New Jersey’s unfunded liability for pensions and retiree health benefits for teachers and state government workers now tops $150 billion — four times the size of the state budget. That’s $16,600 in pension debt for each and every New Jersey resident — over $66,000 for a family of four. It’s the main reason New Jersey has the second-worst bond rating after Illinois.
We have to face the problem head-on. We have to pay. Pensions are a contractual right and state governments — as sovereign entities with the power to tax — cannot go bankrupt. But pension systems can go bankrupt, and if they do, future taxpayers will be on the hook for $11 billion a year just to pay current benefits.
That’s a staggering number, but the solution is not much better: Over the next four years, actuaries project the state will have to increase its annual pension funding from $3.2 billion to $6.7 billion to finally reach our actuarially required contribution. That doesn’t include the $700 million that health benefits are projected to rise over that period.
What does that mean for future state budgets?
Eighteen months from now, the state will be facing a $2 billion deficit just to cover the ongoing costs of pensions, benefits and normal inflationary budget growth. That deficit will grow to $2.8 billion the year after that and $4 billion in fiscal year 2023.
Let’s put that deficit in perspective:
• To make up a $4 billion deficit, the state would have to raise the 6.625 percent sales tax to roughly 9 percent, by far the nation’s highest state sales tax.
• Or the state would have to raise income taxes on every resident by 25 percent.
• Or the state would have to institute a millionaire’s tax of 18 percent — over 30 percent higher than California’s highest-in-the-nation bracket
• Or the state would have to increase its highest corporate income tax rate to an unparalleled 25 percent — over twice as high as Iowa’s 12 percent highest-in-the-nation rate
Let’s understand how we got here. There’s plenty of blame to go around. For two decades, under Democratic and Republican governors, the state skipped tens of billions of dollars in pension payments. Gov. Christie Whitman did a $2.7 billion pension bond that will wind up costing taxpayers $11 billion.
But the public employee unions weren’t without blame. They lobbied the Legislature in 2001 to give their 800,000 members and retirees a 9 percent pension increase in 2001 without funding it. They pushed for legislation that cut employee pension contributions to 3.5 percent of salary for 15 years when they should have been paying 5.5 percent, and for legislation allowing public employees to retire five years earlier at full pension. They did so even though they knew these benefit changes would have a negative impact on the pension system. But they did so because they believed they could stick future taxpayers with the bill.
New Jersey lags in economic growth because we cannot make the investments we need to make. Year after year, all of our revenue growth goes to pay for the cost of the government — for pension and benefit costs and debt service.
The billions of dollars we keep pumping into pension and benefit payments are billions that we cannot use to fully fund our K-12 school districts, which are underfunded by $1.3 billion. It’s money that cannot be used to expand preschool, to lower high college tuition costs, to build affordable housing, to improve NJ Transit, to expand the social safety net, to assume the costs of extraordinary special education and implement other initiatives that would reduce the state’s over-reliance on property taxes that are the highest in the nation.
If we are going to make those investments in future years — investments that states like New York, California and Massachusetts that don’t have huge pension liabilities are already making — we need to fix our fiscal crisis once and for all.
That’s why I convened a bipartisan Economic and Fiscal Policy Workgroup of economists, academics, accountants and public finance experts co-chaired by Senate Budget Chair Paul Sarlo, D-Bergen, Senate Republican Budget Officer Steve Oroho, R-Sussex, Assembly Majority Leader Lou Greenwald, D-Camden, and Assembly Budget Chair Eliana Pinto-Marin, Essex, last year to work on long-term fiscal solutions to our most pressing fiscal problems.
The workgroup issued its report in August, and now it is up to all of us — as legislators, citizens, taxpayers, business executives and union leaders — to make sure that its balanced, common-sense solutions are implemented before the hole gets any deeper.
The workgroup recommended the creation of a hybrid pension system that will preserve the current defined benefit pension system for all teachers and state workers with more than five years of service. It would put new hires and non-vested employees with less than five years into a hybrid plan that provides the same pension that other employees receive on their first $40,000 of income and adds a portable cash balance account that provides a guaranteed 4 percent return or 75 percent of pension fund earnings on income above that. More and more states, including Pennsylvania, are shifting to hybrid plans.
To control healthcare costs, the committee recommended shifting all employees and retirees from the current platinum level to a gold plan with an 80 percent actuarial value comparable to coverage offered by the best private-sector companies. This would not only save $585 million for the state budget immediately, but would translate into $71 million in savings for state workers, who pay an average of 21 percent of their premium costs. That would offset most increases in out-of-pocket costs, and all savings would be dedicated to the pension system.
Counties, municipalities and school districts participating in the state health plans would save at least $600 million more, and their employees would save too. Big savings for local governments also would come from the committee’s proposal to cap payments for future unused sick leave, which will eventually put an end to the “boat checks” that are so costly for property taxpayers.
The workgroup also recommended the consolidation of all school districts into regional K-12 districts, state assumption of most extraordinary special education costs, and the development of a new shared services process designed to create property tax savings by benchmarking the size of the population at which services can be delivered most effectively and at the least cost.
We cannot wait any longer to restore fiscal sanity, enhance our economic competitiveness and make New Jersey more affordable for all of our residents. That’s why we are developing legislation to implement the most critical recommendations this spring and will be pushing them as part of the budget process this spring.
If we succeed in our bipartisan efforts to fix our pension and health benefits crisis, we can truly improve the state of our state, and once again begin to make New Jersey a model for the nation. That would be something to brag about.
Sen. Steve Sweeney, D-Gloucester, is president of the New Jersey State Senate. The full taskforce report can be found at pathtoprogressnj.org.
Read the article on the Asbury Park Press site here