TRENTON - Without drastic changes, New Jersey's public employee pension funds are headed for insolvency.

Gov. Christie is expected to unveil his proposal to reform the public employee pension and health-care system this week. The governor has made clear that workers should expect cuts, which may include a rollback of a 9 percent pension increase granted in 2001.

But even with significant cuts in benefits, the pension system, which covers more than 720,000 current workers and retirees, needs massive infusions of taxpayer dollars to remain afloat. That is in large part because for more than a decade, the state has skipped paying most or all of its share of contributions, even as it increased benefits.

This year, according to actuarial calculations, the state was supposed to contribute $3.1 billion to the pension system. Of that amount, $1.8 billion was to pay for the unfunded actuarial accrued liability, while only $1.2 billion was for current costs. Under Christie's first budget, the state put in nothing.

The official estimate of the state's public employee pension fund shortfall is $45.8 billion as of June 30, 2009, or more than $5,200 for every man, woman, and child. Per capita, New Jersey's unfunded pension liabilities are the highest in the nation.

Many experts believe that even $46 billion is a gross underestimate of the state's true shortfall. According to a study from the Mercatus Center at George Mason University, New Jersey's pensions would have an unfunded liability of $174 billion using the accounting methods required for private-sector pensions.

A recent study by the Pew Center rated the Garden State's public pensions among the eight most poorly managed in the country.

Exactly how long New Jersey's pension funds will remain solvent depends on any number of unknowable variables, including when government employees retire, the rate of investment returns, what changes are made to benefits, and how much the state pays into the system.

One national pension expert, Joshua D. Rauh, an economist at Northwestern University's Kellogg School of Management, estimates that assuming an 8 percent return on investments, New Jersey's public employee pension funds will run dry in 2019. Rauh's calculations assume the state will contribute enough each year to cover the costs of new benefits, which means if the state does not do that, the pension funds could go broke even sooner.

While government workers and retirees have the most at stake, all taxpayers should care about the health of the pension system because, ultimately, they will be held liable for paying for those checks.

Jeremy Gold, a New York actuary and economist who has long pushed fellow actuaries to adopt more conservative models for public pensions, also believes there is a real possibility that New Jersey's public employee pension funds could run out of money in the near term.

"The way things seem to work," said Gold, "you continue to pretend it's not a problem, and at some point you can't pretend any more.

"You can pretend," he added, "right up until that moment."

Changed the rules

Public employee pension funds in every state have been battered in the Great Recession. But New Jersey is hurting more than many other states in part because the state's lawmakers have systematically and consistently shortchanged the public employee pensions.

Going back to at least Gov. Jim Florio, state legislators and governors of both parties have changed the accounting rules used to calculate the state's pension liabilities and assets, sweetened benefits for government workers without paying for them, and simply skipped payments with little explanation.

"Even though all of the public-sector pensions are in trouble across the country, no state other than New Jersey thinks that making its contribution is optional," said Hetty Rosenstein, New Jersey state director for the Communications Workers of America, the state's largest public employee union.

Over the last 10 years alone, New Jersey's public employee pension funds, which at last count have $66 billion in assets, have seen a healthy surplus of $7.5 billion morph into a whopping unfunded liability of $46 billion. Since 2004, state and local governments have deferred putting in more than $14.4 billion in money owed to the pension system.

According to the Pew study on public pensions, New Jersey paid only 33 percent of its annual required contributions on average over the previous five years, less than any other state. The next-lowest state, Washington, paid an average of 37 percent but had funded 100 percent of its accrued liabilities, and Pennsylvania, at 52 percent, had funded 87 percent of its accrued liabilities.

The federal government sets and enforces strict rules regarding private-sector pensions, but few such rules exist in the public sector. When New Jersey's pension maneuvering has caught the attention of the federal government, the state has received little more than a slap on the wrist.

In the private sector, the federal Employment Retirement Income Security Act of 1974 and the Pension Protection Act of 2006 set minimum standards for retirement and health-benefit plans and made illegal many of the actuarial gimmicks that got some private-sector pension plans into trouble. ERISA also guarantees workers whose companies go bankrupt some pension protection.

But few such protections or rules exist for state pension funds.

