New Jersey Leads the Way with Landmark Bipartisan Pension and Health Benefits Reform

Press Release

Demonstrating once again that New Jersey is leading the way with bipartisan solutions for the toughest challenges facing states today, Governor Christie secured final legislative passage tonight for landmark pension and health benefit reform. The reforms passed this evening in the Assembly after receiving passage in the Senate on Monday. The fundamental reforms, passed with bipartisan support from Senate President Steve Sweeney and Assembly Speaker Sheila Oliver, will shake up New Jersey's out-of-date, antiquated and increasingly expensive pension and health benefit systems. These historic reforms bring to an end years of broken promises and fiscal mismanagement by securing the long-term solvency of the pension and benefit systems, while at the same time achieving critical savings for state and local governments. Pension reform alone will provide savings to New Jersey taxpayers of over $120 billion over the next 30 years, and an additional $3.1 billion over the next 10 years from health benefits reform.

"Together, we're showing New Jersey is serious about providing long-term fiscal stability for our children and grandchildren. We are putting the people first and daring to touch the third rail of politics in order to bring reform to an unsustainable system," Governor Chris Christie said. "I want to thank Senate President Sweeney and Speaker Oliver for putting aside politics, committing themselves to reform and remaining unwilling to settle for anything less than the real, viable solutions New Jerseyans have been demanding."

The reform legislation both secures the long-term solvency of the pension system by achieving a projected funding ratio of 88% within the next thirty years while providing over $120 billion in savings for New Jersey taxpayers. Similarly, the reforms to the health benefit system will save New Jersey taxpayers $3.1 billion over the next 10 years alone while offering greater choice and affordability. The combined savings from these reforms directly translates to real property tax relief for New Jersey families and budget relief for local governments.

Governor Christie continued, "We are once again showing the people of New Jersey that our state is leading the way on the biggest challenges before us and remains unafraid to do what is hard, but necessary. Instead of just talking about reform, New Jersey has come together in a bipartisan way, put our heads down and actually gotten the work done. We are fixing our pension and health benefit systems in order to save them and in the process bringing fiscal sanity to our state."

In September 2010, Governor Christie first laid out a series of ambitious reform proposals to deal with an immediate combined unfunded liability for the pension and benefit system of $121 billion. Recognized as key cost-drivers for government at the state and local levels, the Governor once again made clear in his 2011 State of the State that modernizing the pension and benefit system in New Jersey was one of the big things to be achieved this year.

Governor Christie will sign the landmark reforms into law on Monday, June 27.

The Pension Reform Plan: Protecting Retirees and Providing New Jerseyans Over $120 Billion in Taxpayer Savings By 2041

The reforms will ensure long-term solvency, while slowing the rapid growth of government costs, spending and taxes that have overwhelmed taxpayers.

With reform, future retirees are protected and New Jerseyans provided with over $120 billion in taxpayer savings through 2041.

Increasing the Funding Ratio of the Pension System to 88%. These reforms protect the pension system for retirees, increasing the funded ratio of the combined state and local systems from the current 62% to more than 88% over the next thirty years. By 2041, this will reduce total pension underfunding to $37 billion. Without these critical reforms, the unfunded liability across the pension systems would have skyrocketed to $183 billion, resulting in a massive impact on state and local budgets.

Providing New Jerseyans Over $120 Billion in Taxpayer Savings by 2041. This comprehensive set of reforms means critical savings for state and local governments and real property tax relief for New Jerseyans.

* $79 Billion in State Contribution Savings: Over the next 30 years, the state pension contribution will be $148 billion, a projected savings of nearly $80 billion. Without reform, the state is projected to contribute $227 billion over the same period.
* $43 Billion in Local Government Contribution Savings: Over the next 30 years, local government pension contributions will be $70 billion, a projected savings of nearly $43 billion. Without reform, local governments are projected to contribute $113 billion over the same period.

Changes for All New Public Employee Retirement System (PERS) and Teachers Pension and Annuity Fund (TPAF) Employees:

* Updating the Formula for Retirement Eligibility:
o Establishing the normal and early retirement age at 65 years.
o Adjusting the early retirement penalty to 3 percent for each year.
o Increasing eligibility for early retirement to 30 years of service.

Changes for All New Police and Fire Retirement System (PFRS) Employees:

* Updating the Formula for "Special Retirement" Eligibility:
o Changes eligibility for special retirement from 65% with 25 years of service to 65% with 30 years and 60% with 25 years.

Changes for All Active Employees (Judicial Retirement System (JRS), PERS, TPAF, PFRS and SPRS):

· Employee Contribution Rate:

Current Reform Legislation

PERS/TPAF 5.5% 6.5% (+1 additional point phased-in over 7 years to a 7.5% total)
PFRS 8.5% 10.0%
SPRS 7.5% 9.0%
JRS 3.0% 12.0% (increase phased-in over 7 years)

Changes for All Current and Future Retirees:

* Eliminating Automatic Annual Payment Increases: Eliminates all statutory Cost of Living Adjustments (COLAs).

