Thursday, January 11, 2018 4:20 pm
Chris Christie's dubious claim he saved $120 billion in the NJ pension system
SALVADOR RIZZO | Washington Post
"These reforms will save $120 billion for the system over 30 years and have staved off, for the time being, the insolvency of the system. . . . In our eight years, we have contributed $8.8 billion in cash to the system. This represents 2 1/2 times more than the last five governors before me combined. If such contributions had been made all along, our problems would almost be nonexistent. -- Gov. Chris Christie, R-N.J., in remarks during his state of the state speech, Trenton, N.J., Jan. 9, 2018
It's a rite of passage for politicians leaving office to talk about bright spots and accomplishments, even if they have to fudge a few details that get in the way of an upbeat story. But what happens when the problems are too big – say, when a governor inherits a massive financial wreck and hands off a massive financial wreck?
In Gov. Chris Christie's case, that means a spin extravaganza on New Jersey's pension system, which remains one of the worst-funded in the nation as Christie wraps up his eight years in office.
In his last state of the state speech Jan. 9, Christie argued that he achieved "historic reform" on the pension front and that, if the previous five New Jersey governors had done what he did, the state's pension problems would be "almost nonexistent." He was just as boffo in recent exit interviews with the New York Times and the Star-Ledger.
It sounds impressive, and Christie has earned praise in some quarters for charting a more responsible course on pensions. But do his numbers add up?
Let's start with some Pension 101. New Jersey manages retirement funds for nearly 800,000 public employees -- teachers, judges, prosecutors, state troopers and others – and each year the state is required to pay enough to stay abreast of what it will owe retirees 30 years later. That's called an actuarially determined contribution, or ADC, and it's a lot like the minimum payment on your credit card.
But the last time New Jersey made its minimum payment was 1996, and it's all been downhill from there. Think of it like credit card debt that has gotten wildly out of hand. Under normal circumstances, missing your minimum credit card payment might mean higher interest rates and bigger payments down the line. But when the debt is approaching $100 billion, falling short on one payment means paying billions more dollars down the line.
During eight years, Christie and the Democratic-controlled state legislature never made a full minimum payment, and the long-term cost has been severe.
A December report from Moody's Investors Service estimated that New Jersey's pension liabilities would rise from $95 billion to $116 billion from fiscal years 2016 to 2017, a 22 percent increase, because of the pension-skimping maneuvers. "Despite large pension contribution increases, the state's structural imbalance has remained steady at 11 percent, of which pension contribution underfunding is the primary source," according to the report.
The grim result is that New Jersey's unfunded pension liabilities grew every year under Christie's watch. The state's credit rating was downgraded four times by Moody's, four times by S&P Global Ratings and three times by Fitch Ratings, reaching the worst grade of any state except Illinois. Christie is the most-downgraded governor in U.S. history, and the pension system is now ranked variously as the worst-funded in the nation or somewhere in the bottom five.
– 'We have contributed $8.8 billion in cash to the system'
Although New Jersey's state government did contribute $8.76 billion over eight years to the retirement funds under Christie, as he said, that was far less than the $31.65 billion total he faced in minimum payments. Christie averaged a 28 percent ADC over eight years. Although they paid $3.4 billion in total, the five previous governors combined averaged 21 percent from 1995 to 2010.
According to Moody's, 28 percent is "well below the level that would allow the state's reported net pension liability to 'tread water' – or remain stable from one year to the next, assuming investment return and other actuarial assumptions are met." In layman's terms, that means 28 percent is not enough to get back to fiscal health.
So, the Moody's report indicates that - contrary to what Christie argued in his speech - New Jersey's pension problems would be looming large today had his five predecessors contributed 28 percent rather than 21 percent of what was due.
The key fact missing from Christie's speech and interviews is that pension finance is a long game; the funding gap grows exponentially each year that New Jersey skips or shorts its minimum payment. So when Gov. Donald DiFrancesco, R, skipped a $700 million contribution in 2002, the minimum payment the next year was still $700 million, in part because the pension system was funded then at a higher level.
But by the time Christie skipped a $3.1 billion contribution in 2011 and began to short subsequent ones, the system had fallen into serious disrepair, and the unfunded liabilities over 30 years grew at a much higher rate compared with DiFrancesco's term. Christie will leave office with an ADC that grew from $3.1 billion in the first year to $5 billion in the current one. Because he had the misfortune to be the latest governor saddled with this financial calamity, Christie's moves to short the pension payments took the biggest toll by far.
A spokesman for the Christie administration did not answer a list of questions but insisted the governor was right.
"The increase in funding is far more significant than you acknowledge," said Willem Rijksen, a spokesman for the New Jersey Treasury Department. "Not only is it more than 2.5 times the total contributed by the five previous governors combined. . . . Perhaps most significantly, there is for the first time in state history a universally acknowledged strategy to reach the full annual actuarially required contribution."
