Budget Breakdown: How does this year’s budget address pensions?

July 13, 2018 | Politics

The new state budget signed into law by Gov. Phil Murphy earlier this month hiked state spending by more than $1 billion. A major portion of that increase is going to something that most New Jersey residents know very little about: the state’s grossly underfunded public-employee pension system.

In all, the new budget adds $700 million to what the state will be contributing to the retirement plans for teachers, judges and other government workers during the 2019 fiscal year.

That will push the total state pension contribution to a record high of $3.2 billion, which is enough money to build two more MetLife Stadiums in the Meadowlands.

It’s also nearly 10 percent of the entire state budget, which now totals $37.4 billion, also a record high.

But despite the planned record spending on the pension system, New Jersey still has a deep hole to dig itself out of. The state’s worker-retirement funds are routinely rated as being in the worst shape of any in the nation, and that’s due, in part, to a long history of prior New Jersey governors and Legislatures ignoring the payments that were recommended by actuaries who closely study the pension system. Instead, they chose to use some or even all of that money for other purposes, or to offset tax cuts.

By some estimates, the state is now $80 billion in the hole, which is enough money to build another 50 MetLife stadiums, or to run the entire state government for a full two years.

So just like someone who falls behind on their credit-card bill after skipping a series of payments, the debt doesn’t go away and eventually the bill comes due. For New Jersey, that means the state now has to play catch up to ensure the pension system remains solvent. Under a payment plan that was established several years ago — in the wake of a series of costly state credit-rating downgrades — New Jersey is trying to boost its pension contribution incrementally each year until the full amount pegged by the actuaries is being paid.

This year’s record contribution will equal about 60 percent of the payment that the state should be making, meaning Murphy will have to book billions more for the pension system over the next few years if he wants to stick to the schedule that will eventually get the state up to the full funding of its pension obligation.

Murphy’s predecessor, former Republican Gov. Chris Christie, had pressed lawmakers to reduce pension-funding costs by changing worker benefits, and even by moving some employees into a different and cheaper retirement system that would more closely resemble the 401(k) plans that are now popular in the private sector. But the Democrats who control both houses of the Legislature resisted those more drastic changes.

Looking beyond this year’s budget, the pension contribution is set to increase again next year, to near $4 billion. That could force Murphy, who is also a Democrat, to consider making some benefits changes that would ease the pressure on the cost side of the ledger. Another option would be to increase taxes, which is what Murphy and lawmakers decided to do this year to keep pace with the growing pension obligation.

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