The Politics of Closing the Budget Gap: Everything is NOT on the Table

Mark J. Magyar | May 19, 2014 | Budget, Politics
With Christie ruling out millionaire’s tax, real battle looms over pensions, ‘one shot’ gimmicks, and spending cuts

Senate President Stephen Sweeney (D-Gloucester) and Gov. Chris Christie,
Despite Gov. Chris Christie’s insistence that “nothing (is) off the table” to plug an estimated $1.6 billion hole in this year’s and next year’s budget, Christie made it clear last week that he will not sign a “millionaire’s tax” or any other broad-based tax increase. To do so would not only violate his “no new taxes” pledge, but kill off Christie’s flickering 2016 Republican presidential ambitions.

That leaves the governor and legislative leaders with few options other than increased reliance on “one-shot” gimmicks — such as deferring a scheduled pension or school aid payment, raiding dedicated funds or implementing a tax-amnesty program — and politically painful spending or benefit cuts as they head into a six-week battle over the budget.

Christie, whose line-item veto gives him the ultimate power in any budget battle, will lay out his plan to fill this year’s $807 million deficit and a comparable shortfall next year no later than Wednesday, when state Treasurer Andrew Sidamon-Eristoff is scheduled to testify before the Assembly Budget Committee.

The state’s latest budget problems — coming on top of a $694 million current year budget gap closed largely through a series of “one-shot” budget maneuvers in March – led Fitch Ratings Inc. and Moody’s Financial Services to follow Standard and Poor’s in downgrading New Jersey’s credit rating to single-A status, joining Illinois and California in the bottom rung of the 50 states.

While Senate President Stephen Sweeney (D-Gloucester) and other Democratic leaders have made it clear they are not willing to revisit the 2011 pension law that requires the state to make a $1.558 billion pension payment by June 30 and $2.25 billion next year, Christie has explicitly refused to rule out a deferral in pension payments as a budget-balancing option.

Indeed, Christie has been setting the stage for a confrontation over the state’s pension and retiree health benefit obligations for the last four months. Last Wednesday, Christie declared at a fiscal forum in Washington) that if New Jersey is to avoid future budget problems, “the only way is to stop the insanity of a defined benefit pension system that we cannot afford and of a health care system that Obamacare called a Cadillac plan.”

Christie has given no indication that he plans to use the latest fiscal crisis and the June 30 deadline for enactment of a balanced budget to attempt to force fundamental changes in the pension system, make major cuts in health benefits, additional increases in public employee pension payments or in contributions toward retiree health care by current or retired workers.

But the New Jersey governor’s constitutional and statutory preeminence in budget issues puts Christie in the driver’s seat in any showdown over pensions or other fiscal issues.

First, Christie unilaterally changed the funding formula for the state’s pension contribution four months ago so that he could retroactively cancel $93.7 million of this year’s previously budgeted pension payment, cut next year’s pension bill by $150 million, and put a total of $900 million less into the underfunded pension system by the end of his term.

Christie could have Sidamon-Eristoff instruct the state’s pension actuaries to change the funding formulas again.

In fact, John Loos, co-chair of the New Jersey Retired Public Employees Organization, contended in an April letter to legislators that New Jersey’s current pension payment is needlessly inflated by the state’s current assumption that public employee salaries will rise by 3.45 percent for the next three years and then by 4.75 percent after that.

“The salary assumption should be no higher than 2.5 percent,” said Loos, a former political director for the Communications Workers of America, the largest union in state government. Loos noted that Christie limited state workers to a total pay increase of just 2.75 percent over four years, and that the 2 percent spending cap has sharply limited pay increases for teachers, police and other local government employees. Lowering the salary assumption would lower the annual pension payout by 41 percent for an employee retiring 30 years from now, Loos wrote, and would save the state billions of dollars in pension payments over that time.

Keeping the projected unfunded pension liability high also pushes back the date at which the various state pension systems would be 80 percent funded, triggering resumption of cost-of-living increases for retirees that were suspended under the 2011 law, Loos said. “It’s my opinion that there is also a political interest for Christie to keep this number high so he can keep going around the country railing against public employee costs while he runs for president,” he said.

Second, while Christie signed the 2010 law locking the state into a seven-year ramp-up to actuarially required funding of the pension system by FY2018 — of which this year’s $1.558 billion payments is the third stage — Christie’s attorney general has previously argued successfully in court that the New Jersey Constitution establishes the primacy of the annual budget bill over all other state laws and makes such funding guarantees essentially worthless.

If Christie cannot find $807 million in “one shot” budget maneuvers or last-minute spending cuts to balance the current budget, and therefore decides to push off a portion of the $1.558 billion pension payment past June 30 into the following fiscal year, any court challenge to the deferral by the state’s public employee unions would most likely not be decided for months.

