Pensions, Transportation and State Spending

Almost $6 billion of the OLS structural deficit projection for the next fiscal year is based upon assumptions about how much the state will need to fully fund school aid, municipal aid, property tax rebate programs, the senior citizen property tax freeze and other programs at the level authorized under state statutes, to restore the higher education cut, and to fund the usual increase in state salaries and health benefits.

Christie points out that he has no intention to do so. “This is a mindset that says, ‘We’re going to build back all the cuts the governor made this year, and we’re going to then give it the hands-off-the-wheel enhancement,” Christie noted in his Wednesday press conference. “The new bar is set. The place to reduce from is where we are now.”

What that means is that in Christie’s eyes, the additional $2.3 billion needed to fully fund the school aid formula is largely a mythical number, unless the state Supreme Court rules otherwise. The $330 million to fully fund the municipal aid formula or the $272 million to restore cuts to higher education funding fall into the same category.

Christie is developing a plan for direct property tax credits to replace the $2.242 billion OLS is projecting to fully fund the old Homestead Rebate program and the Senior Citizen Freeze for all those eligible under the law. He did, however, put aside less than $300 million for a fourth-quarter credit in this year’s budget and had made no commitment on how much he will spend next year.

Similarly, OLS projects $400 million for salary increases and benefit increases for state workers in the new contracts Christie will be negotiating to take effect July 1, 2011. But Christie has been campaigning publicly against the unions and certainly does not anticipate such a first-year cost increase.

There are two categories of new spending Christie will most likely have to deal with in next year’s budget that are identified in the OLS forecast. First, the $300 million in increased Medicaid spending because of health care cost inflation will be difficult to cut, unless Christie can get the legislature to go along with a cut in some of the optional benefits offered by the state, which is unlikely. Second, Christie has already said he plans to cover the cost of funding transportation capital programs within the existing budget, although he may not be willing to go as high as the $800 million figure projected by OLS.

That leaves the cost of fully funding the state’s pension obligation, which OLS projects at $3.530 billion for the next 20 years, up from $2.5 billion in OLS’s forecast the year before. For two decades, that figure has been growing, as governor after governor failed to put the needed funding into the budget to cover the state’s future pension obligations. Christie followed Corzine’s lead from the year before in not putting anything into the budget for pensions, asserting that the pension reforms he is planning could markedly reduce the state’s obligation.

But that’s not what OLS projections show. “Our projection of the state’s pension obligation is based on what it would take to fully fund pensions over a 20-year period,” Rosen said. “Pension income is based on a five-year rolling estimate, so adding another subpar year on pension investment income to three earlier down years pushes up your number. But much of the increase from year to year is based on the failure of the state to make payments the year before. Every year you put off the problem, the eventual cost of the solution grows.”

To put that $3.530 billion a year pension figure in perspective, the state would have to raise the income tax by 35 percent or hike the sales tax from 8 percent to 11 percent to generate that kind of revenue this year, and the magnitude of the problem gets worse every year.

When the Assembly Budget Committee takes up the issue next week, expect chairman Greenberg to make that point in the first five minutes.