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Strict Fiscal Oversight Keeps New Jersey Cities Out Of Bankruptcy

Detroit’s fiscal disaster raises questions about adequacy of state pension funding.

camden

Detroit’s bankruptcy sent shock waves through political circles and intensified the debate over whether state and local pension systems are underfunded, but don’t look for Camden or other distressed New Jersey cities to follow Detroit into bankruptcy court, municipal finance experts said.

While more than 20 counties and municipalities and authorities in 10 states have filed bankruptcy since 2003 because of poor financial practices or unsustainable pension debt, New Jersey has not had a local government bankruptcy since the Great Depression.

“Camden in many ways is in worse shape than Detroit, but Camden isn’t in bankruptcy and isn’t going to go into bankruptcy,” said Marc Pfeiffer, assistant director of the Local Government Research Center at Rutgers University’s Bloustein School of Planning and Public Policy.

“While New Jersey has a few municipalities that are severely distressed, we are considered one of the better states in oversight and managing funds, and it’s a system that continues to work. The states where municipalities have gone bankrupt were those with a lack of oversight and limited engagement by the state government until it’s too late,” said Pfeiffer, who spent more than 20 years tracking New Jersey municipal finances before retiring last year as deputy director of the state Department of Community Affairs’ Division of Local Government Finance.

Camden, Paterson, Trenton, Harrison, and Asbury Park are all under supervision by the state’s Local Government Finance Board and part of a special transition aid program “designed to keep municipalities afloat,” Pfeiffer said, and both Harrison and Salem City are under close fiscal supervision because of problems with development bonds.

“A bankruptcy like Detroit just isn’t going to happen in New Jersey,” agreed Jon Moran, the New Jersey State League of Municipalities’ longtime legislative director. “Here in New Jersey, for a community to declare bankruptcy, you have to get approval from the Local Government Finance Board, and before it gets to that point, the Board and the Director of the Division of Local Government Services will already have taken steps to fix the problem.”

New Jersey’s centralized system of six state-administered pension funds providing benefits for all of the hundreds of thousands of employees of state, county and municipal governments, school districts, public colleges and authorities also provides more stability than states with dozens or even hundreds of locally administered pension systems.

Fully Funded Pensions

However, the Detroit bankruptcy’s application of new national pension liability standards that revealed a $3.5 billion hole in two Detroit pension systems that were previously thought to have a manageable $734 million liability does raise questions about whether New Jersey is on track to fully fund its pension system even after the passage of the 2011 pension bill championed by Gov. Chris Christie and Senate President Stephen Sweeney (D-Gloucester).

Designed to make up for almost 15 years of state underfunding, the new pension law has created a budget nightmare by forcing the state to pump at least an additional $600 million each year into the pension system under a seven-year ramp-up to “full funding” of pension benefits that will cost taxpayers as much as $5.5 billion a year by Fiscal Year 2018. Those calculations, however, are based upon the same actuarial methods that previously estimated Detroit’s pension liability at $734 million.

The new Governmental Accounting Standards Board has adopted more conservative standards that would drastically increase the size of New Jersey’s current state and local government unfunded pension liability, which was most recently projected to be more than $43 billion under the old method.

The new GASB rules do not require New Jersey to change its pension contribution formula for the state, county, and municipal governments – which remains a state decision -- but it does require state and local governments to report what their pension liabilities would be under the new GASB principles whenever they issue new government debt.

The Christie-Sweeney pension overhaul, which increased employee pension contributions at the same time that it set a seven-year schedule to ramp up state pension funding, strengthened the state’s legal commitment to retirees to fund their pension payments -- although the inability to bind spending by future governors and legislatures forces state bond prospectuses to routinely contain warnings that “no assurances can be given as to the level of the state’s pension contributions in future fiscal years.” That is why union officials in New Jersey and across the country are closely watching the Detroit case to see if it sets a national precedent for whether state or local governments can get out of paying their full pension obligations in the event of dire fiscal hardship.

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