New Jersey is facing a four-year budget crisis, with the cost of pensions, retiree health care benefits and debt service projected to rise at least $4.6 billion over Gov. Chris Christie’s last four budgets, a NJ Spotlight analysis shows. The four-year jump would be equal to 14 percent of the current $32.6 billion budget, and would represent a significant challenge for any governor or Legislature.
But New Jersey’s fiscal crisis is deepened by four years of overborrowing that has bankrupted the Transportation Trust Fund a year early, a reliance on fiscal gimmicks and a cannibalization of the state surplus that led to Standard & Poor’s credit downgrade, and a governor so eager to cut taxes that he jumped at the idea of eliminating the $325 million realty transfer tax at the same time that he is proclaiming that New Jersey is like Detroit headed down the road to bankruptcy.
Furthermore, while New Jersey could conceivably cover its soaring pension, retiree health benefit and debt-service costs over the next four budgets, that depends on Wall Street’s bull market continuing at least another three years to keep tax revenue flowing in from the wealthy 1 percent who pay 40 percent of the state’s income tax. It was a “recession of the rich,” not the increase in middle-class unemployment, that sent state revenues plummeting from 2008 to 2010.
Despite the deepening state fiscal crisis, the Fiscal Year 2015 budget that Christie proposed two months ago is likely to be enacted with few changes. For the third year in a row, Christie Treasurer Andrew Sidamon-Eristoff’s revenue projections are higher than those of the nonpartisan Office of Legislative Services’ budget director, David Rosen.
But unless an “April surprise” shows lower income tax collections for the biggest month of the year when the figures are released in mid-May, Christie and Sidamon-Eristoff will simply use their executive branch power to certify their $34.4 billion revenue forecast for next year’s budget. And even if Democrats did reintroduce a millionaire’s tax to fund new initiatives, as progressive coalitions have suggested, Democrats lack the two-thirds majority needed to override a Christie veto.
The real battle over New Jersey’s finances will be fought after the FY15 budget is enacted at the end of June, and it will be fought out on two fronts over the ensuing eight months.
First, Christie and Sidamon-Eristoff will have to come up with a plan to renew the Transportation Trust Fund without relying entirely on borrowing, without an $8.7 billion rail tunnel project to cancel and without any money left over in future state budgets to provide pay-as-you-go financing — and without violating Christie’s “no new taxes” pledge by raising the gas tax, as Democratic lawmakers want him to do.
Unless he can persuade New York Democratic Gov. Andrew Cuomo to help him break up the Port Authority so he can use its toll revenue to refinance the Transportation Trust Fund — and can somehow overcome opposition from an Assembly Democratic leadership that represents the “Democratic wing of the Democratic Party” — Christie does not seem to have any good options on TTF.
Whatever Christie and the Legislature eventually agree to do to fund at least a five-year, $8 billion extension of the TTF to pay for highway, road, and mass transit construction projects, the solution will undoubtedly include at least $4 billion to $5 billion in additional borrowing that will add to the state’s debt-service costs.
Politically, Christie does not appear to have any better options to reduce the soaring costs of pension and retiree health benefits over his last three budgets either.
While the governor storms from town meeting to town meeting warning Democratic legislative leaders that he will take action to fix the state’s fiscal crisis unless they demand further concessions on pensions and health benefits from state workers, the truth is that there is very little that Christie can do unilaterally. State governments, unlike cities like Detroit, do not have the power to declare bankruptcy, because, as sovereign entities, they have the ability to raise taxes.
And while Christie has renewed his attacks on public employees over their pension and health benefits — the political formula that made him a national Republican star in his first year in office — the governor does not want a full-fledged war with Senate President Stephen Sweeney (D-Gloucester). That is especially so since Sweeney and his political mentor, South Jersey powerbroker George Norcross, are the only Democrats who have expressed any qualms publicly about continuing the Legislature’s investigation of the Bridgegate scandal.
It was Sweeney, an Ironworkers union leader, who put his career on the line by bucking public employee union opposition to sponsor the 2011 pension and health benefits package that locked Christie into a series of escalating pension payments that started at $458 million in FY2012 and are expected to rise to $4.8 billion by FY2018.
That would be Christie’s final budget — and ironically, the end of the state’s immediate fiscal crisis.
