County and municipal governments are once again preparing to pay more to cover employee pension costs, presenting another big challenge for officials aiming to hold the line on New Jersey’s record-high property-tax bills.

The total cost of funding pension benefits for workers employed by county and municipal governments in New Jersey is set to rise in 2023 by nearly 10%, according to the latest billing figures made public by the state Department of Treasury.

The increased spending is required under state law for the pension benefits earned by those workers enrolled in the Public Employees’ Retirement System and the Police and Firemen’s Retirement System. And for many of those county and municipal governments, the increased pension costs come on top of a big year-over-year increase in required spending on employee health benefits due to rising insurance premiums. In New Jersey, about half of the revenue raised from the state’s average $9,300 property-tax bills funds county and municipal governments, according to data collected by the state Department of Community Affairs.

‘Where else do you  go? You have to lay off workers, cut services, (or) more than likely, though, we’re going to see a significant increase in property taxes.’ — John Donnadio, New Jersey Association of Counties

Public-worker pension and health benefit costs are generally exempt from New Jersey’s 2% cap on annual property-tax levy increases — which has been credited with helping slow the rate of growth in recent years. So the higher costs could be passed along, in full, to property owners.

While that remains to be seen, John Donnadio, the executive director of the New Jersey Association of Counties, said he does expect there to be some impact on property taxpayers.

“Where else do you go? You have to lay off workers, cut services, (or) more than likely, though, we’re going to see a significant increase in property taxes,” Donnadio said.

No fat in the budget

Meanwhile, for municipal governments, many have been operating in a “bare-bones” mode since the 2007–2009 Great Recession and 2012’s Superstorm Sandy, said Michael Cerra, executive director of the New Jersey League of Municipalities.

Now dealing with surging inflation and the rising employee-benefit costs, the same governments have “little recourse or options left,” Cerra said.

“The 2023 budgets look bleak and property taxpayers face increased property-tax bills and further reductions in services,” he said.

A bill has been introduced in the Legislature that would use some of New Jersey’s remaining federal pandemic aid to blunt the impact of the rising health-benefit costs.

Earlier this year, county and municipal governments learned the cost of funding their workers’ health insurance premiums was increasing year-over-year by more than 20%, in many instances. That’s due to numerous factors outside of their direct control, including the rising cost of health care, the impact of the COVID-19 pandemic and overall inflation.

In response to concerns about the rising health-insurance costs, officials from the New Jersey Association of Counties and the New Jersey League of Municipalities have called on Gov. Phil Murphy and lawmakers to intervene with direct cash assistance to prevent widespread property-tax increases.

In recent weeks, a bill has also been introduced in the Legislature that would use some of New Jersey’s remaining federal pandemic aid to blunt the impact of the rising health-benefit costs. New Jersey received a total of $6.2 billion last year from the American Rescue Plan Act, and a $1 billion-plus portion of that funding has yet to be allocated by Murphy and lawmakers.

Meanwhile, the county and municipal government officials last week raised new alarms about the potential for future property-tax hikes after getting the billing information for their respective employer pension obligations for the 2023 calendar year.

In New Jersey, public-worker pension benefits are funded with contributions made by both public employees and their taxpayer-supported government employers. Revenue is also generated from long-term pension fund investments, which are managed on a day-to-day basis by the Department of Treasury’s Division of Investment.

Employer contributions climb

To ensure worker pension benefits remain properly funded, the county and municipal government officials said the estimated government contribution rates for workers enrolled in the Public Employees’ Retirement System is increasing in 2023 from 15.98% of salary to 17.11%. And for workers enrolled in the Police and Firemen’s Retirement System, the employer contribution rate is increasing in 2023 from 33.25% to 36.51% of salary, the officials said.

In raw dollars, the increases add up to about 10% year over year. But not all government employers will see the same increases across the board, according to Treasury officials.

“Annual employer pension costs typically grow year over year, because they are based on an actuarially determined contribution rate applied against the pensionable salary of each employee,” Treasury spokeswoman Danielle Currie said.

“If pensionable salaries increase, then the employer’s pension cost will increase accordingly,” she said.

Updating pension assumptions

Also playing a role in the latest annual pension-bill increases, according to Currie, is the continuance of an “experience study” that is updating pension-fund assumptions, including life expectancy, and the continued lowering of the state’s assumed rate of return for pension-fund investments.

Under a policy adopted by Murphy, the assumed rate has been lowered in phases over the past several years to a level that is considered more realistic for annual returns.

Lowering investment assumptions typically shifts more of the pension-funding burden onto taxpayers, and a policy enacted by former Gov. Chris Christie, a Republican, would have forced county and municipal governments to take on the increased costs all at once.

But Murphy, a Democrat who took office in early 2018, changed course by allowing the assumed rate to be lowered over the course of several years to spread out the impact on taxpayers.