law to allow the use of surplus assets to replace the normal contributions (which is what the NJEA sued over in the first place). This became regular practice during the dot.com stock market boom and resulted no new money (besides borrowed POB proceeds) being put into the pension system for seven straight years – a total of $8 billion of missed contributions. The historical record shows the NJEA was a willing participant in the POB deal that undermined pension funding.

The NJEA leads the 2001 pension raid.** During the 1990s, the NJEA had persistently lobbied for pension enhancements, and the dot-com boom provided the nominal surplus assets to pay for them. Gov. Whitman vetoed a pension-enhancement deal but when NJEA-friendly Republican Senate President DiFrancesco became acting-governor, he signed the law, granting both existing and prospective retirees a 9 percent pension increase. But the deal once again raided pension assets to pay for the enhancements. Even worse, the legislature knowingly and retroactively valued the pension assets $5.3 billion higher than what they were currently worth because of the dot.com bust. The NJEA engaged in a major grassroots effort to gain passage of the bill, explicitly arguing that surplus assets should be used to pay for the enhancements. Once passed, the NJEA claimed it was “one of the most significant legislative accomplishments in NJEA history.” That was a NJEA-backed pension raid.

Despite $54 billion in contributions to state pensions, TPAF remains in poor condition. That NJEA-backed, systematic underfunding haunts TPAF to this day. At the NJEA’s urging, Gov. Murphy pumped $28.1 billion into TPAF — or 60% of the $47 billion he put into the state pension system as a whole (Gov. Sherrill will add another $7.3 billion) — but as of last year TPAF was only 48.6%-funded (that is, about 49 cents set aside for each dollar owed), according to the most recent state actuarial report. It is true that 77.8% of state lottery proceeds automatically go into TPAF (which raises the funded ratio to 61%), but that is a payment added on top of TPAF’s annual results, and it’s TPAF’s results that determine the actual amount of the 82% of TPAF’s funding that comes from the state budget (not the lottery). Thus, as Beatty notes, 85% of the state’s contribution goes to paying down accumulated pension debt. It is important to look at TPAF on a stand-alone basis because it reveals the intrinsically poor condition of the plan and what can be expected in the future. Adding more people every year into an unsound TPAF does not make sense. But that is precisely what Beatty wants to do.

To avert insolvency, Chapter 78 put teachers in inferior Tier 5 pensions.*** By the time Gov. Christie was in office, the cumulative funding shortfalls had set TPAF on a path for near-term insolvency. As a result, Senate President Sweeney led a bipartisan majority of the legislature to pass the 2011 Chapter 78 reforms, placing new teachers in inferior Tier 5 pensions and taking away COLAs from all pension participants. Over half of all teachers are currently in Tier 5 plans.

Adding new members to TPAF is not sustainable. Beatty is right that closing TPAF to new teachers would not reduce the current pension debt, but it would prevent new entrants into TPAF, which is less than half funded on its own, and thus prevent new pension liabilities (and potentially more pension debt) from being created. As it is, the state will have to make $4+ billion contributions every year until 2049 to get TPAF to full funding and that assumes a 7% increase in assets every year. What happens when there is a market downturn or recession? If COLAs are ever reinstated or teachers upgraded from Tier 5 plans, that will increase the liabilities and require extra annual funding on top of what is already required. Beatty talks about the NJEA working to improve current pensions, but it is almost impossible to see how the state can allow new entrants into TPAF and also expect that TPAF pensions can be improved. Add in the state’s skyrocketing public employee health benefit costs. Where will the state get the money?

Simply adding to and funding the status quo is not sustainable.

*For a full discussion of the POB deal with sources and footnotes, see Sunlight’s report “Job Number One: NJEA’s Leading Role in New Jersey’s Pension Crisis,” p. 17-18.

** For a full discussion of the 2001 pension raid with sources and footnotes, see Sunlight’s report “Job Number One: NJEA’s Leading Role in New Jersey’s Pension Crisis,” p. 18-20.

*** For a fuller discussion of Tier 5 pensions, see Sunlight’s “Facts and Sources Sheet on New Jersey Teachers’ Pensions.”