Unfunded liability for pensions and retiree health benefits now tops $230 billion
New Jersey faces a daunting fiscal crisis. For more than two decades, the state has severely underfunded its pension systems for public school teachers and state government workers. As a result, our unfunded liability for pensions and retiree health benefits now tops $230 billion – six times the size of the entire state budget. And, we have the second-worst bond rating in the country, after Illinois.
For decades, governors and legislators from both parties have largely ignored the issue and they definitely shoulder much of the blame for these mounting pension problems. But union leaders who repeatedly pushed to increase benefits and to reduce employee contributions without considering the future costs must also share the responsibility. All sides are culpable for the fiscal gimmicks and underfunding that went on year after year. We can sit around and argue about who deserves more of the blame or we can face up to reality and the enormity of the challenges and get down to business to save our pension system.
Delay is no longer an option. The combination of the poor credit rating of the state, the exodus of the higher income earners, the unfavorable business climate added to the $230 billion deficit permit no further delay.
To help rectify the sins of the past and to begin to right the fiscal ship, the legislature is gradually increasing our state pension contribution over the next four years to roughly $6.7 billion – the amount that actuaries have determined that we should be paying. But the escalating costs of pensions and health benefits have us at the brink of fiscal ruin. Within a few years, pension and health benefit payments will account for a quarter of the state budget which will force cuts to local aid and social programs.
We are staring head-on at a deficit of as much as $4 billion by fiscal year 2023 if we do nothing to address our major cost drivers. It could be even worse, because this estimate assumes normal revenue growth and no economic downturn, which is not a safe assumption. The economic expansion that followed the recession of 2008 is now in its tenth year. We are in the later innings of this game of economic expansion.
We cannot tax our way out of this crisis, even with an increase in the top rate. New Jersey taxpayers – businesses and residents alike – already bear a high tax burden. Higher taxes will only make New Jersey less affordable and less competitive. Before we ask our residents to pay more, we must do everything we can to ensure that we are spending the public’s tax dollars as efficiently as possible. Why raise more revenue to spend it on broken systems?
At the start of 2018, Senate President Steve Sweeney made a commitment to address this fiscal crisis head on. He commissioned the bipartisan Economic and Fiscal Policy Workgroup, which was comprised of eight legislators (five Democrats and three Republicans) and 17 experts who have served in academia, private industry, and the public sector. I was pleased to be asked to serve on the Workgroup. Last August, we issued our Path to Progress report. Our recommendations are practical solutions designed to address the ongoing structural deficit. They take a measured approach that will provide savings for the state budget, local and school budgets, government employees, and taxpayers.
The panel recommended the creation of a hybrid pension system that would preserve the current pension system for employees with over five years of service, but provide new hires and employees with less than five years of service with a defined benefit pension on their first $40,000 of income and a cash balance account on earnings beyond $40,000. The cash balance plan would earn a guaranteed 4 percent minimum return or 75 percent of the state’s earnings, whichever is greater.
According to an actuarial analysis, this plan will save the state and its local governments a combined $25 billion over 30 years and will reduce the unfunded liability by $18 billion. Contrary to statements made by the public employee union leaders, this plan will keep employer and employee contributions in the system and create stability – as evidenced by the huge projected reduction in the unfunded liability.
In order to address our escalating healthcare costs, the Workgroup recommended shifting all employees and retirees from platinum-level health plans to gold-level plans. Gold-level plans are comparable to those offered by top private sector companies and other public sector employers around the country and are better than many taxpayers in New Jersey have. This would save more than $450 million for the state budget and over $1.1 billion for local governments, school districts, and property taxpayers. Furthermore, shifting from platinum to gold would put over $350 million back into the pockets of public employees due to reductions in their health care premiums.
The Path to Progress includes much more than pension and benefit reforms. It recommends the consolidation of all elementary and K-8 school districts into regional K-12 systems, which would result in state and local savings and ensure that our students who attend regional high schools will be learning on the same schedule from the same curriculum. It recommends full state funding of Extraordinary Special Education costs, a cap on payments for unused sick leave, and increasing the resources that are available to local governments considering or implementing shared services, among other initiatives.
Legislators in the Senate and the General Assembly have introduced legislation to implement these important recommendations, and they have announced plans to advance them on a bipartisan basis. It is imperative that New Jersey gets government costs under control so that we don’t crowd out all other important spending needs, such as fixing NJ Transit, making higher education more affordable, and, most importantly, fully funding state aid to school districts to enhance educational opportunity and to hold down property taxes. Imagine what good can be done with hundreds of millions of dollars every year while still reducing the overall tax burden of the people.
Every month, every year that we fail to act, our fiscal situation gets worse. The time for the Governor and Legislature to begin implementing these common sense, fiscally responsible recommendations is now. Delay is not an option.