Jersey pension system beyond saving at any reasonable cost
For three years now PSI has been warning (see here and here ) that New Jersey had neglected its government employee pension system for so long that the state’s 2010 and 2011 reforms were inadequate to save the system. At some point we said (numerous times) the state would have to admit it could not possibly keep to the refunding schedule it had set for itself.
Yesterday Gov. Christie declared as much when he announced he would help erase the state’s current budget deficit by paring back its pension contributions. But even the payments that Christie announced he couldn’t afford to make amount to about half of what it would cost the state every year to adequately fund its pension system. The numbers, quite frankly, are staggering.
Christie said he would make a nearly $700 million pension payment this year, instead of the $1.6 billion the state originally committed to, and he’s planning to cut next year’s payment to $681 million, from a projected $2.25 billion. The lower figures are what the state estimates it costs to pay for pension benefits that state workers are earning this year; the additional costs are to pay back what Christie describes as the sins of past neglect.
But those higher costs are still just partial payments that understate the real price of fixing the system. In 2010, when the state committed to a new funding schedule for pensions, it gave itself seven years to gradually ramp up payments. We’re only in year four of that schedule. The true cost next year for funding the state’s pension system adequately isn’t even $2.25 billion, it’s about $4.5 billion. By 2018 it will be more than $5 billion.
The problem is that Jersey only collects about $32 billion in taxes and other revenues. States have never historically devoted 14 percent of their revenues to pensions. The norm has been about 3 percent to 4 percent. There is no plan under which a state pays its other bills, accounts for increases in costs, and spends 14 percent of its taxes–or even 10 percent of its taxes, frankly–on pensions.
(Municipalities, which don’t have costs such as Medicaid and transfer payments like local aid, spend a greater percentage of budgets on compensation, including pensions).
Jersey’s pension mess is the result of more than 20 years of shenanigans, detailed in section one of this report, which began with fiscal gimmicks to understate annual contributions, continued with politically motivated moves to increase benefits even as the state’s budget was cratering, eventually included lying to taxpayers and investors about the state of the pension system, and then simply ended with the state stopping all contributions into the system.
Even now, as Rick Dreyfuss, the actuary who co-authored this report, makes clear, the state is valuing the system’s debts optimistically because the cost of genuinely accounting for the shortfalls in Jersey’s pensions are too enormous to contemplate under acceptable accounting standards. The state is still assuming future annual investment gains of 7.9 percent annually though actuaries who serve public pensions are suggesting that the odds of achieving that over the next 10 years are less than 50 percent.
Under acceptable standards, Jersey is insolvent. To be fair (if that’s what you can call it), Jersey is not alone in this. The real cost of saving Illinois’ state pension systems are beyond the fixes the state has proposed. Even the $7 billion annually the state is now spending on pension contributions and repaying pension borrowings falls short. California’s Calstrs’ (teachers) pension system is on a path to insolvency and needs about $4.5 billion more annually for the next 30 years to fix the problem. That would come on top of the demands of its other big pension fund, Calpers, that government employers increase by 50 percent their contributions to it over the course of the next five years. Meanwhile, Chicago’s public safety pensions are less than 30 percent funded and the city is looking at a doubling of contributions–at a cost in property tax increases of more than 50 percent, perhaps, next year.
PROJECTED CHICAGO PENSION CONTRIBUTIONS
Los Angeles is headed towards spending 35 percent of its general fund just on pensions, a predicament faced by numerous other California municipalities. Around New York state, more and more municipalities like Albany are simply not making their full pension payments under a new state plan that allows municipalities to borrow from the pension system. Memphis can only afford about one-fifth the actual annual contribution necessary to wipe out the debt in its pension system.
What more and more places are doing is essentially holding on by their fingernails. They have enough money in their pension trusts to pay current retirees, but the drain on the system continues and reforms fall far short of putting the pension systems on a path to sustainability. The major reason for that in Jersey is that the true cost of fixing the system was simply too staggering for anyone to admit in 2011.
The Christie administration has said that it will offer new proposals for additional pension reforms, including possibly moving workers into defined contribution plans. That’s something the state should have done three years ago, although neither Christie nor Democrats who controlled the legislature proposed it at the time. Even a new system, however, doesn’t wipe out the debt from retirement credits that workers have already earned and that has kept building up thanks to unrealistic market return assumptions.
Democrats in NJ have proposed raising taxes (again), after about $3.6 billion in tax increases under McGreevey and another $2 billion under Corzine, which didn’t do a whole lot of good for the state’s economy and didn’t solve Jersey’s persistent budget and pension problems. But even their so-called millionaires’ tax proposal (actually a half-millionaires’ tax on top of the one McGreevey passed in 2004) wouldn’t begin to solve the state’s pension woes. Jersey simply can’t tax its way out of its staggering pension debt.
There is no precedent for where Jersey is heading now. The recent bankruptcies in Detroit and Stockton give us some guidance on how municipal insolvency will play out when pensions are a contributing factor. States are a different story. So far the solution is to keep putting off the problem because pension debts aren’t quite like, say, a bond payment or your monthly mortgage payment, where when you don’t make them you are in default. That’s how we got into this mess in the first place–by skipping pension contributions because they were too costly–and in many places it’s how we’re continuing to treat the problem.