New Jersey's pattern of skipping payments into the pension system would never be allowed in the private sector, said Edward Thomson, an actuary who has served as a public employee pension fund trustee in New Jersey for 17 years. "That would be terms for going to jail fiduciarily if you were in the private sector. You'd be going to court. That would be the end of you."

Some argue that the unions have been complicit in the pension mess, by bargaining for and accepting benefits they knew would be unsustainable.

But when the New Jersey Education Association sued the state, arguing it needed to make the full payments into the pension system, a Superior Court judge ruled in 2008 that the state could skip making full payments as long as the pension funds remained solvent.

Limited efforts

State lawmakers have made limited efforts over the years to recognize and address the growing pension problem. As acting governor, Richard Codey convened a pension and benefits review panel in 2005 that identified mistakes the state had made and suggested ways to fix them. The panel recommended that the state and local governments make full payments into the system, stop using "actuarial and valuation gimmicks," and end pension abuses, among other steps.

Under Gov. Jon S. Corzine, a special legislative committee on property-tax reform included a subcommittee on benefits reform, which recommended dozens of changes to shore up the pension system. Corzine eventually prevented the Legislature from adopting most of those changes, however, saying they should be negotiated with the unions at the bargaining table.

The first bill Christie signed into law, in March, made modest pension changes, mostly aimed at future hires, that will do little for the short-term health of the pensions.

One new element was a plan to fully phase in state contributions into the pension system over seven years, starting next year.

But at a news conference in July, Christie said that New Jersey might not pay the $512 million owed under the new law next year, saying it would depend on the state's fiscal situation.

The governor defended withholding payments this year by saying he did not want to contribute money to a broken system, sidestepping the fact that a key reason the system is broken is that the state has not paid its fair share.

It is clear Christie will call for significant sacrifice from public workers. The governor has frequently called attention to the gap between private-sector employees, many of whom must rely on defined contribution plans, and public-sector employees.

Senate President Stephen Sweeney (D., Gloucester), who has proven to be a key ally thus far for Christie, has said that he also supports reforms to strengthen the pension system.

But it is not clear how far the state can cut pension benefits.

Pension experts say accrued benefits for vested workers and retirees are typically considered untouchable, although benefits for the future service of current workers is less clearly protected. Health-care benefits are easier to change, and could save the state a significant amount of money, but won't fix the pension problem.

The unions will argue that the unfunded liability in the pension system is largely the result of state and local governments' failing to pay into the system.

"Public employees have been making their contributions from day one," said Steve Baker, a spokesman for the New Jersey Education Association. "It's the state that's not holding up its end of the bargain."

A law signed by Gov. Christie Whitman in 1997 also appears to guarantee pension benefits for public employees.

Both the Office of the Attorney General and the nonpartisan Office of Legislative Services issued memos in 2006 stating that the law guaranteed benefits for vested members of the pension systems.

Still, other states have tested the waters in attempts to fix their pension systems. Colorado, Minnesota, and South Dakota have already gone after retiree benefits; if they succeed, other states might follow suit.

Experts agree there is no easy way out.

"Going forward, there's really nothing but pain," said James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. "It's going to be a combination of raising the retirement age, greater contributions by both taxpayers and public-sector workers, probably retirees may be asked to pay some portion of their health care. . . . That's the end result of overpromising benefits and not having the means to pay for them."

If the pension system does run out of money, Hughes said, the state would be entering uncharted territory. If state taxpayers were forced to pay pension liabilities out of general revenues, it would mean unbearably massive tax increases, potentially disastrous levels of cuts in services, or both.

Some have suggested that states like New Jersey might need to seek help from the federal government.

The bottom line? No matter how deep the cuts in benefits, New Jersey must start putting serious money into the pension system as soon as possible.

"They can't not write the check," Thomson said. "It's not an option anymore."

The following are links to studies about New Jersey pensions
Study by Eileen Norcross of the Mercatus Center at George Mason University on New Jersey pensions:
Study by Joshua Rauh of Northwestern University predicting New Jersey’s pension funds could run out of money by 2019:
Study by The Pew Center On the States comparing all the states’ public employee pensions:
Contact staff writer Adrienne Lu at 609-989-8990 or