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State Treasurer Calls Increase in Taxes Inevitable Without Benefits Reforms

With employee costs rising 15%-20% and revenues rising 3%, official calls equation ‘unsustainable’

ford scudder
Acting Treasurer Ford Scudder (second from left) with Deputy Treasurer Thomas Neff (left) testifying in Trenton.

Spending on public-employee benefits may not be the biggest single item in the state budget, but it’s definitely one of the most controversial.

The growing amount of money the state plans to dedicate to healthcare and pension benefits for state workers during the next fiscal year was hotly debated throughout a daylong Assembly Budget Committee hearing held in Trenton yesterday.

Republicans complained that the state is spending so much now on worker healthcare and pensions that there are few dollars left for other top priorities like education.

But Democrats on the panel said Gov. Chris Christie is still shortchanging the state pension system, and they also raised concerns about loosely defined savings from employee healthcare changes that the governor is banking to balance his proposed budget for the next fiscal year.

The hearing, meanwhile, also served as the committee’s formal introduction to acting state Treasurer Ford Scudder, who was named to the post by Christie last fall but has yet to be officially nominated or confirmed by lawmakers. Scudder also appeared on Tuesday before the Senate Budget and Appropriations Committee.

Benefits account for most new spending

Christie’s proposed $34.8 billion budget would increase state spending by about $1 billion. Roughly 80 cents out of every dollar in new spending would go toward employee pensions and healthcare. That includes a $555 million increase in funding for the state’s grossly underfunded pension system.

Assemblyman Declan O’Scanlon (R-Monmouth) said after sitting through several recent public hearings on Christie’s proposed budget that it’s clear to him New Jersey residents want to see the state spend more on education and other worthy programs and services. He asked Scudder yesterday if the state can afford to do so as long as public-worker pension and healthcare costs keep rising faster than the rate of growth in tax collections.

“Is it safe to assume that there will be no money for anything additional going forward if we keep going at this rate without reform or massive tax increases?,” O’Scanlon asked.

Scudder replied that employee costs are rising by at least 15 percent and are projected to top 20 percent in a few years. But growth in revenues in the next fiscal year is projected at roughly 3 percent.

“Yeah, I would submit that is unsustainable if we want to provide the same level of services without raising taxes,” he said. “Something has to give.”

Christie seeks employee givebacks

To address employee-benefit costs, Christie has called for a new round of benefits changes in the wake of a bipartisan reform law passed in 2011. He wants to freeze enrollment in the current pension system and force employees to accept less generous healthcare plans.

Democratic legislative leaders, meanwhile, are backing a constitutional amendment related to pension funding that could go before voters this fall. The amendment would require the state to make pension contributions equal to the full amount calculated by actuaries, and to make those payments on a quarterly basis instead of all at once at the end of each fiscal year.

While answering questions from Committee Chairman Gary Schaer (D-Passaic), Scudder took aim at savings the Democrats are expecting to generate from the quarterly pension payments that would be required under the proposed constitutional amendment.

Under the Democrats’ plan, making pension payments on a quarterly basis would give the funds the best chance to grow under the pension system’s current assumed 7.9 percent annual rate of return. Even if the state had to borrow money to make the first few payments, since the bulk of tax collections don’t come into Trenton until later in the fiscal year, the Democrats have argued the interest rates on that borrowing would be well below the expected return on the investments.

“Is it a question of if the pension’s being paid, or when the pension’s being paid?” Schaer asked.

Treasurer opposes more borrowing

Scudder said the interest costs could still top $100 million – an estimate Democrats strongly dispute -- and the increased borrowing could rattle Wall Street credit-rating agencies and lead to a lowering of the state’s already poor debt grade. The state already borrows nearly $2 billion on a short-term basis to pay its bills each year, and that number could more than double if the amendment is passed, he said.

“That’s a very large increase that, in all candor, I’m not sure Wall Street will finance,” Scudder said.

But Schaer also raised his own concerns about banking on savings that may not materialize. He asked Scudder to further explain how Christie is counting on the state to realize $250 million in savings from employee healthcare changes that have not yet been identified. Ultimately, those changes would have to win approval from health-plan committees with equal membership from public employees and the Christie administration, adding to the uncertainty.

“The real question I have is on what basis do we assume $250 million in savings?” Schaer asked. “That money is not specified to the best of my knowledge.”

“Whatever the amount is, this has significant budgetary impact. The government of New Jersey -- legislative, executive, whatever -- is depending on $250 million to be found,” Schaer said.

Scudder conceded there are no clearly defined plans to achieve the full $250 million in projected savings, but he added the employees and the administration both have incentives to find savings since they could both benefit from reductions in areas like out-of-network costs.

Assemblyman Troy Singleton (D-Burlington) also challenged claims Scudder made about Christie contributing more into the pension system than his five predecessors combined. The pension system currently is underfunded by an estimated $43 billion, and though Christie promised in the 2011 reform law to follow a seven-year ramp-up schedule to full state payments, he’s since swapped that payment contribution for a more gradual schedule.

Singleton also noted that employees are still contributing more toward their pensions as a result of the 2011 law even though Christie broke his promise on state funding.

“I’m curious why you noted how much he contributed in your remarks, but you seem to omit that he’s underfunded at such a high amount at the same time,” Singleton said.

Scudder defended Christie, saying his contributions in most years have fully covered the pension liabilities attributable to current employees, while also helping some to pay down some of the system’s unfunded liability.

“My point being the amount that we are missing the pension payment by is almost 100 percent due to the underfunding of the previous two decades,” he said. “We are actively working toward rectifying that fact.”

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