That would give Christie the window he needs to at least push off his budget problem until next year, when he planned to make long-term pension and retiree health benefits a centerpiece of the FY16 budget battle. By then, the state’s appeals courts also would have issued their final ruling in a legal challenge to the 2011 law’s elimination of $74 billion in cost-of-living increases over 30 years.

Third, deferring part or all of the pension payment for a week or two, then borrowing the $500 million or so needed to make the payment at a low interest rate for a few months, would not cause irreparable harm to the state’s pension system or its unfunded liability.

The pension system would lose just a couple weeks of income on that portion of the pension payment that was deferred. Two weeks of lost income on $500 million at the current projected return-on-investment of 7.9 percent for pension investments, would be just over $1.5 million — not much more than the equivalent of a rounding error on what is projected to be an unfunded liability of $54 billion in the state’s pension system by FY18, when the ramp-up to full funding is expected to be completed.

The more serious consequence, for Sweeney and Democratic leaders, is that it would establish a precedent for Christie to ignore the 2011 pension law in the future by not only deferring, but potentially cancelling, part of a future pension payment.

Finally, Christie could seek to build support for the pension and retiree health benefit changes he wants to make by proposing cuts in state aid and other popular programs as part of his solution to what is expected to be an $800 million-plus gap in next year’s budget, but offering to rescind those cuts if the Democratic-controlled Legislature requires public employees to pay more toward their pensions and health benefits instead.

Democratic legislative leaders have noted that pension and health care payments were already increased substantially for public employees in 2011, and argue that Christie should keep the funding agreement he made.

Sweeney has previously threatened to refuse to pass a state budget and force a state government shutdown) if Christie failed to make the required $1.558 billion pension payment by June 30. However, Christie might welcome a government shutdown over pension issues as a 24/7 news event that would boost his popularity with Republican primary voters in the 2016 presidential polls.

The last state government showdown — which was a Democrat-vs.-Democrat confrontation in 2006 between Gov. Jon Corzine and Assembly Speaker Joseph Roberts (D-Camden) over whether half of a planned sales tax increase would be dedicated to property tax relief – aroused little public furor. Essential state workers — including State Police, prison guards, psychiatric hospital, developmental center and child welfare workers — stayed on the job. The biggest outcry in 2006 was over the closure of Atlantic City’s casinos because of the furlough of Casino Control Commission employees, but they are now considered essential workers, so the casinos would stay open.

However, if Christie builds a $500 million pension payment deferral, for example, into his budget solution for the current year, that would put the onus on Sweeney, Assembly Speaker Vincent Prieto (D-Hudson), and their budget committee chairs, Sen. Paul Sarlo (D-Bergen) and Assemblyman Gary Schaer (D-Passaic) to come up with equivalent savings.

The easiest way, of course, would be for the Democratic-controlled Legislature to pass a “millionaire’s tax” – a permanent or temporary increase in income taxes for wealthier taxpayers. The current top bracket of 8.97 percent kicks in on income over $500,000, and a previous three-stage income tax surcharge imposed by Corzine in 2009 on those earning over $400,000 with a top rate of 10.75 percent on millionaires aimed to raise $800 million.

Sweeney suggested to the Democratic State Committee in Atlantic City on Friday that Democrats should push for a millionaires’s tax even if Christie would most likely veto it – which would be a popular political move with the “Democratic wing of the Democratic Party” that Sweeney needs to woo if he plans to run for governor in 2017 to succeed Christie.

Christie, of course, would also benefit politically with national Republican primary voters by vetoing a “millionaire’s tax” – which he predicted last week Democrats would propose as an alternative.

“It’s like saying you own a restaurant and you’re not making any money and you say to your partner, ‘To make more money, let’s raise our prices,’” Christie said at the Peter G. Peterson Fiscal Summit 2014 in Washington Wednesday, drawing laughter. “That’s not how you get more people to come to your restaurant,” he said. “We’re in competition with 49 other restaurants,” he said.

New Jersey’s income tax is already so dependent on wealthy taxpayers, Christie said, that if the 10 wealthiest New Jersey billionaires moved to Florida, which has no income tax, the state would lose as much income tax revenue as the bottom 2 million income tax filers paid last year.

If Christie vetoed a Democratic-sponsored millionaire’s tax toward the end of June, the governor could simply go ahead and defer part of the pension payment until after June 30 to balance the current year budget, then use his line-item veto power to make the necessary budget cuts for the upcoming FY15 budget, as he did three years ago when Democrats passed a budget built on a millionaire’s tax to fund property tax relief programs for senior citizens.
Christie’s budget veto, which came less than a month after he and Sweeney stood together at Trenton’s War Memorial to laud their teamwork on the 2011 pension bill, led to a short-lived, but very public, falling out between the Christie
and Sweeney that the Senate president used to bolster his Democratic credentials.

A similar public dispute over the budget this summer could once again play to the political advantage of both of the on-again, off-again allies in their respective quests for the Republican presidential nomination in 2016 and the Democratic gubernatorial nomination the following year.