Christie Targets Medicaid to Close $10.5 Billion New Jersey Budget Deficit

New Jersey Governor Chris Christie may propose cutting Medicaid spending and employee benefits to help close a $10.5 billion budget deficit, even as he considers contributing $512 million to the state’s underfunded pension.

The 48-year-old chief executive, who joined 28 other Republican governors asking President Barack Obama and congressional leaders last week for permission to reduce Medicaid outlays below federally prescribed levels, said in a Jan. 4 interview that “certainly” the program “is one of the things we’re going to have to look at.”

The second-wealthiest U.S. state budgeted $3.1 billion for Medicaid in the fiscal year ending June 30 and was scheduled to receive $1.1 billion in federal stimulus funding, according to the Treasury Department. Christie, who took office a year ago, said he’ll tell lawmakers in his Jan. 11 State of the State speech that New Jersey remains in a financial crisis and they need to maintain fiscal controls as employment and revenue recover slowly from the longest recession since the 1930s.

New Jersey has run consecutive annual deficits for a decade. The governor told reporters last month that balancing the next budget will be even tougher than with the current plan.

“First and foremost is continuing on the path of fiscal discipline,” Christie said in his wood-paneled office at the state Capitol in Trenton. “I’m not going to allow us to revert back to the wild spending that we’ve had for the last decade. It’s going to take years for us to dig out of this hole.”

Deficits Nationwide

States face deficits that may reach $140 billion in the next fiscal year, according to the Center on Budget and Policy Priorities in Washington. The 2009 economic-stimulus bill and the health-care overhaul signed by Obama last year bar governors from reducing eligibility for the state-administered health-care program for the poor and uninsured below a prescribed income level.

From New York to Washington, governors are targeting Medicaid for cuts. New York’s new governor, Democrat Andrew Cuomo, said he wants to lower spending $2.1 billion, the Wall Street Journal reported. Rick Scott, the recently elected Republican governor of Florida, said he is looking to trim the program by $1.8 billion.

Big Hole

Christie may face a deficit next year equivalent to more than a third of his current budget, the nonpartisan Office of Legislative Services projected in July. In the current year, he closed a record $10.7 billion gap by slashing school and municipal aid and skipping a $3 billion pension payment.

The governor didn’t specify how much he may take out of Medicaid. He said he anticipates seeking to trim costs through unspecified efficiencies, after leaving spending on the program intact last year because of the economic slump.

New Jersey will also lose $900 million in federal funding for Medicaid next year, even as it’s required to maintain benefits, under conditions of the stimulus act, according to Michael Drewniak, Christie’s spokesman.

“That’s a big hole to have to fill,” Christie said. “We’re going to have to look at all options. We have to figure out how we’re going to deal with that.”

Contract Talks

Christie said in the interview he’ll also seek savings in contract talks with state workers’ unions later this year, especially since the Jan. 1 expiration of a no-layoff agreement instituted by his predecessor, Democrat Jon Corzine. He declined to provide details. Christie said he’d prefer to make moves through negotiations with unions, not executive order.

“I think collective bargaining is an important process and I want to participate in it fully with the workers of this state so they feel whatever deal they end up getting is a fair deal,” Christie said. “If I have to resort to other tactics, I will, because I have to balance this budget.”

While he wants to cut Medicaid and worker benefits, Christie said he may resume contributions to the state’s pension system for the first time since 2008, when Corzine made a partial payment of $1 billion. The fund had assets to cover 62 percent of its obligations as of June 30, down from 66 percent a year earlier, according to Treasury Department data.

New Jersey’s pension deficit increased $8.05 billion, or 18 percent, this year to $53.9 billion, from $45.8 billion as of June 2009. The state has failed to make actuarially recommended contributions since 2003, according to bond documents. The funding shortage was $28.3 billion in 2007.

Benefits Overhaul

Christie said the pension deficit would have grown this year even if he made the $3 billion recommended payment. He said his ability to make a $512 million contribution next fiscal year will depend on the state’s financial condition.

“There’s a benefit problem,” Christie said. “We need to get at the benefits and we need to get realistic with folks and tell them the truth: promises were made that can’t be kept. We need to go after the drivers of these costs.”

In September, Christie proposed undoing a 9 percent pension increase enacted in 2001, raising the retirement age and freezing cost-of-living raises for retirees. The governor said he will push the Democratic-led Legislature to pass a measure requiring require employees to contribute 8.5 percent of salaries toward pensions, up from 5.5 percent now.

As the economic recovery took hold, the state collected 3.8 percent more revenue in the first five months of the fiscal year than projected as income taxes ran almost 13 percent above estimates, Treasurer Andrew Sidamon-Eristoff said on Dec. 14.

Work Remains

The increase may not herald the end of lean times for the state, Christie and Sidamon-Eristoff said. It may be a one-time infusion as high-income filers avoided potentially higher rates that were averted when Congress approved an extension of the Bush-era tax cuts.

“Imposing fiscal discipline is not a one-year fix,” Christie said.

During his first year in office Christie enacted a 2 percent cap on the growth of New Jersey’s property taxes, which at an average of $7,281 are the highest in the U.S. He also placed a threshold on school superintendents’ pay and limited at 2 percent raises given to police and firefighters by arbitrators when contact negotiations break down.

Getting the economy moving, as well as calls for austerity and job creation, also will dominate the speech, Christie said. The governor will also push a proposal to make it easier for school districts to fire their worst teachers and base pay on student performance.

Christie needs to get lawmakers to approve the remaining items in his “toolkit” of measures designed to help schools and municipalities stay within the new cap, which took effect this year, said Brigid Harrison, a professor of law and politics at Montclair State University. The proposals would cap contract awards and curb payouts for unused sick-leave and vacation days.

“It’s the difference between his being able to achieve political success and just being another politician with promises to lower property taxes,” she said.

To contact the reporter on this story: Terrence Dopp in Trenton, New Jersey, at tdopp@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum in New York at mtannen@bloomberg.net.

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