North Jersey towns face spiraling increases in pension costs over the next several years, and that could mean higher property taxes for homeowners. The towns had enjoyed a holiday from such payments – which cover the pension plans for most municipal employees – because the state’s overall pension investments were so rosy.
But now, with a shaky stock market, the bill is coming due again. And it’s a whopper.
The required contributions in many towns will more than double next year, the third since they began paying into the pension funds again after a seven-year lull. A handful of North Jersey towns will see their bills grow by more than $1 million.
Combined with rising health-care costs and fuel prices, that could mean property-tax increases of a few dollars to upwards of $100 for the average homeowner in North Jersey, assuming other spending and revenues remain the same.
What’s more, the increases are expected to continue at least for several more years.
Fort Lee, for example, paid $573,520 into the pension plans this year. By 2008, borough officials estimate that the bill will climb to $2.5 million.
“There’s no question that it, by itself, will increase taxes,” said Mayor Jack Alter. “I think it’s a sleeping problem that a lot of taxpayers are going to wake up to.”
William Dressel, executive director of the state’s League of Municipalities, said that although the towns knew they would have to resume pension payments, the bills are much higher than anticipated.
“It’s created a considerable hardship for towns,” Dressel said. “I hear folks that are irate over it.”
Stock market fallout
Normally, government employees and employers – towns, counties and the state – make regular contributions toward employee pensions.
No matter how well or how poorly investments do, the employer must pay the employee the agreed amount on a regular basis after retirement. So the employer has some flexibility in the timing and amount of its contributions.
Back in the late 1990s, when the economy was soaring, New Jersey officials felt the pension funds were doing so well – on paper, at least – that they decided to take a break from making contributions. The towns got a breather, too.
While they were at it, state lawmakers sweetened retirement benefits for some workers, at significant cost to taxpayers. In 2001, for example, the state lowered the age at which some employees could become eligible for retirement benefits from 60 to 55, resulting in a longer payout.
“In general … people thought the good times would last forever,” said State Treasurer John McCormac, who noted the decisions predated his tenure. “Nobody thought it would end. We made decisions based on it never ending.”
Eventually, of course, the economy fizzled. The dot-com bubble burst. The Sept. 11 attacks occurred. Cracks in the mighty empires of Enron, WorldCom and others were exposed. And many a portfolio – in the public and private sectors – nose-dived.
New Jersey’s pension funds dropped from a peak of $85 billion at the end of 1999 to $58 billion in 2002, McCormac said. He said the state has since diversified its pension portfolios to guard against another precipitous drop.
Today, the funds have rebounded to $70 billion – but they are still underfunded by $25 billion.
Of the three factors – a weakened stock market, improved retirement benefits and the pension holiday – it was the stock market that caused the biggest problems, McCormac said.
Local officials realized a few years ago that they would have to start paying into the pension plans again. Fearing the budget impact, they persuaded the state to put them on a payment plan. Towns restarted contributions in 2004 at vastly reduced rates. They won’t fully catch up until 2009. In theory, they would then continue making regular contributions.
Even the discounted bills are daunting, though, officials say.
“All of it is just crushing to our budget,” said Wayne Mayor Scott Rumana. “This issue is strangling towns all throughout the state of New Jersey and at a time when property taxes are on the mind of every person.” Rumana added that state aid to towns has remained flat for several years.
Better planning needed
Not surprisingly, labor unions are displeased with the towns’ attitudes.
“The reality is they’re paying very small percentages of what they contractually should have been paying for the last six years,” said Bill Lavin, president of the New Jersey Firemen’s Mutual Benevolent Association.
He noted that towns didn’t have a problem spending the money they would have otherwise put toward pensions.
“We feel like they used our funds as an ATM machine and a loan, almost like a spoiled child,” Lavin said “When they had excess funds, they used it for excess things. Now, after living off of our pension funds, they have the audacity to complain that somehow police and firefighters are responsible. We’re outraged by that.”
Rob Nixon, a lobbyist for the New Jersey State Policemen’s Benevolent Association, agreed.
“This shouldn’t be a surprise that these payments are required,” he said. “Police officers have been making their required contributions all along.
Some towns did plan ahead, however.
L. Mason Neely, the finance director for East Brunswick and chairman of the League of Municipalities’ health and pension benefits committee, for example, set aside money in a reserve fund to soften the blow.
“If you have had an expenditure out of your budget and you no longer have to make that expenditure, you have one of two choices,” Neely said. “You can lower your budget, so when that expenditure comes back, you’re ready to pay for it, or you can substitute and spend the money on something.”
Several municipal officials defended their decisions not to set money aside, saying it helped keep taxes lower.
“Any time you have the opportunity to cut the tax levy, you’re going to do that,” said Louis Garbaccio, Hackensack’s treasurer and chief financial officer.
Others said they had no idea the pension bills would be as high as they turned out to be.
Teaneck Manager Helene Fall said the municipal tax rate would have to rise by 4 cents per $100 assessed value just to cover the increase of nearly $1 million in pension payments.
Garbaccio, for one, acknowledged towns could have done a better job planning.
“I guess any good budget course is going to say you’ve got to put some money away for the rainy days,” he said.
Tim Blake, an analyst for Moody’s Investors Service, wouldn’t criticize New Jersey’s pension holiday, but pointed out that other states handle things differently.
New York, for example, maintains a “minimum contribution level to avoid swings,” he said. “They want to keep some minimum amount even when the value of the pension fund is high.”
“That sounds like a good idea,” Blake said. “Anything that keeps the budget less volatile is a good idea.”