Analysis: Democratic Tax Plan is Just a Down Payment on NJ’s Fiscal Needs

Mark J. Magyar | June 23, 2014 | Budget, Politics
Christie’s veto of tax increases would leave insurmountable $4.3 billion pension gap to be made up by FY18

Gov. Chris Christie
Gov. Chris Christie’s unilateral decision to slash $2.4 billion in scheduled pension payments is just the latest in a series of budget choices made by governors and legislative leaders over the past two decades that have combined to push New Jersey into a fiscal death spiral that will require exponentially more difficult political decisions every year to reverse.

“We can’t keep kicking the can down the road,” Assembly Budget Committee Chairman Gary Schaer (D-Passaic) warned sternly last month after Treasurer Andrew Sidamon-Eristoff acknowledged that the pension cuts would push the state’s unfunded liability over $40 billion.

Schaer has plenty of experts in his corner.

For three years, blue-ribbon budget committees have been warning that New Jersey’s revenues would not be sufficient to meet the state’s fiscal obligations. That prognosis has been borne out by the Christie administration’s pattern of lurching from crisis to crisis to plug one revenue shortfall after another with increasingly dubious fiscal maneuvers that add to the next year’s problems.

The three bond-rating agencies have lowered New Jersey’s credit rating twice on Christie’s watch, citing the state’s “negative” long-term budget outlook, its failure to address its long-term pension and retiree health-benefit liabilities, and its reliance on “one-shot” fiscal gimmicks to balance its budgets.

Transportation funding experts note that New Jersey has to come up with a new $8 billion, five-year plan for the Transportation Trust Fund a year early because Christie cannibalized pay-as-you-go transportation funding to balance past budgets. What’s more, this time there is no multibillion-dollar rail-tunnel project available for Christie to cancel to avoid raising gas taxes.

Former Republican Gov. Thomas H. Kean has called for a bipartisan panel patterned after the federal Simpson-Bowles Commission to forge a long-term solution to the state’s fiscal crisis that would need to include a mixture of spending cuts and revenue increases carefully chosen not to worsen New Jersey’s economic competiveness.

It is against this backdrop that Senate President Stephen Sweeney (D-Gloucester) and Assembly Speaker Vincent Prieto (D-Hudson) this week are pushing an alternative budget bill that would raise taxes on the wealthy and on corporations to enable the state to make next year’s scheduled $2.25 billion pension payment.

But even the enactment of a $1.6 billion Democrat-sponsored budget package built around a hefty millionaire’s tax and corporate income tax increases — which Christie has vowed to veto — would put New Jersey less than halfway to the estimated $5 billion outlay that would be required under a 2010 law requiring the state to make the full actuarially required pension payment by Fiscal Year 2018.

Even with the Democratic tax package, New Jersey would still have to come up with another $2.7 billion in revenues for pensions three years from now. And if Christie, as expected, vetoes the Democratic tax package — leaving next year’s pension payment at $681 million — the state will have to find an additional $4.3 billion for pension payments by the FY18 budget.

To put that in perspective, the state budget for the current fiscal year that ends June 30 is limping in at $31.5 billion — $1.3 billion below the Christie administration’s revenue estimates. New Jersey’s economic and employment growth ranks near the bottom nationally, and even with a record bull market on Wall Street, total state revenues have grown just $2.8 billion in the past three years.

“New Jersey doesn’t have a spending problem, it has a revenue problem,” Prieto insisted — the exact opposite of Christie’s mantra for the past five years that “We don’t have a revenue problem, we have a spending problem.”

However, Facing Our Future, a bipartisan group of former cabinet officers and high-ranking policy experts, says New Jersey has both a spending and a revenue problem.

“The state cannot grow its way out of its budget problem,” Facing Our Future warned in January 2011. “Furthermore, even if taxes were increased, the increase would never be sufficient to address the long-term gap facing New Jersey. In no year of our research — from 2013 through 2017 — is New Jersey able to achieve a balanced state budget without significant service,
programmatic and employee benefit changes.

“This means that policy makers will need to reduce the state’s spending patterns radically as no projected revenue increase is sufficient to match projected expenditures to fund ‘current services needs, ’” the report concluded.

Ultimately, Christie and the Legislature may have no choice but to increase revenues or cut spending: Superior Court Judge Mary C. Jacobson has scheduled a hearing Wednesday on a public employee union lawsuit challenging Christie’s right to cut state pension payments.

If Christie vetoes the Democratic tax package, Jacobson and, ultimately, the New Jersey Supreme Court could order the governor and Legislature to come up with $1.5 billion for the Fiscal Year 2015 pension payment and to keep to the future pension payment schedule, just as the Supreme Court did in 2011, when it ordered Christie to find $500 million in additional aid for the 31 urban school districts covered under the Abbott v. Burke cases.

But even if the courts do not compel compliance with the 2010 pension law, the problem does not go away. “We know we’re going to have to make the pension payments eventually,” said Assemblyman Declan O’Scanlon (R-Monmouth), who acknowledged that no state has reduced the actual pension checks of retirees. “Each time we push it off, it ends up costing us more money in the long run.”

Christie promised a comprehensive plan to cut the state’s future pension and retiree health benefit costs by mid-June before the Legislature would have to vote on the budget, but it is unclear when the governor will make his recommendations — or just how substantially he can slash the state’s future pension costs.

New Jersey already took $74 billion in savings by cutting cost-of-living increases for retirees in the 2011 pension bill — a provision that also is awaiting a court decision on its legality. That same law already required public employees to pay more toward their pension and retiree health benefits, and raised the retirement age to 65.

Switching current employees to a hybrid plan that combines the current defined-benefit plan with a 401K-style defined-contribution plan — similar to the original Rhode Island plan that Sidamon-Eristoff has praised — might not produce significant short-term budget savings.

Based on court decisions in other states, Christie could recommend requiring retirees to pay more toward their healthcare which could hold down the annual increases in retiree health-benefit costs, now $1.4 billion a year, that Christie complained about in January.

Fiscal experts say there is no viable way to reduce the $51.5 billion unfunded liability in retiree health benefits for teachers and state government employees. The state pays for retiree health care costs on a pay-as-you-go basis, but those bills will soar in future years: Actuaries project that the $1.4 billion the state is paying for retiree health benefits is $3 billion less than the $4.4 billion it should be paying to properly amortize future costs.

As Prieto noted last week, Christie and the Legislature also have to come up with a new $8 billion, five-year plan to renew the Transportation Trust Fund to pay for highway, bridge, and mass transit construction projects this summer because the Christie administration diverted TTF’s pay-as-you-go funding to plug holes in its past several budgets, forcing it to deplete its borrowing capacity a year early.

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