The Federal Reserve recently announced that it would lend all 50 states, including New Jersey, money in the form of short-term loans. These loans will need to be paid back within three years, but given New Jersey’s financial condition before the current crisis, the state might never be able to pay off the increase in debt associated with the loans. This new debt, therefore, will have a negative impact on the state’s finances in the long run.
Before the coronavirus crisis, New Jersey was more than $209 billion in debt, which amounted to a per taxpayer share of $65,100. While this debt calculation includes $99 billion of unfunded pension debt and $92 billion of unfunded retiree health care debt, it does not include capital debt and is offset by non-capital assets.
For years, New Jersey state legislators and governors have claimed balanced budgets while the state’s debt continually increased. The state was woefully unprepared for any crisis, much less the dramatic one we are currently experiencing. State pension systems are massively underfunded with New Jersey having only 34 cents for each dollar of pension benefits promised and virtually no money set aside for retiree health care benefits promised.
While these Federal Reserve loans will help in the short run to give New Jersey money to pay for critically needed services and benefits, the loans will most likely harm the state and its taxpayers in the long run. The state has no mechanism in place to run the true surpluses needed to pay down debt. In the past, New Jersey has balanced its budgets by borrowing from the future and not providing the contributions needed to fund its pension and retiree health care benefits properly. These practices are akin to people claiming they have balanced their budgets by taking out loans or not paying the minimum payments on their credit cards. To achieve a true surplus the state would have to generate enough revenue to pay for current expenses and would have to provide the money needed to properly fund its pension systems.
Since this is unlikely given the difficult financial times to come, to pay back the Federal Reserve notes New Jersey will most likely have to borrow money from other sources and/or underfund its pension systems even more. If governments choose to underfund their pension systems, getting back on track to properly fund the pension systems will prove to be even more difficult because the retirement plans are currently experiencing investment losses. While benefit amounts will stay the same, more money will be needed from the government to offset the investment losses.
While most people believe these temporary loans are needed, citizens must understand that this new debt most likely will permanently harm New Jersey’s finances. Taxpayers will be paying interest on this debt or on new debt that will need to be issued to repay the Federal Reserve loans; future services and benefits may be cut back and less money may be contributed to the pension and retiree health care systems; and, most likely, taxes will have to be increased.