Aug. 4 (Bloomberg) -- Governor Chris Christie faces an array of painful choices for curbing New Jersey’s $52 billion pension burden, and most won’t make a significant dent.
Though the second-term Republican won’t specify proposals he plans to make in coming months, he has spoken of higher employee contributions and retirement ages -- building on his 2011 moves -- and switching workers with fewer service years to a 401(k)-type model. A Democratic option he opposes, increasing taxes on the wealthy, would be only a short-term fix.
Obligations to government workers have strained finances from Illinois to Pennsylvania, forcing governors to raise taxes or cut other costs to balance budgets. New Jersey’s pension system faces bankruptcy unless lawmakers approve a makeover, says Christie, a potential 2016 candidate for president who has made “No Pain, No Gain” his summer mantra as he stumps in favor of a solution.
“The money is not there and will not be there,” he told about 300 people on July 30 in Belmar. “The question is going to be, what is the fairest way for us to deal with the situation that we have?”
The governor initially said he would release his proposals by the end of August. On Aug. 1, he said his plan would come after a panel he is creating to “think big” on pension solutions announces recommendations within 60 days.
Option one: more employee concessions.
Christie won his first round in 2011 when Democrats agreed to boost workers’ contributions, raise the minimum retirement age for new hires and freeze cost-of-living adjustments. The agreement included a pledge to make gradually higher pension payments until the state reached full funding in fiscal 2018.
New Jersey’s pensions were held that status as of 2002. The gap between promised payments and funds to cover them climbed as high as $53.9 billion in 2010 after governors and lawmakers increased benefits and skipped payments.
The concessions that Christie won helped trim the gap to $36.3 billion. His partial contributions, though, increased the hole to $52 billion, with New Jersey’s share at $38 billion.
Christie has said his 2011 overhaul didn’t go far enough to contain costs, which are crowding out spending on services such as schools and public safety.
“We have to pare back benefits,” he told about 200 people, about half of them police and firefighters, in Long Beach Township on July 22. Public workers have pledged to fight the cuts and have Democrats on their side this time.
The crisis demonstrates the shortcomings of the 2011 pension changes, said Patrick McGuinn, a politics professor at Drew University in Madison, New Jersey.
“New Jersey didn’t so much change the structure of the pension system -- what we really did was just cut benefits,” McGuinn said. “That’s a reform in the sense that it helps state budgets. It’s not a reform in the sense that you’re fundamentally changing the design and trajectory of the pension system itself.”
Democratic Senate President Stephen Sweeney has said the 2011 changes would have worked if Christie kept his promise.
After revenue missed Christie’s forecast, he cut a $3.85 billion contribution for fiscal 2014 and 2015 to $1.37 billion. The smaller payments will boost the gap to more than $40 billion by 2016, Treasurer Andrew Sidamon-Eristoff said in May.
“Three years into his own law, he sabotaged his reforms,” Eric Richard, legislative coordinator of the New Jersey State AFL-CIO, said by telephone July 29.
Option two: Create a defined-contribution plan
Assembly Minority Leader Jon Bramnick, a Republican from Westfield, said the state will need to phase in a 401(k)-type plan as an alternative retirement.
Though such efforts in Illinois and Colorado are being challenged by pension members in courts, those states are closer to a solution than New Jersey, according to Alicia Munnell, director of the Center for Retirement Research at Boston College.
“Illinois and New Jersey have traditionally been the worst actors in the country,” Munnell said. “Illinois has somehow got a little bit of religion recently and said, ’Well, we’ve been doing a really bad job.’ New Jersey just keeps making the situation worse.”
West Virginia started enrolling teachers in a 401(k)-type plan in 1991, when the system had enough assets for just 18 months. It voted to return to pensions in 2005.
“The state was faced with a situation where teachers who’d taught for decades had $38,000 in their retirement plans,” said Rob Alsop, who was deputy counsel and revenue secretary to former Democratic Governor Joe Manchin III. The defined benefit “was actually the cheaper plan to administer over the long run.”
Option three: Raise taxes.
This is one that Christie refuses to entertain. Sweeney, the Senate president, said a proposal he made in June to increase levies on millionaires and corporations would have raised $1.6 billion.
If Christie seeks the presidency, any move in that direction could be fatal to his aspirations. Republicans have made opposition to taxes a central tenet for decades.
Residents of New Jersey already pay more than many Americans. It’s second only to New York on a ranking of highest state and local tax burdens in the U.S., according to the Tax Foundation, a Washington-based nonpartisan research group. On an index of the 2014 business-tax climate, New Jersey ranked 49th of 50 states.
Hitting high earners harder wouldn’t address retirement costs that grow each year, Christie said in Long Beach Township.
“You cannot raise taxes enough in New Jersey to pay for the pension hole that’s been dug,” Christie said.
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