A commission composed of politicians, economists and financial professionals recommended that New Jersey develop a hybrid system for new employees and lower-tenured employees in two large pension systems within the $77.3 billion New Jersey Pension Fund, Trenton.
The proposal calls for "a blended defined benefit/defined contribution plan for new non-uniformed state, county and municipal government and school district employees," as well as employees in these job categories with less than five years of service, said the report by the New Jersey Economic and Fiscal Policy Working Group. Longer-tenured employees would remain in the traditional DB plan.
The proposal calls for considering two hybrid options — shifting to a cash balance plan or offering a DB plan for the first $40,000 of a participant's income and a cash balance account within the pension system that guarantees a 4% minimum return on all income above $40,000.
The Legislature and governor should agree on a final plan within the next four months so it can be part of the next state budget process, the report said. Any plan "will require additional analysis with an actuary to determine long-term cost savings, budgetary impact and timing for implementation."
The legislation also should allow employees covered by the hybrid plan to opt out to join a 403(b) or 457 plan instead, the report said
The proposal would affect the Public Employees' Retirement System, which had assets of $29.2 billion as of June 30, 2017, according to the latest audited report, and the Teachers' Pension and Annuity Fund, which had $24 billion in assets as of June 30, 2017.
The Police and Firemen's Retirement System, which had $26.4 billion in assets as of June 30, 2017, is unaffected by the proposals. Gov. Phil Murphy signed into law in July severing this pension system from the New Jersey Pension Fund effective at the start of the next fiscal year.
"The PFRS board may wish to consider similar reforms for new employees and/or those with less than five years of service," the report said.
The pension recommendations are part of a larger report that covered making changes in health benefits, education administration, county and municipal government structures and services, and state and local taxes. The working group was convened by Senate President Stephen Sweeney, a Democrat. Three co-chairs represented Democrat and Republican legislative leaders.
"New Jersey faces a series of fiscal and economic challenges that threaten to undermine our ability to address the needs of our residents and invest in the programs and services that will move the state forward," Mr. Sweeney said in an Aug. 10 news release accompanying the release of the report.
"We confront an unsustainable legacy pension and benefit costs that will make it all but impossible to meet our priorities, including full funding of public schools, expanding preschool and making New Jersey more affordable for families, senior citizens, and businesses," he said. "We have to be willing to take the actions needed to maintain fiscal stability and promote economic responsibility."
The commission also recommended legislators explore transferring "major assets" such as the New Jersey Turnpike system to the pension system to lower the unfunded liability and "generate new revenue streams for the pension system." Former Gov. Chris Christie signed a law last year transferring ownership of the state lottery to the pension system.
"This form of asset transfer provided a framework for an important pension funding solution," the commission report said. The lottery transfer was promoted as a way to provide a consistent source of funds for the pension system, thus reducing the reliance by the New Jersey Pension Fund on general operating revenues .
This isn't the first time an independent commission has recommended changes in the state's pension system. In 2015, a commission created by Mr. Christie advocated, among other things, freezing the pension systems, creating a cash balance plan, and ending the accrual of new benefits and employee contributions. The Legislature never acted on those proposals.