February 21, 2018
Legislative Alert: Time Sensitive
Re: Bill to Transfer of PFRS to a Labor-Management Board before Senate
On Monday, February 26 the full Senate will consider S-5, which transfers the management of Police and Fire Retirement System (PFRS) to a Board of Trustees of PFRS. This legislation would disproportionately shift control of the PFRS, from balanced labor-management control, to a union-dominated (7-5) decision-making structure. (To date, an Assembly companion has not yet been introduced.)
The League adamantly opposes S-5.
Please contact and ask your State Senator to oppose this bill until it is amended to add the necessary safeguards advocated by the League, the Conference of Mayors (NJCM), and the Association of Counties (NJAC.)
You can find your Senator’s contact information, listed by municipality, here.
Given the inaction on extending the 2% cap on binding interest arbitration awards, the sun setting of employee health benefit controls implemented under Chapter 78, the restricting of SALT deductions on federal income taxes, and the long-term ramifications of enacting this legislation without the recommended safeguards, municipal and county leaders fear they are facing a perfect storm of uncontrollable property tax growth and substantial service cuts.
Funded entirely by property taxpayer dollars, municipal and county governments will spend an estimated $913.0 million in 2018 to subsidize the Police and Firemen’s Retirement System (PFRS), while PFRS members will contribute approximately $334.0 million to the defined benefit plan. In other words, property taxpayers will finance over 73.0% of PFRS in 2018, while PFRS members will pay 27.0%.
In its current form, the bill will allow public safety union members and retirees to enhance their own benefits; while forcing their public employers, and New Jersey taxpayers to assume a disproportionate amount of the risk.
The legislation gives the labor-management board, at its discretion, and at such time and in such a manner as it determines the ability to:
- Enhance any benefit set forth in N.J.S.A. 43:16A-1 et seq.; and
- Modify any such benefit as an alternative to an increase in the member contribution rate; and
- Reinstate, when appropriate, such reduced benefit to the statutory level without an additional contribution by the member.
The legislation would allow the PFRS to enhance member benefits without meeting the 80% target fund ratio. The target fund ratio is a measure put in place to ensure the financial stability of the State’s pension systems prior to enhancing member benefits and something that is required by the State’s other pension systems.
PFRS is not like a 401K. Rather, it is a defined benefit program in which the employers are responsible for any shortfall in funding. Employees’ contribution rates are capped by statute at 10% of their salary while the employers’ contribution rates are based on the funds needs and performance based on actuarial reports. Currently, that requires local employers to contribute 27.35% of the employees’ salary.
As a result any shortfall due to a downtown in the economy, mismanagement of fund assets, or any enhancement in benefits ordered by the labor-controlled board, will be borne by property taxpayers.
The League, along with NJCM and NJAC, opposes the bill for the reasons outlined above. We have unsuccessfully requested the following taxpayer-friendly changes that will serve to protect the long-term health and viability of PERS as well as establish critical safeguards that require the new Board of Trustees to manage valuable property-taxpayers’-dollars in an effective and efficient manner:
- Create a 15-member PFRS Board of Trustees comprised of an equal number of labor and management representatives with 1 independent member;
- Authorize the League and Association of Counties to make direct management appointments to the new Board of Trustees as is the case for the labor representatives;
- Prohibit the new Board of Trustees from enhancing member benefits until the system achieves a target funded ratio of 80% as required under current law;
- Require a vote of 2/3 of the full membership of the new Board of Trustees to enhance members benefits, and only after the system achieves a target funded ratio of 80%; and
- Establish a mandatory retirement age.
The League and Association of Counties further suggest that if the Legislature and Governor fail to amend the measure accordingly, then PFRS must be changed to a defined contribution plan where employees make greater contributions and assume a greater risk of loss as is the case with 401(k) investments.
Michael J. Darcy, CAE