A New Paradigm for Pension Plan Design:

* The legislation creates a new Plan Design Committee for each pension plan. The Committees will have new authority to change important plan design features --- such as retirement ages, employee contribution levels, and future cost-of-living adjustments (COLA) --- within a financially prudent framework that mandates an ongoing, stable level of funding for each system.
* A "Target Fund Ratio" (TFR) will define the boards' ability to make plan design changes. The TFR is a target ratio of a fund's actuarial value of assets (AVA) to that fund's actuarially determined liabilities. In general, only funds that are at or above the TFR will have flexibility to make plan design changes.
o A "Target Fund Ratio" (TFR) of 75% is established as of the legislation's effective date, increasing to 80% over seven years.
o Only funds meeting or exceeding TFR will be eligible to make plan design changes. Funds below TFR may not make changes.
o Funds above the TFR but below 80% (during the seven-year phase-in period) may make only those changes that do not reduce their funded ratio upon implementation or below the TFR at any time within the succeeding thirty years.
o Plans above 80% may not make changes that bring their funded ratio below 80% upon implementation or at any time within the succeeding thirty years.
* In general, pension funds are considered to be adequately funded if their AVA funded ratio is at or above 80% (the federal standard for "at-risk" funds).
o At the end of fiscal 2010, the State's plans' combined AVA funded level was just 56 percent.
* The State Investment Council will expand from 13 to 16 members and include more direct public employee stakeholder input.

Changes to Reflect More Realistic and Financially Sound Principles:

* Amortization methodology is changed from a percentage of pay schedule (which defers the retirement of any unfunded liability) to a level dollar amount each year in order to retire part of the system's unfunded liability each year and earlier than the previous methodology.
* Amortization methodology is changed from a 30 year open period (which retires less of the unfunded liability each year and results in a lower funded ratio) to a maximum open period of 20 years (phased-in over 19 years).

The Health Benefit Reform Plan: Transforming the System to Create Choice and Lower Costs for New Jersey Taxpayers

The reforms will modernize the State employee health benefits plans by bringing the system more in line with the private sector and federal government. Today, New Jersey's unfunded other post-employment Benefits (OPEB) liability for providing health benefits is $71.4 billion. These reforms will substantially lower health benefits costs for local governments, including those at the county, school and municipal levels, representing another major step forward in providing real, long-term property tax relief. New Jersey spends $4.4 billion annually on public employees and retiree health care costs, with the cost of health benefits making up 9% of the State's budget today.

The reforms will result in $3.1 billion savings for taxpayers over the next 10 years alone, while increasing choice for employees and ensuring affordability.

Cost Sharing Reforms for Active Employees:

* All public employees will pay a statutorily-established percent of premium ("premium share"), instead of a percentage of salary, for all State Health Benefits Plan (SHBP)/School Employee Health Benefits Plan (SEHBP) and non-SHBP/SEHBP participating plans.
* The employee's share will phase in over four years.
* The premium share requirement will not affect employees until their current contract expires.
* Premium shares will vary by salary level and coverage, but may not be less than 1.5% of salary (the current standard).
* Current employees (excepting those with 20 or more years of service as of the effective date) will pay a premium share in retirement based on the date they reach 25 years of service. If they reach 25 years after the effective date, the employee will pay the premium share in effect based on the date s/he reaches 25 years (i.e., if the employee reaches 25 years in year two of the four year phase-in, then the employee, in retirement, will pay the premium share in effect in year two of the phase-in.)

Changes for Current Retirees:

* There will be no change with respect to premium cost sharing for current retirees.

Changes for Local and Education Employees Outside SHBP/SEHBP:

* If the employer is not participating in the SHBP/SEHBP, then the employer and employee could agree to a different premium share and out-of-pocket cost arrangement that results in the same level of savings as the statutory premium share formula and plan design changes in the SHBP/SEHBP.
* Savings would have to be certified by Division of Local Government Services and Division of Pensions and Benefits and the local Financial Officer in each local entity.
* All local employers are required to offer a Section 125 "cafeteria plan" to employees.

Health Plan Design Reforms

Joint Employer and Employee Plan Design Committees:

* For both SHBP and SEHBP, a state-level joint employee-employer Plan Design Committee is established. The employer and employees are equally represented.

Committee Role in Plan Design:

* The Committees are responsible for providing plans with at least three levels of coverage, featuring varying levels out-of-pocket costs. The Committees have sole discretion to set the amounts for maximums, co-pays, deductibles, and other such participant costs for each plan.
* The Committees must also provide for a high deductible health plan.
* All current statutory requirements with respect to plan design will be repealed.

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