Why New Jersey pension spinoff may hurt state's credit controls

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New Jersey’s shift toward giving firefighters and police officers control of their pension fund decisions may hurt the Garden State’s finances by hamstringing future efforts to control benefit costs, according to Moody’s Investors Service.

Moody’s analyst Douglas Goldmacher said legislation signed on July 3 by Gov. Phil Murphy, which separated New Jersey's $26 billion Police and Firemen's Retirement System from other public plans, diminishes the state's legal flexibility to make meaningful changes. Goldmacher called the move a credit negative for a state whose pension burden has already dragged it to the second lowest Moody’s rating of all U.S. states at A3.

“PFRS now will be the only fund whose benefits, investment policies and actuarial funding policies will not be managed directly by the state,” Goldmacher said in a July 27 report. “Moving PFRS management to its own board may misalign the state’s interest in improving its pension funding with the new PFRS boards’ interest in maintaining benefits for its members.”

Goldmacher said the state is insulated by a “relatively small” obligation to the public safety pension system, equivalent to around 5.7%. New Jersey local governments face much higher exposure with around 84% of the total liability. He said while New Jersey retains statutory authority over the PFRS, reducing benefits may be politically difficult without agreement from the employee-dominated board of trustees. The state last underwent a pension overhaul in 2011 when then-Gov. Chris Christie suspended cost-of-living adjustments, which reduced unfunded liabilities by 37%.

“New Jersey does have moderate legal flexibility to adjust benefits, which it will retain for its other six pension plans,” said Goldmacher. “Although the state is not currently contemplating additional pension reform, the option for future reform is an important governance advantage to manage higher-than-expected pension burden growth for state and local government employers.“

The Garden State’s municipalities are more vulnerable to governance structure changes because PFRS-related liabilities comprise the largest portion of their pension burden. While New Jersey localities have smaller budgets to respond to the PFRS switch, Goldmacher said they are “considerably better” funded because they are required to pay full annual pension contributions.

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