New Jersey is not alone when it comes to having an underfunded public-employee pension system, but a new analysis of budget practices in all 50 U.S. states finds New Jersey is still at the bottom in terms of dealing with its hefty long-term obligations in recent years.
In all, state and local governments across the country now have more than $1 trillion in unfunded pension liabilities, according to a report released yesterday by the Volcker Alliance, an organization led by former Federal Reserve Bank Chairman Paul Volcker that promotes sustainable budgeting and best practices for state policymakers.
With another $600 billion in unfunded healthcare obligations owed to retired employees across the country, those so-called legacy costs pose the “most-threatening” challenge to the overall fiscal stability of the states, the report said.
“Some states are going to be up against it, very shortly,” Volcker said while speaking at a news conference inside the Roosevelt House in Manhattan that coincided with the release of the report.
But while some of the states received good grades for keeping pace with the obligations to their retired employees over the past several years — or for being on course to do so shortly — New Jersey is among a group of states that barely escaped a failing grade as they continue to underfund actuarial-determined pension contributions. And overall, in three of the five different budgeting categories that the states were graded on by the Volcker Alliance, New Jersey only scored a “D” or “D-.”
Still, the organization’s comparisons did offer some signs of hope for New Jersey, including “B” grades in the categories of transparency and budget reserves. A spokesman for New Jersey’s Department of Treasury also said yesterday in response to the report that Gov. Chris Christie deserves credit for making good progress on several budget weaknesses during his tenure, including pension funding.
The Volcker Alliance began its analysis of the states’ budget policies in 2015, releasing an initial report that scrutinized the fiscal practices of just New Jersey, California, and Virginia. The exercise was then widened, with help from faculty and staff at 11 universities, as well as Massachusetts-based consultant Municipal Market Analytics. The goal, according to the organization’s new report, is to better inform the public about state budgeting matters so they can begin encouraging policymakers to improve transparency and overall performance.
“By pursuing this investigation, the Volcker Alliance hopes that drawing attention to prevailing practices — and identifying the strongest and weakest among them — will encourage new efforts to raise standards for all states,” the report said.
But New Jersey fared poorly in the initial comparisons released in 2015, and the Garden State was also among those receiving the worst grades in the latest report.
With an unfunded-pension liability measuring at least $50 billion according to the state’s latest calculations — and much larger by some other estimates — New Jersey earned a “D-” minus in the category of legacy costs. That comes even as the state has been in the midst of ramping up pension contributions over the past several years.
The analysis looked backward at the past three fiscal years, so recent changes the state has made in pension funding — including switching to a quarterly pension-contribution schedule and dedicating state Lottery revenues to pension funding — have yet to produce the positive results that Christie and legislative leaders are expecting them to.
But at $2.5 billion, the state’s current fiscal-year pension payment still comes up 50 percent short of the amount actuaries say the state should be contributing to restore the pension fund to good health.
Low grades in forecasting
New Jersey, meanwhile, also scored “D” grades in the categories of budget forecasting and budget maneuvers in the Volcker Alliance’s latest report. They come after the state budget once again fell short of revenue estimates before the end of the past fiscal year, with the Christie administration closing an estimated $527 million shortfall by delaying payments to towns to cover homeowner property tax relief credits, among other maneuvers.
In recent years, state lawmakers have tried to enact legislation that would overhaul New Jersey’s budget-forecasting process, which now is dominated by the executive branch. Their efforts have been blocked by Christie, a second-term Republican.
The Volcker Alliance’s report held up a consensus-forecasting model that involves several voices representing different branches of government, and even outside economists, as one of the best practices in the category of budget forecasting. Washington, which uses the consensus model to produce revenue estimates, received an “A” grade in the forecasting category and was highlighted in the report.
Reached after the report was released yesterday, New Jersey Treasury spokesman Willem Rijksen pointed to several recent changes to fiscal policies that have been enacted during Christie’s tenure, including a move away from relying on so-called one-shot revenue fixes, and a bill passed in 2011 that forced employees to contribute more toward their pensions.
“While think tanks and academia have the luxury of thinking deep thoughts, from day one the Christie administration has been hard at work fixing New Jersey’s finances and dramatically improving the state’s fiscal outlook,” Rijksen said.
And while New Jersey didn’t come up by name during a panel discussion that covered the potential harm that states can do to their budgets, including handing out lucrative corporate-tax incentives, that conversation came as New Jersey has dangled a total of $7 billion worth of tax incentives before online retailer Amazon in a bid to land the company’s second corporate headquarters.
“States are pretty vulnerable on that issue,” said Merl Hackbart, a former budget director for state government in Kentucy who now teaches finance and public administration at the University of Kentucky.
“Once you pass a tax expenditure, it’s very difficult to eliminate it,” he said.