Comptroller Finds Non-Compliance with 2007 Pension Law

A study by the New Jersey State Comptroller has found instances of state pension system participation by professional service contractors for municipalities and school districts—contrary to a 2007 law that prohibits their continued membership in the plans.

The comptroller released a report on the findings, Improper Participation by Professional Service Providers in the State Pension System, July 17. In a sampling of 58 municipalities and school districts, the comptroller found 202 instances of professional service providers—mostly attorneys, but also engineers and medical professionals—who are still enrolled in state pension systems, even though their removal was required by the 2007 statute. About one-eighth of the cases involved school districts, according to a staff member in the Office of the State Comptroller.

Recommendations The Office of the State Comptroller (OSC) called for several changes to expedite local government units' implementation of the 2007 act, including the following:

• That the Division of Pensions and Benefits develop a comprehensive checklist for required use by local governments and school districts to determine and certify pension eligibility of professional service providers.
• That the state provide additional resources to address questionable PERS enrollment.
• That local units seek advice on the pension eligibility of professional service providers from the Division of Pensions "or an impartial attorney who does not have a personal interest in the outcome of the opinion."

Non-implementation A press statement from the comptroller's office indicated various reasons for the "failure to implement the 2007 law."

"Some local governments…simply failed to perform the required analysis to determine if their professional service providers qualified for pension credits," the OSC stated. "Other local officials said they kept these individuals in the pension system because they thought they were ‘grandfathered' in because of their long-standing membership in the system. However, the law contains no grandfathering exception.

"Other local governments used a skewed analysis that weighed only those factors consistent with employee status while ignoring more significant factors that pointed to independent contractor status."

The OSC statement continues, "Perhaps most prominent was these local governments' failure to give appropriate weight to individuals' separate employment in a private professional firm. Guidance from the Internal Revenue Service makes clear that it is unlikely that a professional service provider is a bona fide government employee if that professional simultaneously is engaged in business through a private firm and offers his or her services to the public.

"In some cases, local governments opted to keep their attorney enrolled in the pension system based on the legal advice of the same attorney whose pension eligibility was in question."

Enabling Legislation The 2007 pension reform provisions cited in the OSC report are part of an omnibus pension and health benefits reform bill that also addressed health benefit reforms. NJSBA supported the legislation.