Senator Proposes Using Budget Surplus to Boost State Pension Payment

Calls for taking $500 million of expected extra revenue to nearly double additional contribution proposed by Christie

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Just like a homeowner trying to decide whether to replace an aging roof or put more cash into a savings account, an improving outlook for state tax collections has led to a debate in Trenton over the best way to use a growing surplus fund.

The spending plan that Gov. Chris Christie has proposed for the next state fiscal year would increase the surplus account to nearly $800 million, a marked improvement over some recent budgets when the surplus was less than half of that amount.

If Christie’s plan ultimately survives upcoming budget negotiations with lawmakers, that would be the state’s largest proposed budget surplus in a roughly a decade.

But at least one veteran Republican lawmaker is already suggesting a different way to use the money, saying the extra cash should ultimately end up in the state’s chronically underfunded public-employee pension system.

His proposal, however, has not been embraced by Democrats who control the Legislature or by public-employee unions. They want the state instead to be required to make much larger pension contributions. And though New Jersey also needs a new source of revenue for the state’s Transportation Trust Fund, the Democrats right now are hoping to convince Christie to fix that problem, not with surplus, but with some new borrowing and possibly an increase of the state’s gas tax.

‘Rainy day’ fund

The state’s surplus fund has traditionally served as the budget’s “rainy day” safety net account, keeping available extra cash that can be used when there are major revenue shortfalls or to cover spending needs that arise unexpectedly.

Budgeting experts generally recommend that states maintain a surplus fund that socks away at least 3 percent of total spending, which would be about $1 billion based on the state’s current total budget of roughly $34 billion.

But Christie has gone through some recent fiscal years with surplus funds that have totaled as little as $300 million, or roughly a third of what’s recommended. And that practice didn’t go unnoticed by major Wall Street credit-rating agencies. It was mentioned along with several other factors in a series of downgrades issued during Christie’s tenure that has left New Jersey with one of the lowest debt ratings among all U.S. states.

The state’s thin surplus accounts have also had more direct consequences for many New Jersey taxpayers in recent years. Christie at times has been forced to delay property tax relief payments to close budget shortfalls that grew larger than the size of the surplus fund.

This year, however, state tax collections have largely matched the governor’s growth projections. That’s allowed for a modest padding of the surplus account as the fiscal year has progressed.

The $34.8 billion budget that Christie has proposed for the fiscal year that begins July 1 would continue that improvement. Christie has proposed an opening surplus of $787 million surplus, which is more than $150 million larger than the surplus at the start of the current fiscal year.

The opening surplus for the 2017 fiscal year would also be “higher than any budget proposed during the past ten fiscal years,” Christie’s administration said in a budget summary attached to his proposed spending plan.

But just as Christie is proposing to continue building up the surplus account in the new fiscal year, longtime Sen. Joseph Pennacchio (R-Morris) said he plans to draft a resolution this spring that would eventually earmark the extra revenue for the state pension system.

Putting a dent in deficit

If the Christie administration can make it all the way through the 2017 fiscal year without needing to tap the surplus account, Pennacchio said, $500 million should then be taken from the surplus and invested in the pension system, which right now is running at a deficit of at least $40 billion.

“I endorse freezing all spending in the governor’s FY17 budget as he proposed it and eliminating any of the usual requests for legislators’ spending additions,” Pennacchio said.

Under Pennacchio’s plan, the extra $500 million would be added to the $560 million increase in the pension payment that Christie has already proposed. Under Christie’s plan, the pension payment would increase to $1.86 billion; the payment would rise to $2.36 billion using the extra $500 million Pennacchio would allocate from surplus.

That would set a new record for the state. But it would also still fall short of the $3.8 billion contribution called for in a bipartisan pension reform law that was enacted by Christie and lawmakers in 2011.

Improving the condition of the state’s $73 billion pension system has been a long-term goal for Christie, but in 2014 he backed away from a promise made in the 2011 reform law to make increased state contributions over a seven-year term.

The pension reform law also required public employees to contribute more toward their pensions.

Public employees took the Christie administration to court in the wake of his broken pension-funding promise. When the case made it all the way to the state Supreme Court last year the justices ultimately sided with the governor.

The high court is scheduled today to hear oral arguments in another major pension case involving cost-of-living adjustments for retirees that were suspended under the 2011 reform law.

Pennacchio, a former member of the Senate Budget and Appropriations Committee, said earmarking the $500 million budgeted for the surplus fund would help the pension system “without raising taxes, cutting public services and jeopardizing job growth.”

“New Jersey Republicans have always said we will support making the biggest, fiscally responsible state pension payment,” Pennacchio said.

But his proposal also comes as Democratic legislative leaders, with full support from public-employee unions, are seeking to restore the health of the pension system through a proposed ballot question. If their proposal wins final legislative approval in the coming months, voters would be asked this fall to approve inserting into the state constitution a new schedule of ramped-up state pension contributions.

The annual state pension contribution would eventually grow to over $5 billion starting with the 2022 fiscal year, under the Democrats’ proposal.

A spokesman for Senate President Stephen Sweeney (D-Gloucester), the sponsor of the ballot question, declined comment when asked about Pennacchio’s proposal on Friday. Although Christie has repeatedly decried the proposed ballot question — saying it could bring on massive tax hikes or budget cuts — the governor’s office did not respond to a request for comment on Pennacchio’s plan.

A spokesman for the New Jersey Education Association, which has been perhaps the loudest backer of Sweeney’s plan – and the biggest critic of Christie’s handling of the pension issue – said union officials need to see more information about Pennacchio’s proposal.

But NJEA spokesman Steve Baker also pointed to the state’s failure over the last two decades to make the full pension state contributions calculated by actuaries.

“That’s why we support a constitutional amendment to require regular, responsible funding,” Baker said. “We don’t need more pension funding proposals. We need a pension funding guarantee.”

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