Bloomberg News

New Jersey Cities Abusing Pension Law May Waste Millions

July 17, 2012

New Jersey Cities’ Pension Abuse May Waste Millions, Audit Says

A rally to protest a Senate Budget Committee hearing on employee benefits at the State House Annex in Trenton, N.J. Photographer: Rich Schultz/AP Photo

New Jersey local governments failed to remove hundreds of contractors such as lawyers and engineers from pension rolls, which may cost taxpayers millions of dollars a year in improper payouts, a state audit shows.

Auditors identified 202 contractors who work for 134 communities and 25 school districts and participate in the Public Employees’ Retirement System even after a 2007 ban on their participation. Hundreds more probably are still enrolled by more than 1,100 other local government units, according to a report today from Comptroller Matthew Boxer.

“These 202 enrollees have accrued pension credits that could result in the state paying them a total of approximately $1.9 million per year” in retirement, according to the report. “Removing these professionals as of the 2008 cut-off date would significantly reduce the future annual pension payouts.”

Boxer said he referred the 202 enrollees to the state Division of Pensions and Benefits for removal of improper credits. His report didn’t identify the individuals.

Pension ‘Tacking’

The comptroller’s audit found that many of the contractors boost pensions by working for multiple government units, a method called “tacking.”

The audit cited an attorney who works for both the borough of Fairview and the Guttenberg school board, earning $241,654 a year combined and amassing credit for 22 years of service and an annual pension of $97,196 if he quit tomorrow. The amount could be cut by $29,420 if the lawyer’s eligibility had ended in 2008, it said.

The attorney, John Schettino, said in a telephone interview today that he’s worked for both entities for more than 20 years, and their boards determined in 2008 that he fit Internal Revenue Service guidelines to be considered an employee. In both cases, he said he’s paid a salary and doesn’t charge a retainer or bill hourly.

“It’s unfair to be singled out, especially since there are many IRS criteria under which I satisfy the terms to be considered an employee and therefore eligible,” Schettino said when reached at the Hackensack office of his private law firm. Schettino said he also maintains offices at both Fairview and Guttenberg and handles all of the legal work for both entities.

Funding Hole

New Jersey’s pension system has a funding deficit that reached $53.9 billion in 2010 after the state expanded benefits and skipped payments over a decade. The gap fell to $36.3 billion after Governor Chris Christie signed bills in 2011 that boosted employee contributions to pensions and health care, raised the minimum retirement age for new workers and froze cost-of-living adjustments.

The unfunded liability swelled to $41.8 billion by June 2011 after Christie, a Republican, skipped a $3 billion pension payment. The deficit would have been more than $61 billion without his benefits overhaul, the state treasury has estimated.

A law enacted by Christie in 2010 required the state to begin phasing in full pension payments over seven years. The budget he signed for the fiscal year that began July 1 includes a $1.03 billion pension contribution.

“These individuals are vendors, not public employees, and giving them pension credits is a taxpayer rip-off and a violation of the law,” Michael Drewniak, a spokesman for Christie, said in an e-mail today. “We didn’t go through the exercise of achieving hard-fought, critical reforms of the pension system to ensure its long-term health and solvency only to have it abused and disregarded.”

No Grandfather

Drewniak said Christie has asked the state's Division of Local Government Services to require as part of the municipal auditing process an examination of whether towns are treating vendors as employees. The state may withhold aid to municipalities that don't comply with the statute, he said.

With about $69.4 billion in assets as of May 31, New Jersey pension funds provide benefits to almost 800,000 active and former employees through seven retirement systems. Using just 10 contractors, with credits for almost $412,000 in payments, as examples, Boxer’s report said taking them off the rolls as of 2008 would save $151,473 in annual obligations.

Municipalities failed to consider facts and situations that would bar a professional from pension enrollment under the 2007 law, according to the audit. In some cases, governments improperly treated professionals as municipal employees or incorrectly said exemptions were allowed for contractors enrolled in the pension system before the law took effect.

Several governments opted to keep their attorney enrolled in the pension system based on legal advice from that person, the report said.

“Government officials should not be relying on pension eligibility advice from the very attorney whose eligibility is at issue,” Boxer said. “That just flies in the face of common sense.”

To contact the reporter on this story: Terrence Dopp in Trenton, New Jersey, at tdopp@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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