That claim, and one other by Christie, are also worth fact-checking.
–'These reforms will save $120 billion'
In his speech, Christie said New Jersey taxpayers would save $120 billion over 30 years because of several measures he signed into law in 2011. The state raised public workers' retirement age, increased their pension costs, and froze cost-of-living adjustments for retirees. At the time, it was landmark legislation that helped Christie burnish his resume for an eventual presidential run.
But the $120 billion figure does not tell the whole story.
One of the most important parts of Christie's 2011 plan was a seven-year schedule to ramp up the state's pension payments by billions of dollars, until reaching the full ADC, or minimum pension payment, this year. Christie flip-flopped and scrapped that plan in 2014, three years in, because state revenue did not keep up and he refused to raise taxes to cover the difference.
What Christie ended up doing was extending the ramp from seven to 10 years. So instead of being on the hook for a full $5 billion ADC this year, he contributed only half, $2.5 billion. And instead of seeing the seven-year ramp to completion during his two terms, Christie left to his successors the tough chore of finding more than $21 billion, according to one state estimate, to finish the 10-year ramp over the next five years.
The shift came with a cost that Christie fails to acknowledge.
By switching from seven to 10 years, less money went into the pension system. Less money was invested by the state's pension managers, and less investment returns were generated. The unfunded liabilities therefore grew more than Christie expected in 2011, when he rolled out the $120 billion savings estimate.
Yet Christie still uses the $120 billion figure, without accounting for the cost of his new 10-year ramp. His math is similar to President Trump boasting of having cut $5.5 trillion in taxes. Trump's figure doesn't account for $4 billion in tax increases included in the same package, which means Trump signed a net $1.5 trillion tax cut.
The net figure for all of Christie's changes to the pension system is unknown. A representative for Moody's said that the $120 billion savings estimate is "partially offset by the lower-than-expected annual contributions" but that the agency could not quantify the "net savings" from Christie's changes. But it's clear the $120 billion is no longer valid.
The design of the pension plan - both initially and when Christie revised it in 2014 - left some of the hard decisions for later, which would make sense if a governor was hoping not to stick around for a full eight years.
"In the final analysis, Christie's 2011 pension reforms called for a grand bargain in which state workers would make a number of sacrifices in their benefits in exchange for the state promising to make its full ADC payments," said Patrick McGuinn, a professor at Drew University who wrote a 2014 report for the Brookings Institution recommending that New Jersey move new hires to 401(k)-style plans instead of pensions, which are more generous. McGuinn also recommended moving to hybrid plans.
"At the end of the day the workers fulfilled their part of the deal (because they had no choice) and the state did not (because it did have a choice and the choice was politically unpalatable)," McGuinn wrote in an email. "As a result, the unfunded pension liabilities in New Jersey remain enormous and create a formidable fiscal challenge for the incoming . . . administration and threaten to derail the many campaign promises it made regarding new investments."
Christie does deserve credit because "his use of the bully pulpit on the issue raised its profile and increased the sense of urgency to deal with it in a serious way" and for "his willingness to work across party lines with Democrats in the legislature," McGuinn said.
Rijksen, the state Treasury Department spokesman, noted that Christie also committed nearly $1 billion a year in state lottery revenues to the pension funds. Ratings agencies said this was an improvement, but not a huge one, because New Jersey reduced its pension contribution from the state budget by an equal amount. (The difference is that the lottery money is bound to go to the pension system no matter what happens in the state's annual budget negotiations.)
And the governor was the adult in the room by reducing New Jersey's assumed rate of return - what it expects to generate from its pension investments - from 8.25 percent when he took office to 7 percent, which is more in line with industry standards, Rijksen said. That may turn out to be better long-term planning, but it also means the unfunded liability will be growing, because less money is expected to go into the system.
The Pinocchio Test
Christie argues that he achieved "historic reform" of New Jersey's distressed pension system and that there would be almost no funding issues - "almost . . . nonexistent" – had the previous five governors done what he did.
He notes that New Jersey contributed a record $8.8 billion to the pension funds under his watch but neglects to mention important data. The retirement system's unfunded liabilities continued their rampant growth, and over eight years, Christie contributed 28 percent of the minimum payments the state was required to send the pension funds, compared with a 21 percent average for the previous five governors combined. According to Moody's, 28 percent is not considered a healthy funding level.
Christie also claims that New Jersey taxpayers saved $120 billion over 30 years because of a 2011 law he signed raising the retirement age, freezing cost-of-living adjustments for retirees and increasing what public workers pay toward their retirement accounts. But Christie leaves out that by scrapping another part of that law, which required him to make bigger pension payments, he also saddled New Jersey taxpayers with an indeterminate but substantial cost over 30 years.
Apple-polishing is to be expected for a departing governor, but Christie earns Three Pinocchios for statistics that belie a rotten core.