The next governor — and Sweeney is one of the leading Democratic candidates — would inherit a manageable annual pension increase in FY19, a projected reduction in debt service, and lower annual increases in retiree health benefit payments due to changes in Sweeney’s pension and health benefits bill.
Sweeney is not going to want to do anything to help Christie push off any of those costs past FY18, especially the seven-year ramp-up to the full actuarially required pension payment that was a cornerstone of the 2011 bill he and Christie teamed up to pass. That legislation was designed to make up for 15 years in which Democratic and Republican governors and legislatures put off making billions of dollars of pension contributions not only for state workers, but also for teachers in every school district, whose pension costs are paid for by the state government.
While future governors will continue to pay in billions every year to cover what is still expected to be a $54 billion unfunded liability at the end of FY18, the annual increase in pension payments — which is expected to jump by $2.45 billion over Christie’s last three years to a total of $4.8 billion that year — is projected to slow dramatically starting in FY19. In fact, the state’s pension payments could actually drop in future years as the unfunded liability is slowly paid down.
That does not help Christie. The governor keeps complaining that rising pension, health benefits, and debt service increases are eating up 94 percent of this year’s revenue increase, but does not intend to propose any changes until he puts together his FY16 budget next February, Christie spokesman Kevin Roberts told Star-Ledger columnist Tom Moran.
Christie’s call for Democrats to push public employees to pay more toward their pension and health benefits is not going to resonate with Sweeney either.
Sweeney paid a political price for jamming through legislation that increased pension and health benefit payments for all employees of state, county, and municipal government and school districts, froze cost-of-living increases for public employee retirees, and suspended collective bargaining on healthcare issues by public employees for four years.
Angered by what they viewed as Sweeney’s treason to the union movement, the public employee unions banded together to block the state AFL-CIO from endorsing Sweeney, Sen. Donald Norcross (D-Camden), then the head of the South Jersey Central Labor Council, and other Democrats who voted for the pension and health benefits bill for reelection in 2011.
Sweeney, who will undoubtedly face a contested primary fight for the Democratic gubernatorial nomination in 2017, has been trying to rebuild alliances with the public employee unions, starting with his insistence that Christie stick to the pension funding agreement he made in 2011 and not ask public employees to pay more — a position in which he has the strong support of Assembly Speaker Vincent Prieto (D-Hudson) and top Assembly Democrats.
Sweeney also knows that the increasing cost of retiree healthcare costs is also going to slow after FY21, the third year of the new governor’s administration, as a direct result of provisions in his pension and health benefits bill that will require employees who had less than 20 years of service as of June 28, 2011, to pay some of the cost of their medical coverage after retirement.
Aon Hewitt, the state’s benefits consulting firm, has calculated that the healthcare bills for public employees who retire after 25 years with full medical coverage will increase by an average of 8.5 percent through FY21 both for those whose full medical bills are paid by the state prior to age 65 and those who only rely on the state for Medicare copayments, according to an April 9 bond refinancing document issued by the Educational Facilities Authority.
Christie retroactively used $120 million in reserves in the State Health Benefits Program Fund to lower the payment as part of a series of budget maneuvers totaling $694 million that were criticized by Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings, Inc.
Use of the retroactive “one shot” to lower the FY14 contribution resulted in a $263 million increase to $1.701 billion for retiree healthcare costs in the upcoming FY15 budget. Using Aon Hewitt’s projections, NJ Spotlight estimates that retiree healthcare costs will rise to $2.173 billion by FY18, Christie’s last budget, and continue to go up by 8.5 percent annually to $2.775 billion in FY21 under the next governor, then level off to 5 percent annual increases.
While the unfunded liability for retiree medical benefits — $51.5 billion at the end of FY12 — is actually 50 percent higher than the liability for pensions, which gets more attention, the state does not attempt to prefund postretirement medical benefits, and the cost to begin to do so would be prohibitive
However, beginning in FY21, Aon Hewitt calculates that the annual increase in retiree health care costs will drop to 5 percent a year – once again, a more manageable number considering that state revenues tend to rise an average of 6 percent a year, David Rousseau, a former Democratic state treasurer who serves as budget analyst for New Jersey Policy Perspective, pointed out.
Officials in the governor’s office and the Treasury Department did not respond to questions last week about future projections for retiree health benefit payments.