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Democratic Leadership Urges Governor to Make Upfront $1.3 Billion Pension Payment
Early pension payment projected to earn $87 million in extra investment income, shoring up underfunded system and saving future tax dollars
TRENTON - New Jersey's Democratic legislative leadership today called upon Governor Christie to make the state's $1.3 billion budgeted pension payment in early July to shore up the underfunded pension system.
The Senate and Assembly leaders authored a concurrent resolution calling upon the governor to make the upfront payment using the state's line of credit. Plans are for the Assembly and the Senate to vote on the resolution today. Democratic leaders plan to discuss the resolution during an 11:45 a.m. news conference on fiscal issues.
"Making the $1.3 billion payment now, rather than waiting until next June, would generate a projected $87 million in additional investment income for the pension system over the course of the year," said Senate President Stephen Sweeney (D-Gloucester).
"That's $87 million that taxpayers will not have to put into the system in the future, and that money will continue to grow year after year after year," Sweeney said. "This is a no-brainer that should draw bipartisan support."
"We presented the governor with a fiscally responsible budget that fully funded our obligation, but he instead chose a different course that will lead to more credit downgrades, increase state debt and hurt our economy," said Assembly Speaker Vincent Prieto (D-Hudson/Bergen).
"These are difficult fiscal times, which means we have to be creative and consider all responsible options," the Assembly speaker said. "This is one of them. Democrats are being responsible. It's time for Governor Christie to follow suit."
Prieto and Sweeney said making the pension payment now would reassure both the bond rating agencies and retirees that the budgeted pension payment will indeed be made. They noted that the governor retroactively changed the pension contribution formula early last spring, then cancelled $2.25 billion in budgeted pension payments for FY14 and FY15 when revenues came up short.
Tapping the state's line of credit to make the $1.3 billion pension payment early next month rather than waiting until next June is simply an extension of normal state Treasury practices. Each year, the state borrows about $2.5 billion in July to cover an annual cash flow shortfall; the cost of the interest payments is included in each year's budget.
During the past fiscal year, the state took out a $2.5 billion line of credit, which it tapped as needed last summer and fall. The interest cost on that line of credit was 0.52%, which would translate into $6.5 million in interest costs if the $1.3 billion was borrowed on July 15 and not repaid until June 30, 2016.
The State Investment Council has projected that the state's pension system will earn a 7% return on investment in the upcoming fiscal year, which would project out to $87 million in additional investment income over 11 ½ months. If the pension system earns the 7.9% rate of return built into the state's actuarial projections, the additional investment income would be $98 million for that period.
"Whether we earn 7% or 7.9% or some other figure, the investment earnings clearly dwarf the interest costs," said Senate Majority Leader Loretta Weinberg (D-Bergen). "Whatever we can do to help fix the pension system and cut into cost for future taxpayers, we should do."
"Democrats are coming to the table time and time again with responsible ideas," said Assembly Majority Leader Lou Greenwald (D-Camden/Gloucester). "This plan gets us closer to our goal of fully funding the pensions, all within normal fiscal practices, and in the end will result in real savings for taxpayers.
"The only reason Governor Christie would reject the idea is if he truly does not want to meet the state's obligations. It's time we creatively worked together to strengthen the pension system and provide savings for taxpayers," Greenwald said.
The Democratic plan to make the full $1.3 billion pension payment early is the latest in a series of proposals designed to get state funding into the pension system as quickly as possible to maximize return on investment, reduce the unfunded liability and save money for future taxpayers.
The Legislature last Thursday approved a bill sponsored by Sweeney and Prieto to require the state to immediately put $300 million in stronger-than-expected revenues from FY15 into the pension system, and also passed legislation sponsored by Senator Bob Gordon and Assemblyman Benjie Wimberly (D-Passaic/Bergen) requiring the state to make its pension contributions at least on a quarterly basis every year.
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