New Jersey plans to fully fund its pension system for the first time in 25 years with a $6.4 billion contribution, Gov. Phil Murphy announced during his annual budget address on Feb. 23.
“The problems in our pension system, rather, have everything to do with past administrations, of both parties, and going back 25 years, who simply and short-sightedly decided not to pay,” Murphy, a Democrat, said in his pre-recorded address, which was streamed on YouTube. “In fact, some suggest, even today, that we skip out on our pension obligation. We won’t go back to those failed, old ways.”
New Jersey last paid its full pension bill in 1996, but in the years after state leaders continually paid less than the Actuarially determined contribution (ADC) called for. Putting off the full contribution caused the state’s pension debt to increase, similar to someone who only pays the minimum payment on their credit card.
In other words, inaction on the part of state leaders and the legislature led to billions of dollars in pension debt that could’ve been avoided had the ADC been paid consistently over the years.
This caused the Garden State’s pension system to be the most underfunded in the country—in 2019 the funded ratio was near 40% and it was estimated the retirement system for state workers could run out of money in 12 years.
New Jersey has been taking steps to improve its pension system—annual payments have been increased by increments of 10 percentage points per year in an effort to meet the 100% ADC by 2023.
Murphy’s proposal would help the state reach that mark a year earlier than projected. “Making the payment is keeping our word to hundreds of thousands of retirees who depend on their pensions,” Murphy said. “It means keeping our word to families all over our state who were made promises by governors who then turned their back on them.”
While its case is the most severe, New Jersey is hardly alone in neglecting its ADC obligations. Many states have paid less than what was required over the years, even before the Great Recession or Covid-19 rattled the economy, according to Equable’s analysis.