A CASE STUDY OF WHAT HAPPENS WHEN A SPECIAL INTEREST LIKE THE NJEA BECOMES TOO POWERFUL
New Jersey’s past is coming back to haunt the present at a very bad time.
In this time of COVID-squeezed budgets, Governor Phil Murphy has proposed making a $4.9 billion contribution to shore up New Jersey’s worst-in-the-nation public pension system. That’s 12 percent of Murphy’s entire FY2021 $40.1 billion budget. State Treasurer Elizabeth Muoio recently revealed the ugly truth about the $4.9 billion payment: $4.2 billion, or 85 percent, will go to paying down the state’s $100 billion of unfunded public pension liabilities. In other words, Murphy wants to spend over 10 percent of his entire FY2021 budget to pay for past underfunding. As Treasurer Muoio said, that’s $4.2 billion that current citizens must pay for past neglect, and $4.2 billion that cannot be devoted to helping schools, hard-pressed families, laid-off workers, struggling small businesses, or any other important priorities during these difficult times.
The second ugly truth is that even this $4.9 billion is only 80 percent of the actual required contribution, which means that the unfunded liabilities will continue to grow despite the large payment. The full required payment would amount to $6.1 billion, or 15 percent of the state budget. Governor Murphy has committed to making the full payment, so for the foreseeable future, this massive burden will continue to crowd out other priorities.
The third ugly truth is that sixty percent of the state’s pension payment will go to one of the single worst public pension funds in America, the Teachers’ Pension and Annuity Fund (TPAF) — a case of throwing the proverbial good money after bad. TPAF is the state’s largest public pension fund and the poster-child for New Jersey’s broken public pension system. Even before COVID hit, it was only 27 percent funded and ranked among the bottom five percent of public pension funds nationwide. Taking into account the effects from COVID, the Center for Retirement Research projects that TPAF will run out of assets by 2027. Thereafter, TPAF’s $4.5 billion-plus of annual benefits payments will have to come directly from the state budget. Absent some sort of federal bailout, it is highly unlikely that New Jersey can make these payments without drastic service cuts or much higher taxes or perhaps even a debt restructuring. TPAF is a looming disaster for the state.
How did TPAF get in such dire condition?
Treasurer Muoio was right. The numbers tell the story: 88 percent of the $3.7 billion state contribution to TPAF will go to paying down TPAF’s $62 billion of unfunded liabilities. Incredibly, only 12 percent of the contribution will go towards the pensions that current employees are earning. In other words, the state must pay $3.3 billion because past legislatures made promises to the New Jersey Education Association (NJEA) and its members but did not fund them. So most of New Jersey’s current bill for past neglect is due to TPAF.
Of course, the NJEA blames TPAF’s crisis entirely on the state, but the facts show otherwise. The facts show that the NJEA played a lead role in structuring TPAF, undermining its funding, depleting its assets, enhancing its benefits and blocking reforms. The Sunlight Policy Center of New Jersey (SPCNJ) presents eight facts about how TPAF got into this position and the NJEA’s undeniable leading role:
- TPAF Is Projected to Be Insolvent by 2027
- The NJEA Ensured TPAF Was an Obligation of the State
- NJEA-Engineered Salary and Pension Structures Systematically Underfunded TPAF
- The NJEA Led the Way in Undermining TPAF’s Funding
- The NJEA Strongly Supported the Disastrous 1997 Pension Obligation Bond Deal
- The NJEA Led a Brazen Pension Raid in 2001
- The NJEA Did Not Hold Lawmakers Accountable for Underfunding Until 2015
- The NJEA Blocked All Reform Efforts Until It Was Too Late
Of particular relevance to current New Jersey citizens, the facts show the NJEA was perfectly willing to abide pension underfunding so long as it believed it had the state and its citizens on the hook. The NJEA was unconcerned about the amount of unfunded liabilities or their ultimate cost to future generations: it only cared that the state and its citizens would be legally bound to pay out the pensions when they came due. Only when the NJEA lost the legal right to benefits and funding did the NJEA act to secure TPAF’s funding in 2015, but by that point TPAF was already in deep crisis.
This is the TPAF that confronts the state today. Yet most citizens are unaware that billions of dollars of their taxes will go to paying off past pension debts rather than funding present needs. Most are unaware that TPAF is a looming disaster. But when budgets are squeezed and there is not enough money for COVID relief, or education aid, or social services, or infrastructure, or any other priority, New Jersey citizens will need to know why.
With this report, SPCNJ brings the facts to light. New Jersey citizens need to understand what happened in the past. They need to know that the sorry, avoidable plight of TPAF is what happens when a special interest accumulates too much political power. They need to know that the taxpayer-funded NJEA was able to dominate both political parties and construct the pension system it wanted, and then chose to stand by and let TPAF’s financial soundness deteriorate, heedless of the cost to future generations.
Now the NJEA wants to escape the blame and stick the state and its citizens with the ruinous bill.
It is time to shine a light on these facts.