New Jersey's pension funding problems have collided with its state budget woes.
Observers of New Jersey's fiscal situation disagree about some things but agree that the state's situation is tough and will get tougher.
Most place the state's unfunded pension liability among its biggest problems. As of July 1, 2013, New Jersey's adjusted net pension liability stood at $38.6 billion, or 126% of state revenues, if $1.3 billion for smaller state pensions is excluded, according to Moody's Investors Service.
Now deepening budget problems are challenging the state's ability to make a dent in the problem.
New Jersey is in a tough spot. The state constitution requires the state government to adopt a balanced budget for fiscal year 2015 by July 1, its first day.
On May 13, Moody's analyst Baye Larsen said the state faced up to a $3 billion structural budget gap in fiscal 2015. This figure assumes the state uses one-time solutions to defer into fiscal 2015 the $807 million gap that recently arose in the current year budget.
Republican Gov. Chris Christie's solution for the $807 million gap, announced May 21, is to break the agreement he reached in 2011 with the legislature to ramp up pension contributions to actuarially required levels over seven years.
The state has a long history of fiscal mismanagement to blame for its current situation, said Steve Malanga, senior fellow at the Manhattan Institute, a conservative research center. The state's budget has not been legitimately balanced for 20 years, he said.
The state government has had a hard time arriving at a budget by the July 1 deadline during the last 10 years. In 2010 the Securities and Exchange Commission cited the state for making false statements from 2002 to 2004 concerning the state's pension system in its municipal bond offering statements.
The state's continued underfunding of the actuarial required contributions for pensions has made the funding gap grow worse.
New Jersey's economy has rebounded much more weakly from the Great Recession than has most of the country, said Hetty Rosenstein, New Jersey director of the Communication Workers of America, which represents state employees.
David Rosen, legislative budget and finance analyst with New Jersey Office of Legislative Services, said that if the state's recovery had followed the national pattern, it would have received $3.3 billion more in revenue in fiscal year 2013.
In the next few weeks there will be much discussion in the New Jersey Assembly and Senate about what course to take with the fiscal 2015 budget, said Assembly Budget Committee chairman Gary Schaer, D-Passaic.
Christie's break with the 2011 pension agreement is very troubling, he said.
To avoid a government shutdown, the state will have a balanced budget by July 1, Schaer said.
"Hopefully, it will be the best of the bad options in front of us," he said.
Both Malanga and Rutgers University political science professor David Redlawsk said that the Democrats, who control the Legislature, will try to get the state to adopt a millionaire's tax. This would raise about $800 million but would still leave the state with a gap of $700 million to $1 billion to address with other means. Beyond the millionaire's tax, the Democrats do not have any magic bullets, Redlawsk said.
Christie plans to propose a new plan for reduced pension obligations in mid-June, said David Rousseau, former state treasurer under Christie's Democratic predecessor, Jon Corzine, and current budget and tax analyst for New Jersey Policy Perspective, a liberal think tank.
Democratic lawmakers do not have an alternative plan to address the major shortfall, Rousseau said. They could promote tax increases but that would be politically hard to do when the recipient would be the state's pension system, he said.
The Democrats "will hem and haw and say [to Christie], 'you're being irresponsible,'" Rousseau said.
But at the end of June, he predicted, they will allow a few Democrats to join with the Republicans to vote for Christie's budget, which will include reduced pension payments.
This year, all three rating agencies have downgraded New Jersey to the A-plus level.
In addition to budget deficits and pension funding, rating analysts raised flags about other post-employment benefits and high per capita debt levels.
Adding to the drama in the near future, three major state unions have announced plans to sue Christie to prevent him from reducing planned pension contributions and any future pension plan reductions.
Christie has already painfully undermined the state's teachers and teacher retirees, said Steve Wollmer, director of communications for the New Jersey Education Association, a teachers union. In June 2011 the teachers were paying 5.5% of their salary into the pension system. In the adopted pension reform, by 2018, the teachers would be paying 7.5%. Their retirement age is being pushed back.
Prior to the pension agreement, the teachers, after two years into their retirement, would get adjustments to their pensions that kept up with 60% of consumer price index increases. Under the 2011 pension system changes, they are expected to get no inflation adjustments until the pensions achieve a certain level of funding. The teachers are going to have to pay for between 18% and 30% of the cost of health insurance, depending on their salaries.
By not making this year's state contribution to the pension system, Christie is clearly in violation of the 2011 law implementing the pension agreement, Wollmer said.
The NJEA, the Communications Workers of America, and the Professional Firefighters Association of New Jersey will sue Christie, CWA director Rosenstein said.
A suit over the 2011 pension agreement's suspension of cost of living increases is still in the courts, Rousseau said.
How the courts will resolve that and the new suits will be interesting, Rousseau said. On the one hand the state constitution says that one legislature cannot make financial promises that bind another legislature unless voters specifically approve the promises, as they do with bond referendums. On the other hand, the state did promise the cost of living increases in contracts with the workers.
New Jersey's fiscal problems may be patched over in the next few months but they are unlikely to be fully resolved, observers said.
Redlawsk said he was not optimistic that the problem would be resolved in the next two years.
"This is a problem that has been building for more than 20 years," he said. "It is unlikely to be solved quickly or easily."
Malanga agreed.
"The schedule to get pensions back to adequate funding extends over 30 years, for instance," he said. "So they must find solutions and then stick to them, as must future administrations."
The state must address a number of financial problems, Schaer said. The New Jersey Transportation Trust Fund and open space fund need dedicated sources of funding. The state's public education and public higher education systems are underfunded, he said. Meanwhile, the state's borrowing has been growing rapidly.
Wollmer said the state should have a tax on high earners and that Christie should stop giving breaks to corporations, something that has cost the state $2.4 billion in the last few years.
Rosenstein had four proposals: the state should adopt a millionaire's tax, she said; corporate taxes need to be restored; the state's gas tax should be raised to support the transportation trust fund; and the state should more efficiently use Hurricane Sandy money and school bonding to get the economy rolling, she said.
Schaer said that Christie has never done the zero-based budgeting and other approaches that he promised to do before being elected governor in fall of 2009. These should be done now, Schaer said.
Rousseau said a public/executive/legislative commission should be formed to discuss fiscal decisions for the state, local and school levels. The commission should prepare a report with recommendations. Rousseau said he was unsure whether the recommendations should come before or after the 2017 gubernatorial election.
The fiscal issues of all the government levels should be discussed simultaneously, since they interact with each other, Rousseau said.
