As Governor Chris Christie breaks a pledge to bolster New Jersey’s underfunded public-employee pension system, retirement-plan overseers elsewhere in the U.S. are taking steps to pare their shortfalls.
Christie plans to close his state’s budget hole by cutting $2.5 billion of pension payments this year and next. In California, Jerry Brown proposes closing a $74 billion shortfall in teachers retirement funds. Pat Quinn is seeking to bring the Illinois plan to full funding in 30 years.
Christie’s cuts allow the potential 2016 Republican presidential candidate to curry national favor as a fiscal conservative, with states and cities across the U.S. facing at least $1 trillion of pension gaps, according to the Nelson A. Rockefeller Institute of Government in Albany, New York. The move puts New Jersey at risk of exceeding six credit downgrades under one governor, a record that Christie matched this month.
“They can raise taxes, which Christie doesn’t want to do, or they can cut programs, which the Democrats don’t want to do,” said Richard C. Dreyfuss, an adjunct fellow at the Manhattan Institute’s Center for State and Local Leadership, which favors less government spending. “So Christie’s solution is: ‘None of the above. We’ll just punt.’”
Under a law Christie signed in 2010, New Jersey was to make higher pension payments each year through fiscal 2018 to help make up for a decade of skipped contributions. Christie said this month that the extra contributions won’t happen this year or next after his revenue targets fell short by $2.75 billion.
Christie, 51, says he’s paying for the decisions of past administrations that left the pension system underfunded by $52 billion. The alternative is to cut spending for schools, education and social programs, he said.
“We’re choosing to be responsible,” he told reporters in Trenton on May 20. “We are choosing to not put at risk those programs that I mentioned and those services that the people of the state rely upon, especially on such extraordinarily short notice.”
California’s Brown, a Democrat, this month proposed making school districts double their share of teacher pensions within seven years. In Illinois, which has the worst-funded pension system in the nation, lawmakers in December passed measures to help resolve a $100 billion unfunded liability. Public-worker unions filed a lawsuit on Jan. 28, alleging that the plan is unconstitutional. Their case is expected to reach the state Supreme Court.
Detroit, seeking to resolve its record $18 billion municipal bankruptcy, is including about 30,000 retirees and employees among the creditors voting on the fate of public pension payments. The choices for raising revenue include a taxpayer infusion of $195 million and the sale of a city art collection, including works by Picasso and Rembrandt, appraised by New York-based Christie’s Inc. for as much as $867 million.
For fiscal 2014 and 2015, Christie plans to pay $1.38 billion to the pensions, or $2.47 billion less than he promised. He signed an executive order giving himself permission to alter this year’s payment. He has said he will ask lawmakers to approve next year’s reduced contribution, and to pass more benefit changes. Democrats control the legislature.
In 2010, as New Jersey’s pension gap reached $53.9 billion, Christie won Democratic approval to raise the minimum retirement age, freeze cost-of-living adjustments and charge workers more for benefits. He also signed a law requiring seven supplemental pension payments, starting in 2011, until New Jersey was making the full amount recommended by actuaries.
The funding gap fell to $36.3 billion with the changes, then rebounded to $47.2 billion in 2012, as Christie made only partial contributions. The 2011 overhaul didn’t go far enough to contain costs, the governor said.
Because of Christie’s lower payments, the state’s share of the pension gap, now $38 billion, will exceed $40 billion by 2016 as its funded ratio drops to 50.8 percent from 53.7 percent, Treasurer Andrew Sidamon-Eristoff told lawmakers on May 21. The administration will resume higher payments in 2016, he said.
“Who can force the state of New Jersey to make its own payments?” said Donald J. Boyd, a senior fellow at the Rockefeller Institute, which researches state finances. “Probably no one.”
New Jersey’s credit rating was cut one step to the fifth-highest level by Moody’s Investors Service this month because of Christie’s revenue shortfalls. The action matched downgrades by Standard & Poor’s and Fitch Ratings. Moody’s A1 grade for New Jersey ties it with California and puts it ahead of only Illinois for the lowest rating among U.S. states.
Moody’s and Fitch both have negative outlooks on New Jersey debt, signaling potential for lower ratings. Fitch in a May 21 report said the lowered pension payments would be a negative ratings factor and that the move displays an “inability to deliver a recurring solution.”
Christie, re-elected to a second term in November, has called New Jersey a national example of how to tackle pension liabilities. Now he may become a lesson in the risks of over-promising, said Lisa Washburn, managing director of Municipal Market Advisors, a Concord, Massachusetts-based research firm.
“To actually undo what was seen as progress so quickly after doing it isn’t viewed very favorably from a credit standpoint,” Washburn said. “Not only are you not making the payments, but you’re using it to fund a budget gap. The payments are expected to spike even higher. You are creating an even larger problem down the road.”