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Balanced Approach Needed to Fix Pension Crisis

The pension crisis has been a conveniently ignored time bomb in New Jersey, but now we are about to light the fuse. A legislative committee just approved a ballot referendum to constitutionally mandate extra spending of over $3 billion now and $6 billion by 2023 on pension contributions – without identifying any source of that funding. In the context of a $33 billion current state budget, that can only mean sharply higher taxes or draconian spending cuts to essential services – or some combination of both.

There is a better way. The pension commission set forth a far more responsible plan based on four key principles: (i) promises made to date to state employees must be kept; (ii) future promises made to state employees should be premised on clearly identified revenues rather than pie-in-the-sky promises; (iii) taxpayers should not have to subsidize more generous benefits than they themselves get; and (iv) necessary spending on education and other key priorities should not be imperiled by putting the state into a fiscal straitjacket. What is unreasonable about that?

Practically speaking, the proposed constitutional mandate means that the public has to pay whatever it will take to fund pension benefits no matter what their cost. This is a potential bottomless pit, particularly if investment returns fail to hit the 7.9 percent annual gain presumed by the state. The carve-out of billions from the normal annual appropriation process would likely result in draconian cuts to school aid and funds for higher education. Many other parts of the state budget are locked into place by various mandates. So among other newly created shortfalls, New Jersey will have fewer resources for quality education. That will mean a less attractive place to raise families, and a less skilled workforce. In turn, this is a prescription for lower economic growth. That will be part of the cost of a fiscal straitjacket.

Ironically, the sponsors of this measure are making a bet on higher economic growth that would produce faster growth in state revenues. The 2011 scheme to increase pension payments over time was based on the same bet that economic growth would make the necessary money appear. That bet has failed cataclysmically. And yet now some choose to double down on an irresponsible bet on revenue growth even as we make it even harder to achieve.

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Democrats have to decide whether they confer special favor on public employees over the interests of others in the middle class that they purport to represent. The pension commission noted that health care benefits accorded municipal employees are far in excess of what the Obama administration would allow before imposing an excise tax starting in 2018 and over $3 billion more generous than the Gold-level benefits prevalent in good plans provided by private sector employers. Reconciling those benefits to the Obamacare Gold Plan level would save $3 billion of the $27 billion in property taxes collected in this state – equating to a property tax cut of over 10 percent.

The pension commission has proposed taking health care savings at the state and local level and using those funds to help fill the unfunded liability in the state pension plans. In contrast, the Senate Democratic proposal in effect asks middle class taxpayers to keep paying for others to get richer benefits than they themselves could ever hope for.

Of course, the $3 billion proposal could also be paid for simply by increasing taxes. But the state income tax, which currently raises about $13 billion, would have to rise by about 24 percent across the board. An increased tax just on millionaires would come nowhere near producing the needed revenue.

We have a pension crisis for two reasons. Some politicians have either written off public employees or taken them for granted and failed to contribute to the pension fund over the past 20 years. Other politicians have tried to curry favor with public employee unions by promising unrealistic increases in benefits and/or contributions. Both approaches have been costly to the state and a disservice to state employees who rely on these promises for a secure retirement. They deserve a reliable payment stream, but not at the cost of crippling much of state government. What is needed is a balanced approach using real numbers rather than irresponsible promises. A constitutional amendment with no clearly identifiable supporting revenue is neither balanced nor responsible.

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