A recently enacted law allowing the Police and Fire Retirement System to be separated from the $77.3 billion New Jersey Pension Fund, Trenton, is a "credit negative" action that will "diminish New Jersey's legal flexibility to further reform PFRS benefits" and place a greater burden on local municipalities, said a report issued Friday by Moody's Investors Service.
The separation legislation, signed into law July 3 by Gov. Phil Murphy, does not affect Moody's credit rating for the state, which remains at A3 with a stable outlook, the report said.
"Moving PFRS to its own board may misalign the state's interest in improving its pension funding," the report said. However, the state "is insulated by its relatively small obligation to PFRS. Local governments face much higher exposure because PFRS related liabilities are typically the largest portion of their total pension liability."
The state's obligation to the police and fire system accounts for 5.7% of the state's adjusted net pension liabilities, a calculation made by Moody's that "adjusts reported liabilities by discounting at a bond market interest rate and making estimated allocations of multiple-employer cost-sharing plans."
The bond-rating firm added such exposure means that "even significant changes in benefit and investment policies would have a manageable impact on the state."
The police and fire system had $26.4 billion in assets as of June 30, 2017, according to the latest audited report. It had been one of seven separate pension funds within the New Jersey Pension Fund.
A separate PFRS will have a governing board of 12 members including seven police and fire representatives. This structure "will likely undermine New Jersey's flexibility to further reform or reduce police and fire retiree benefits," the Moody's report said.
"While the legislature retains statutory authority, it may be politically difficult to reduce benefits without the agreement of the board of trustees," the report added. "Such agreement would be unlikely from an employee-dominated board." However, changes in policy and benefits coverage will require eight votes plus approval by an actuary.