Even if New Jersey Gov. Chris Christie wins his fierce battle to tame the state’s out-of-control budget, the state will then still have to face its pension costs, which are spiraling out of control. Solving that problem will cost Jerseyans billions and will require tough reforms to cap future liabilities.
Meanwhile, New York lawmakers are actually looking to copy some of Jersey’s worst mistakes.
How bad is the Garden State’s situation? A new study by Joshua D. Rauh, a Northwestern University finance professor, warns that Jersey’s public employee-pension plans could run out of money within a decade.
Rauh optimistically assumed that the funds will achieve annual returns of 8 percent a year. Using a lower, more realistic assumption for return on investment, others have estimated that Jersey’s pensions face bankruptcy within as few as five years. Either way, big infusions of cash are needed.
Jersey taxpayers find themselves in this pickle because the state’s politicians have been shamefully irresponsible by granting rich public-sector benefits — and then trying to hide the cost with fiscal evasions.
The problems began in the early ’90s, when the state pension fund began falling behind on funding necessary to pay its future obligations to retirees. Lawmakers’ “solution”? In 1997, Jersey decided to borrow money to place in it — creating the illusion that it was well-funded. And then the state assumed that the money would earn an unrealistic return, somewhere between 8 percent and 12 percent a year.
Then, having created a paper-only “surplus,” Jersey officials enhanced public employees’ already rich pension benefits in 2001, creating billions more in liabilities.
Jersey’s state and local government and school districts dug the hole deeper by hiring robustly even after the state entered a near-perpetual fiscal crisis starting in 2002. Though the state’s population has been largely stagnant and school enrollment has grown just 3 percent since 2001, school districts raised hiring by 14 percent, adding tens of thousands of workers to the pension pool.
With the stock market stagnant, Jersey should have been putting more state money into the funds to cover the growing obligations — but it hasn’t. Then-Gov. Jon Corzine skipped $4.65 billion in pension payments for the last two years; this year, Christie is following suit as he strives to “balance” the huge deficit that Corzine left.
Bottom line: Even after solving its current budget problems, Jersey will have to find another $3 billion a year — about 10 percent of the budget now — to resume making pension contributions. And catching up on the missed payments means coming up with $5 billion to $6 billion a year.
Plus, the state now has to pay interest on those disastrous 1997 pension bonds, further squeezing the budget.
Rauh thinks the numbers are so ugly that a federal bailout of the worst state pension funds like Jersey’s is inevitable. He says such a bailout, to pass Congress, would need to come with strict reforms — like forcing Jersey to immediately close its current plans to new hires and put all future workers in defined-contribution plans, like private-sector 401(k)s.
Others want the feds to be tougher — to shut down current pension funds completely, and cap the benefits of all current employees the way that the Pension Benefit Guaranty Corp. does when it takes over a failed private pension plan.
Christie has said he’ll start facing the pension mess once he’s done with the state’s immediate crisis; he knows that the minor pension reforms he won early this year are not nearly enough. But most Jersey politicians will probably try for yet another phony fix, like the borrowing scheme. (Corzine’s bid to privatize the New Jersey Turnpike, sending the proceeds to the pension funds, was the most recent high-profile bid to kick the can down the road a few years.)
Meanwhile, New York lawmakers are looking to copy Jersey’s disastrous borrowing gimmick. Empire State pensions are better funded than Jersey’s because the courts have forced Albany to make annual contributions. But New York lawmakers are looking to end-run the law by borrowing up to $6 billion to finance this year’s payments into the system.
Even if that effort fails, the temptation for engaging in future gimmicks will grow — because the costs of sustaining New York’s current system of benefits with tax dollars is just too high.
Politicians in both states love to placate special interests by adding to unaffordable public-employee benefits. Without reform, New York may well follow Jersey onto the list of most distressed pension systems, to taxpayers’ regret.
Steven Malanga is senior editor of Manhattan Institute’s City Journal.