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A Bleak but Avoidable Future

What happens if we don’t enact pension reform?  Nothing terrible happens immediately, and that is the danger.  Disaster is a decade away, so politicians see no urgency.  But disaster it will be.

Consider this.  The State’s 2015 budget was approximately $33 billion; its pension plans paid out $7 billion in benefits.  That money came out of the $79 billion of pension plan assets.   Let’s fast-forward a decade or so and imagine what will happen if pension plans run dry.

The unions will go to court and say that even if the plans are broke, retirees still have a statutory and contractual right to receive their monthly pension checks directly from the State.  But if the Court said the State doesn’t have to pay $2 billion now, will it mandate a payment of up to $10 billion in another decade?  Moreover, the US Supreme Court has already ruled that states can use their police powers to impair contracts in an “emergency.”  So I wouldn’t bet my pension security on the courts.

Tax increase proposals may be more of a gambit to build political alliances than to actually solve the problem.  First, Democrats don’t have the votes to override a veto, so the pledges of new revenue now may be just another round of illusory promises.  Second, the revenue package addresses only one year and does not address the stepped up revenue needed in subsequent years.  Third, voters reacted violently when Gov. Florio raised taxes.  So who knows if there will ever be enough votes for another multi-billion dollar tax increase.  Finally, the court has made it clear that it does not have the power to raise taxes.

There is some risk that higher tax rates wind up actually hurting pensioners.  If tax rates continue to rise we run the risk of losing key taxpayers to other states.  Relatively few people can have a material impact.  One half of one percent of New Jersey taxpayers account for almost a third of income tax revenues, and only 600 filers  – many of whom may already have second homes outside of New Jersey – account for about $1.4 billion in income tax payments.  We risk a vicious cycle in which once the most affluent start leaving, the same tax burden falls more heavily upon those less able to pay – not a good thing for middle class residents or for pension security.

It is unrealistic to think that we can squeeze the needed pension payments out of the current State budget.  Already, most State spending is mandatory:  School spending ordered by the State’s Supreme Court, Medicaid spending ordered by the federal government, debt service spending mandated by bond covenants, and other categories.  Even if we slashed all other government priorities to fund pensions – things like prisons, environmental protection, higher education and social services – we still would be billions short.  And the discussion about eliminating business incentives to pay for pensions is specious, because those incentives are conditioned upon a business creating specified jobs and making certain investments in NJ – i.e., if the conditions are met, the State benefits by more than the foregone revenues, and if not, the State has no cost – so there is no discretionary cash to reallocate to pensions.

This is not a stalemate; rather, the hourglass is emptying out as the state pension system continues to experience negative cash flow.  Unions need to be wary of promises for 2017 and beyond; after all, former Gov. McGreevey promised to be the best friend that public employees ever had in the Statehouse, and then barely contributed to the pensions.  The rank and file  should remember that Gov. Whitman’s pension bond, which helped to legitimize the drastic slowing of pension contributions from the State operating budget, passed with union support.  State workers, who rely upon and deserve the benefits they have accrued to date, cannot afford another major miscalculation.

That is why the pension commission proposed a constitutional guarantee of funding, which would supersede the recent court ruling.  However, the funding would come from changes going forward to both the state pension plan and to public employee health benefits.  The plan would fully fund the $40 billion hole in the pension funds.  Benefits going forward would be lower, but still as good or better than private sector levels.    The Commission can’t reverse 20 years of malfeasance, but we were able to identify savings to be recycled solely for the benefit of public workers.  We dealt with reality.

If politicians don’t do the same, accrued pension benefits will not be secure.  Soon the funding gap will be too wide for any solution that preserves meaningful benefits for public employees.  Younger state workers might start to worry about a state-sponsored Ponzi scheme in which they might not even get their own contributions back when the pension funds run dry.

This is all avoidable, but not without leadership and political courage.  Over-simplification of this problem will do no favors for public servants who have done nothing wrong and who deserve the pensions they have earned.  Let’s not dither and let the hourglass run out.

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