The can has been kicked down the road as far as it can go.
Monday’s court ruling that Gov. Chris Christie and the Legislature need to come up with nearly $1.6 billion for the public-employee pension system by the end of June is going to turn a tough budget season into a nightmare.
The ruling effectively means — unless a promised appeal by Christie is successful — that Trenton will have to make significant spending cuts with just months left in the state’s fiscal year. Or it will have to find ways to generate new revenue after previous budget shortfalls have already used up most one-shot fixes like delaying property-tax relief payments.
It also means that the Republicans and Democrats will have to hammer out a way to work together, no small feat given what appear to be insurmountable differences.
And complicating matters: Christie running for president.
Christie and other Republicans have sought to address the pension costs by calling for new cuts, while Democrats have faulted the governor for failing to grow the economy, which they argue would make the pension contributions more affordable.
The Democrats have also targeted corporate tax incentives and have pushed for tax increases to pay for pension and transportation spending that the governor has rejected, preferring cuts instead.
Still, a compromise solution must be found — and the Democrats are not short on bargaining power. Christie will need their votes to pass his preferred budget and any new pension reforms.
“No matter what your political party, there is no way to avoid it, this year’s budget has been dealt an extraordinary blow,” said Assembly Budget Committee Chair Gary Schaer (D-Passaic).
The ruling issued Monday by Mercer County Superior Court Judge Mary Jacobson also means the state is going to have to find a way to make a pension contribution closer to $3 billion in the next fiscal year, which starts on July 1. Christie is scheduled to present his state budget proposal to a joint session of the Legislature this afternoon.
Lawmakers were already worried about how the state was going to be able to balance that budget amid sluggish state revenues and other spending needs in addition to the pension system, including a Transportation Trust Fund that will lose its primary source of money starting July 1.
“The fiscal challenges confronting the state are exceedingly large,” Schaer said.
Pension reform was supposed to be a signature issue for Christie, a Republican who is preparing for a run for president in 2016. Reform laws passed with bipartisan support and signed by Christie in 2010 and 2011 attempted to bring the state’s $81 billion pension system, which covers the retirements of roughly 773,000 current and retired employees, back onto a path toward solvency after years of underfunding.
The reforms called for increased pension contributions from employees, as well as increased employer contributions by the state, phased in over a seven-year period.
But a $1 billion budget shortfall during the last fiscal year forced Christie to go back on his word, reducing a planned $1.6 billion state contribution to $697 million. Jacobson in an earlier ruling issued in late June allowed that cut, saying it was the only way to resolve a fiscal emergency because there were no other alternatives at the end of the last fiscal year.
Her ruling Monday, however, found no such dire circumstances in the current fiscal year.
“In short, the court cannot allow the State to ‘simply walk away from its financial obligations,’ especially when those obligations were the State’s own creation,” she said.
Jacobson issued her rulings in response to a lawsuit filed by public-employee unions last year challenging Christie’s cuts. In addition to reducing funds for the pension system out of the prior fiscal year budget, Christie also cut the contribution for the current state budget from $2.25 billion to $681 million, again citing budget concerns.
Jacobson, in Monday’s ruling, recognized the pressure the decision would put on the state budget with just months left in the fiscal year, but wrote it wasn’t enough of a factor to change her mind.
“The court cannot conclude that plaintiffs’ requested relief should be delayed further simply because it may be inconvenient for the Legislature and the Governor to go back to the drawing board in the middle of a budget cycle,” Jacobson wrote.
Christie’s press secretary, Michael Drewniak, signaled in a statement that the administration will appeal the ruling, blaming “liberal judicial activism.”
Christie has also impaneled a commission of experts to study the affordability of both public employee pensions and health benefits, and a final report could be released along with the new budget today.
“The governor will continue to work on a practical solution to New Jersey’s pension and health-benefits problems while he appeals this decision to a higher court where we are confident the judgment of New Jersey’s elected officials will be vindicated,” Drewniak said.
Patrick Murray, director of the Monmouth University Polling Institute, said Monday’s court decision has difficult political implications for Christie as he turns his attention to the Republican presidential primary.
“It’s very hard to play this positively,” Murray said. “He’s really backed into a corner.”
Schaer, the chair of the Assembly budget panel, added, “It is going to be a difficult amount of money to raise. If you’re talking about cuts, those cuts would be radical.”
He continued, “It’s going to be a tremendous challenge. I’m sure the governor’s speechwriters are very busy.”
But Assemblyman Declan O’Scanlon (R-Monmouth) said Christie has been sounding alarms about the crushing cost of public-employee benefits since early on during his tenure, which began in 2010.
“I’m assuming there will be an appeal, but if the ruling stands it only accelerates the truth that the governor has been preaching,” said O’Scanlon, the ranking Republican on the Assembly budget panel.
“This will prove him right, quicker,” O’Scanlon said.
He also expressed confidence in the Christie administration, saying it was forced to close a deeper, more than $2 billion shortfall shortly after taking office during the recession in 2010.
“We’ll figure it out,” he said. “I do have confidence they’re the right people at the helm.”
Still, this time around a solution everyone can live with could be harder to find. Lawmakers in the Democratic-controlled Legislature passed their own budget bill last year that would have funded the larger pension contribution. It relied on legislation that would have increased income taxes on those earning over $1 million and implemented a corporate-tax surcharge to raise more than $1 billion.
Christie vetoed the tax hikes and used the line-item veto to lower the spending bill to $32.5 billion, saying the increases would ruin the state’s economy.
A coalition of organizations held a news conference yesterday in the Statehouse to call for an overhaul of the state’s economic-incentive programs, arguing those tax breaks are taking too much money out of the annual budget, making it harder for the state to afford things like the pension contribution and spending on transportation improvements.
Right now, the Transportation Trust Fund is being supported by the state’s 14.5-cent gas tax, but starting July 1 nearly all the revenue raised from the tax will go to paying down the fund’s existing debt. Christie and lawmakers have been negotiating a new source of revenue for the trust fund, but have yet to come to an agreement.
The members of the Better Choices for New Jersey Campaign said the tax-incentive programs, which offer tax breaks to businesses to either locate in New Jersey or keep them from leaving, need to be refined, adding that by its calculations about $5 billion in revenue has been sacrificed since 2010 even as the state’s jobless rate has trailed the national average.
“It’s clear that New Jersey needs to start charting a new course,” said Jon Whiten, deputy director of New Jersey Policy Perspective, a liberal-leaning think tank.
“We’re sowing the seeds for another surge in income inequality,” said William Rodgers, a public policy professor and chief economist for Rutgers University’s Heldrich Center for Workforce Development.
But, Michele Siekerka, president of the New Jersey Business and Industry Association, said the tax incentives administered through the state Economic Development Authority have been a success. The incentive programs were overhauled in 2013, and anecdotal evidence is thus far very promising, she said.
“You don’t get to see the benefits very quickly,” Siekerka said. “We know that it makes a difference through attraction, as well as retention.”
Virginia Pellerin, a spokeswoman for the Trenton-based development authority, took no issue with the $5 billion figure put forward by the coalition, and also preached patience in evaluating the effectiveness of the incentive programs.
“It is important to assess the results of these programs over time, and the ripple effect the presence of a corporation can have in a community,” she said.