By Scott Shepard

In the past few weeks, Gov. Phil Murphy and the state Legislature enacted major tax increases and made a record-breaking payment to New Jersey's deeply underfunded pension funds. Last week, Senate President Steve Sweeney, D-Gloucester, proposed structural reforms and spending cuts that would, if enacted, marginally improve New Jersey's financial condition.

But these moves -- made in good faith by leaders who inherited a mess -- don't change the unaddressed, underlying reality: New Jersey has made promises to state and local government workers that cannot possibly be met.

Sooner rather than later, New Jersey will have to cut these promises -- not just for future hires, but for current employees. The real question is how to limit the damage. That's where real options can be found that are relatively fair, given the circumstances.

The new taxes, however extensive, will not generate enough revenue to pay off the current pension promises. The corporate tax increase is ostensibly only temporary -- a move made to convince businesses to ride out the losses rather than decamp for lower-tax locales. If it is not made permanent, the new revenue will dry up. But if made permanent, the tax hike will drive away even more native businesses, lowering total tax receipts.

High earners may also take flight to other states. Some have already left for sunnier, cheaper shores. New Jersey had already lost more native-born, relatively wealthy citizens, and houses more residents who say they're ready to go than any other state. More people, now faced with losing more than a dime in every dollar to Trenton, will surely follow. What then?

Meanwhile, even the $3 billion-plus contribution budgeted for the coming year will not sustain current pension promises. The actuarially sufficient number is almost certainly well north of $5 billion per year. There is no reasonable scenario under which such massive annual payments can be made, considering that even this year's payment relies heavily on short-term gimmicks.

That leaves the conclusion no one wants to come to: cutting benefits. This must be done as soon as possible, with as little pain as possible. The longer the state waits to admit reality, the worse the cuts will have to be.

Having admitted the truth, leaders should start by developing a final, new, affordable tier of benefits to apply not only to all future workers, but to all work not yet performed by current employees. It isn't fair that more cuts fall on the youngest workers, as they have for years.

This new tier of benefits should consist mostly of pension vehicles that resemble the 401(k)s available to private-sector workers. These require worker contributions coupled with "defined contributions," rather than "defined benefits." That way the state knows, and can fund, exactly what it's promising.

Next comes the harder part. The state should then figure out -- using theoretically sound rates of expected investment return and without the all-too-common accounting gimmicks -- exactly how big the rest of the bill is for work already performed.

If it's too big to realistically pay, then New Jersey will need -- finally -- to do the politically ugly but financially necessary thing: start cutting already-earned pension benefits.

There are relatively equitable ways to do this. Set an absolute cap of perhaps $100,000 or $125,000 per year, indexed to inflation, on benefit payments. Cut benefits that pay current or future retirees more than they earned in base salary while working. Reduce "spiked" benefits. Do this while completely safeguarding benefits below a certain comfortable-retirement threshold.

None of this will be fun. But if the promises can't be met, honesty and fairness requires that what must be done, be done quickly.

Scott Shepard is the author of a new study on New Jersey pensions published by the Mercatus Center at George Mason University.