New Jersey Treasurer Andrew Eristoff Thursday named Gov. Chris Christie’s pension and benefit reform initiative as among the state’s top fiscal priorities during a Municipal Forum of New York luncheon.
Along with facing rising retirement costs, Eristoff said his office has plans to strengthen the Treasury Department’s division of taxation, address $1.3 billion of letters of credit on state debt that will expire in early 2011, and help craft a strategy in the coming weeks to replenish the New Jersey Transportation Trust Fund. The fund will run out of revenue and bonding capacity before July 1.
His department is also working on an upcoming $1.43 billion Transportation Trust Fund Authority new-money and refinancing bond deal. Eristoff anticipates it will generate $23.5 million of nominal debt-service savings, including $14 million of net present-value savings, which will help support about $950 million of new-money borrowing within the transaction.
Christie last week announced a series of proposed changes to the state’s pension and retiree and employee health care benefits. They include raising the retirement age to 65 from 55, rolling back a 9% increase to pension benefits, increasing employee contributions, and calculating the salary level on which retirement benefits are based over five years rather than three.
Potential health care program changes include employee increases in contributions, co-pays and deductibles.
New Jersey has a $46.8 billion unfunded pension liability and a $56 billion unfunded post-employment benefits obligation. Eristoff also noted that the state’s health care costs will spike a projected 40% in the next four years.
“It should be clear to everyone that our current pension and benefit structures, no matter how well-intentioned, are simply unsustainable in their current form,” Eristoff said before a room of municipal bankers, lawyers, analysts, and investors. “We have no choice but to act now to safeguard New Jersey’s economy and fiscal future and thus protect the viability of pension and benefits for current and future public employees.”
While Eristoff spoke in mid-town Manhattan, the state’s Investment Council, which oversees New Jersey’s $68.1 billion pension fund, appointed a new chairman and vice chairman, effective immediately. Robert Grady, managing director of Cheyenne Capital, a private-equity firm headquartered in Denver, will serve as chairman. He replaces Orin Kramer.
Grady was a key financial adviser for the Republican governor during his transition before taking office in January.
Nicholas Caprio yesterday joined the council as vice chairman. Caprio, a certified public accountant, worked in the state’s Treasury Department for 30 years as chief fiscal officer and in other positions. He teaches accounting at Mercer County Community College.
The council Thursday chose to review a strategy to limit alternative investments at 38% of total investments, up from the current 28% cap, said Treasury spokesman Andrew Pratt. Raising the limit requires a public hearing and further consideration.
While Christie’s proposals are controversial and unpopular among labor groups and public employees, Eristoff said he feels confident that “when the shouting stops and the rhetorical smoke clears,” the proposals offer the state a way out from under its hefty unfunded retirement liabilities. He also mentioned that the administration consulted New Jersey’s attorney general’s office to ensure that the proposals can stand up to any potential legal challenges.
“We believe we’re on sound legal footing,” Eristoff said. “I believe that we have a good deal of flexibility to move forward on these reforms. Most of them involve members with less than 25 years or they deal with future accruals, so we think, frankly, that we’ve crafted an aggressive plan, but one that will withstand legal challenge. Otherwise, we wouldn’t have done it.”
In the budget for fiscal 2011, which began July 1, Christie opted to skip a $3 billion payment to the pension fund. Republican and Democratic governors in the past have also avoided paying into the fund as a tactic to help balance New Jersey’s operating budgets.
Critics of Christie’s reforms say that while asking employees and retirees to contribute to the pension fund, the state must also pay its fair share. For the fiscal 2012 budget, it must make a pension payment of one-seventh of its total obligation — about $512 million, according to Senate Democrats. Lawmakers last year approved legislation requiring the state to allocate funds to the pension fund beginning in fiscal 2010, with a seven-year ramp-up to full payments.
Christie has said he is prepared to include that allocation in next year’s budget if lawmakers approve pension and health care changes that will lower costs for the state and its municipalities.
“We need to achieve some meaningful reforms and have them in place if we’re going to move forward and continue to invest in this system,” Eristoff said. “So that’s our approach, our planning approach toward fiscal 2012 at this time — reform and then invest.”
Eristoff is also looking to increase tax collections “by tens of millions of extra revenue in fiscal 2011 and beyond” by staffing up and rebuilding the division of taxation.
“When I arrived in Trenton, I had some idea but I really didn’t appreciate the extent to which the tax administration ... had been eviscerated and decapitated over the last six or eight years,” he said. “And so we have, with the governor’s support, begun to rebuild it. And this is not about hammering taxpayers, it’s about delivering better levels of service, administering the taxes fairly and efficiently, and basically doing a better job on behalf of the state in collecting what’s owed and supporting the rest of the budget.”
The treasurer has his eye on $1.3 billion of letters of credit that will expire next year. Eristoff plans to call upon municipal market professionals to help address the liquidity expirations. The LOCs provide liquidity enhancement to New Jersey’s variable-rate debt.
“We will be looking at ways to renew or replace them and we will likely be calling on you for expert advice on the best ways to do it,” he said.