Editor’s Note: Although Gov. Phil Murphy recently announced a deal with state union leaders that will affect roughly 800,000 public employees and save the taxpayers nearly $500 million dollars in savings in fiscal year 2019, the state’s underfunded public pension system remains a serious threat to the state’s economic health.
In fact on the same day the deal was announced, the independent think tank Truth in Accounting cited New Jersey as having the worst taxpayer debt in the union. With political leaders and fiscal policy experts considering the next move, the following considerations help put some light on the current economic time bomb.
There are no quick fixes for the state’s ongoing budget crisis, but the best place to begin is with the chronically underfunded pension system.
During the past seven months the Economic Policy Committee established by Senate President Steve Sweeney (D-Gloucester) — with participation from Republican and Democratic leadership and a volunteer group of 35 policy and fiscal experts — considered the mounting fiscal gaps in the state budget. I was the chair of a group of six people who analyzed pension and health-benefit costs and explored actions that could be undertaken to reduce these costs.
The overall committee did not analyze the state’s tax structure or future tax policy but did develop 40 recommendations that focused specifically on reducing the cost of government and addressing the state’s long-term fiscal problems. But first some background.
New Jersey passed a budget (appropriations act) for fiscal year 2019. It is balanced; it contains reasonable but cautionary revenue estimates; it funds basic needs; it provides an increase in funding for the severely underfunded pension system and for school aid; and it contains a minimum surplus. That is the good news.
However, the future is still bleak. New Jersey has the lowest credit rating of any state, except one — and we have the worst-funded pension system in the nation.
Based on reasonable projections of future revenue growth and future spending, the gap in the state budget will reach between $3.2 billion and $4 billion in the next few years — principally driven by increasing pension and health costs. These numbers assume no economic slowdown, and they take as a given the continued use of revenues that were originally intended for other purposes (affordable housing, turnpike receipts, telephone assessments, and others). If the economy stumbles the situation is worse.
At the local level, the story is not much different. Most people agree property taxes are too high. They also assume that no matter what is done those taxes will increase each year, as they have for each of the past 40 years. Many argue we simply have too many local governments and school districts and most do not share services.
Anyone considering this situation would say: We need a plan to address this problem. Some argue, “economic growth will cover the shortfall.” Others say, “cut the bureaucracy.” Still others insist, “reduce taxes and don’t worry about the impact on programs.”
Each of those recommendations is a poor and incomplete prescription.
The biggest burdens facing state spending are increasing pension and health-benefit commitments, as well as the continued rise in school aid based on the existing formula. School funding is by far the single largest item in the budget (41 percent of all spending). Pension and health benefits are the fastest-growing items in the budget — projected to increase by 56 percent in the next four years, from $7.7 billion to $12 billion. The latter two costs are now 19 percent of all spending and will increase to 26 percent of the budget. Consider how these rising costs will crowd out other demands, such as transportation, public safety, Medicaid, infrastructure, and the wide range of other critical state programs.
It is not possible to continue in this way. Reasonable people will disagree with the finer points of a desirable conclusion, but certain actions are obvious and need to be taken immediately.
The committee’s report addressed the need for K-12 consolidations, expansion of shared services among local governments, reduction of excessive payments for the accumulation of sick and vacation time, rethinking of property-tax assessment practices, and investigating other policy changes.
In my judgment, however, the three key recommendations are:
- Shift all new employees of state and local government (municipal, county, and school districts), along with those employees not yet vested, from the current defined-benefit system to a so-called cash balance system (similar to a 401(k) but better for the employee). Such actions would be a major step toward addressing the long-term unfunded liability of these systems and also reduce local property taxes.
- Shift all state and local government employees and retirees from the platinum-level health coverage (the highest) to gold coverage (second highest), with other, smaller health-coverage adjustments.
- Examine the state’s assets to determine those best suited for dedication to the pension funds. The state has approximately $30 billion in assets (infrastructure, land, buildings, and so forth) — not counting assets of the various state authorities, such as the New Jersey Water Supply Authority, the New Jersey Turnpike Authority, the South Jersey Port Corp. Perhaps those best suited for consideration are those assets that earn revenue.
The foregoing actions will significantly bend the curve of future state and local costs: that is critical and must be undertaken. Additional analysis is needed to determine the exact savings; however, these recommendations alone will not close the entire budget gap. The first two points essentially “stop digging the hole deeper.” The third may possibly start filling that hole.
Unfortunately, additional revenues will be needed or sizable budget cuts will have to be made to important state programs. I neither subscribe to the latter approach, nor do I believe it reasonable or doable. This is certainly a hard message to deliver. Do I mean to say: We make these difficult decisions and cost reductions, but we still have a large budget gap? A realistic analysis suggests it is true. More hard choices are needed by state leadership.
New Jersey’s budget problems did not develop overnight, but action is needed now. The state needs a new budget strategy for today and the future. Delay is not an option. Let’s start with the key reforms I’ve just outlined and determine what other revenues or fixes are needed.
Richard F. Keevey is the former budget director and comptroller for New Jersey appointed by two governors from each political party. He held two presidential appointments as CFO at HUD and deputy undersecretary for finance at DOD. He is currently an executive in residence at the Bloustein School of Planning and Policy, Rutgers University and lecturer at Woodrow Wilson School, Princeton University. This originally appeared in New Jersey Spotlight.