Christie Pension Move Adds $2 Billion to Funding Deficit

Governor Chris Christie’s decision to cut New Jersey’s pension contributions to balance the budget for two years will swell the system’s unfunded liability by more than $2 billion, Treasurer Andrew Sidamon-Eristoff said.

The pension deficit, now $38 billion, will top $40 billion by fiscal 2016 as the funded ratio drops to 50.8 percent for the 2016 year from 53.7 percent, he told lawmakers yesterday.

Christie, a 51-year-old Republican, has reversed course on his pledge to raise pension payments this fiscal year and next, after revenue estimates fell short by as much as $875 million. Reducing the contribution spares other programs, such as hospitals and education, the treasurer said.

“The volatility of our revenue stream is becoming an issue,” Sidamon-Eristoff said. “We’re doing what is appropriate and practical in light of extraordinary circumstances.”

Revenue has come up short of projections for three straight years, driven by optimistic assumptions and a lagging economic recovery that “created recurring mid-year budget gaps and will continue to pressure the budget,” Baye Larsen, an analyst for Moody’s Investor’s Service, said in a report this week.

Budget Hole

New Jersey faces a deficit of almost $2.7 billion over the next 13 months, David Rosen, the legislature’s budget and finance officer, told lawmakers yesterday.

With six weeks left in the fiscal year, the state is $1.07 billion short, Rosen said. Starting July 1, New Jersey will have a $1.59 billion shortfall. Yesterday marked the final time he and Sidamon-Eristoff were scheduled to appear before lawmakers prior to passage of Christie’s budget.

“Our revenue growth is weaker in New Jersey than what one would expect in a growth period,” Rosen said. “New Jersey’s growth lags behind neighboring states.”

This year’s $696 million pension payment will be less than half the planned $1.58 billion. For fiscal 2015, the contribution will be $681 million, less than a third of the record $2.25 billion Christie proposed. The governor expects to resume full contributions in 2016, the treasurer said.

Christie, who has made fiscal rectitude a pillar of his message, signed an executive order giving himself permission to alter this year’s payment, and will ask lawmakers to approve next year’s reduced contribution. Since his first run for governor in 2009, Christie has cited similar lapses in contributions by predecessors as gimmicks that contributed to the state’s poor fiscal health.

Skipped Payments

New Jersey’s pension deficit reached $53.9 billion in 2010 after the state expanded benefits and skipped payments over a decade. The gap fell to $36.3 billion after Christie signed bills to boost employee pension and health-care contributions, raise the minimum retirement age for new workers and freeze cost-of-living adjustments. It rebounded to $47.2 billion as of July 1, 2012, as Christie made only partial contributions.

The governor said in February that the pension deficit had since climbed to $52 billion, including local governments’ share.

Christie signed a law that bound him to make extra pension payments through 2018 to help reduce the unfunded liability. He said he would cover only pension costs “accrued on our watch by active employees.”

“I’m going to pledge to make the payments that we need to make to not dig the hole any deeper,” the governor said May 20. “But in a time when we’re confronted with this type of challenge I cannot also pay for all the sins of my predecessors.”

Tax Shortage

Christie in February proposed the largest budget in New Jersey history, a $34.4 billion plan swollen by rising costs for health benefits, pensions and debt. The plan forecast that revenue would rise 5.8 percent in the fiscal year beginning July 1. Christie is cutting that growth forecast to 3.9 percent and the size of the budget was lowered to $32.7 billion, Sidamon-Eristoff said yesterday.

Senate President Stephen Sweeney, a Democrat from West Deptford, said not passing Christie’s budget is an option. Without a budget in place by July 1 would prompt a partial shutdown.

The governor, a potential 2016 presidential candidate, has refused to raise taxes to remedy the lack of revenue.

“This is a political decision -- it’s all about 2016,” Patrick Murray, director of the Monmouth University Polling Institute in West Long Branch, said by telephone. “Now that he’s not the odds-on favorite of the moderate wing of the Republican Party, he’s got to win conservative voters. He’s got to do everything in his power not to raise taxes.”

‘Really Disappointing’

The extra yield that bond buyers demand to purchase New Jersey debt rather than top-rated munis has decreased this year. Municipal issuance is down 28 percent in 2014 compared with the same period in 2013, data compiled by Bloomberg show. The yield on New Jersey debt maturing in 10 years was 0.22 percentage point above benchmark munis yesterday, down from 0.44 percentage point in January.

That trend may reverse and the yield gap may widen if Christie cuts the state’s allocations to the pension system, said Daniel Solender, who helps manage $15.5 billion of munis at Jersey City, New Jersey-based Lord Abbett & Co.

“For someone who invests in the state, it’s really disappointing,” Solender said. “There’s got to be better things than going after the one item that keeps getting the attention of rating agencies and the investors.”

“This issue is just being pushed further into the future,” he said. “It would seem to be something that should lead to wider spreads for the bonds.”

Six Downgrades

Moody’s cut New Jersey’s credit one step, to A1 or fifth-highest, on May 13. It was the sixth rating cut since Christie took office in 2010. The three major rating companies all cited recurring deficits.

Christie said he doesn’t fear the possibility of more credit downgrades as a result of his pension cut.

“It’s kind of interesting that they continue to downgrade the people who try to act responsibly,” he said. “This is the same group of folks who allowed the financial crisis to occur, in 2006 and ’07 and ’08, and sat on their hands collecting huge fees from their corporate clients and others to look the other way. I don’t know how much credibility these places really have.”

Moody’s and Fitch Ratings both have negative outlooks on New Jersey debt, signaling potential for lower ratings. Fitch in a report yesterday said the lowered payments would be a negative ratings factor and said the move displays an “inability to deliver a recurring solution.”

Reducing Projections

Christie said he’s reducing his revenue projections for this year and next by a total of $2.75 billion.

New Jersey’s $875 million revenue shortfall for the current year was caused in large part by lower income-tax collections after federal rule changes, the governor said May 20.

“Everybody got this wrong,” said Christie, referring to other states that also had misjudged the changes’ impact on revenue. “We did see it coming. We just didn’t see it coming to this extent.”

The governor said in February that public-employee unions and Democrats who control the legislature must agree to changes in retirement and health plans because his 2011 overhaul didn’t go far enough to contain costs.

“Christie said he fixed the pension system,” said Hetty Rosenstein, state director of the Communications Workers of America, the largest state employee union. “Cutting taxes for the super-wealthy while stealing money from pensions hasn’t worked yet. And it won’t work this time.”

To contact the reporters on this story: Terrence Dopp in Trenton at tdopp@bloomberg.net; Elise Young in Trenton at eyoung30@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Jeffrey Taylor, Pete Young

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