TRENTON, June 17, 2015—What will be the impact on your community’s property taxpayers if the cost of teachers’ pensions is shifted from the state to school districts?
The answer to that question will be a crucial one for our state’s lawmakers when they address the issue of pension and health benefit reform. To assess the financial impact of shifting the employer’s share of teacher pension costs to local school districts, the New Jersey School Boards Association and the New Jersey State League of Municipalities engaged the director of the Bloustein Center for Local Government Research at Rutgers University to develop a “policy-neutral” analysis.
Completed last month, the analysis, Cost Allocation of Pension Liability for Each 1% of Payroll Contribution by Raphael J. Caprio, Ph.D., provides the following:
- Pensionable salaries per district;
- Data to enable school officials to calculate the impact of a shift of teacher pension costs on district expenditures; and
- A calculation of the per-community per-household property tax impact for every 1 percent of pensionable salaries.
“The public trust demands development of a well-thought-out, workable, long-term solution to New Jersey’s pension-deficit issue—one that does not adversely affect education programs or local property taxpayers,” said Dr. Lawrence S. Feinsod, NJSBA executive director.
“NJSBA is pleased to join with our partners at the League of Municipalities to provide this important information to our members. We share the League’s concern that any pension and benefits reform plan be cost-neutral for every local school district and local government.”
In February, the New Jersey Pension and Health Benefit Study Commission issued a report, A Roadmap to Resolution, which recommends systemic changes to public employee benefits, including the creation of a new pension system and changes in the level of health benefits for active and retired employees. A central element of the proposal is shifting the employer’s share of teacher pension costs, as well as post-retirement medical benefits, from the state to local school districts. (See summary of the “Roadmap” report recommendations at the end of this article.)
Impact on Expenditures To assess the potential statewide impact of the pension-cost shift, Dr. Caprio’s analysis provides statewide costs for 1 percent, 4 percent, 10 percent and 15 percent of pensionable salaries. (See pages 6 and 8 of the analysis.) In its “Roadmap” report, the state’s study commission placed the school district share of the cost for the new pension plan at 4 percent of pensionable salaries “as a starting point.”
Not included in the NJSBA/NJSLOM analysis is the impact of shifting another significant cost to local school districts: post-retirement medical benefits, which would total over $1 billion in 2015-2016.
“Post-retirement medical benefits were granted to members of the TPAF in the late 1980s by the state, not by local school districts,” explained Feinsod. “The state agreed to pay the cost of teachers’ pensions more than 50 years ago.
“The most critical issue right now is what would happen to educational programs, and local property taxpayers, if school boards are required to take on these new costs today.”
Impact on Property Taxes Part 2 of Dr. Caprio’s analysis, titled “County by County Transition from District Data to Municipal Cost Data,” provides tables showing pensionable salaries per school district, along with a property tax cost-out per household in each municipality. Part 2 begins on page 35 of the report.
The cost-out reflects local school district assumption of 1 percent of the pensionable salaries. However, Dr. Caprio points out, “Once a policy proposal is developed, whether it be 7%, 17%, 27%, or any other number, the average estimated cost per residential property can be determined by simple multiplication of the 1% estimate.”
The NJSBA/NJLOM-sponsored study may be viewed at staging.njsba.org/pension2015.
Roadmap Recommendations The NJSBA/NJLOM analysis responds to the New Jersey Pension and Health Benefit Reform Study Commission’s proposal, A Roadmap to Resolution. That report, released in February,includes the following elements:
- Freezing the current defined-benefit state pension plans, including the Teachers’ Pension and Annuity Fund (TPAF).
- Creating a new lower-cost “cash balance” plan for active employees.
- Shifting the employer’s contribution to the new teacher’s pension system and post-retirement medical benefits from the state to local school districts.
- Aligning public employee health benefits with levels in the private sector and requiring employee contributions to plan.
- Reducing the level of post-retirement health benefits.
- Dedicating local savings that are created through changes in employee health benefits to reducing the deficit in the frozen state pension plans.
- Amending the state Constitution to ensure funding of public employee pensions and to give the state clear authority to change benefit levels.
“Without a guarantee of cost neutrality for all school districts, or a new source of non-local revenue, the outcome of shifting pension and retirement health benefit costs to local school districts could be devastating to educational programs or place an additional burden on local property taxpayers,” said NJSBA’s Feinsod.