Whoever wins New Jersey’s Governor race in November will face a growing financial crisis. The state’s government employee pension fund is in dire financial straits. In fact, the fund is in the worst financial shape of any in the country. Now, the state has just over $49 billion in debt, and New Jersey’s local governments have another $17 billion in unfunded liabilities. The state’s teacher pensions owns the largest share of the problem. It is funded at less than 50 percent and is by itself $30 billion short. In fact, New Jersey’s teacher pension plan scored an F according to our new ranking of all 50 state teacher pension plans.
So what do the gubernatorial candidates propose to do?
Republican Kim Guadagno, the state’s current Lieutenant Governor, would tackle the pension crisis in four ways. First, she wants to increase the number of public employees enrolled in a cash-balance plan rather than the state’s pension fund. These plans are much like 401k retirement accounts, but they carry a guaranteed (but usually more conservative) interest rate. She then wants to find savings by cutting back on “Cadillac” health benefits. Third, she would like to ensure that government employees don’t simultaneously receive a paycheck and a pension, and, finally, she would cut fees paid to Wall Street firms investing those pension dollars. Guadagno believes this multifaceted approach will solve New Jersey’s pension woes.
The other candidate is Phil Murphy, a Democrat who served as President Obama’s top diplomat to Germany and a former Goldman Sachs executive. Murphy has some experience working to reform pensions. In 2005, he served on a task force to reform pensions. His plan is to divest from private equity and hedge funds, reinvest the millions paid in fees to those funds, and to close tax loopholes. Murphy argues that together these actions will fix the problem and allow the state to meet its pension obligations to government employees.
There are things to like about both the Republican and Democrat proposals.
Guadagno’s plan to increase the share of public employees in a cash-balance plan would help in a few ways. For teachers, for example, a cash balance plan typically provides a more valuable retirement benefit for a majority of educators. Furthermore, shifting more public employees into a DC plan will slow down the growth of New Jersey’s pension debts.
Decreasing the rapid accrual of pension debt is critically important, but it won’t be sufficient to ensure that the state can meet its current obligations. On that front, Murphy put forth a strong proposal. His goal of closing tax loopholes would secure significantly more revenue for the state to direct to its pension obligations and ensure that retirees receive the full benefits they earned.
The truth of the matter, however, is that whether Guadagno or Murphy wins in November, their individual proposals alone are likely not enough to solve New Jersey’s pension problems. The best strategy for the victor would be to borrow the elements of their opponent’s proposal described above. Together, this would be a stronger approach that would increase funding for existing pension obligations, slow down debt accrual, and provide higher quality benefits to many public employees.