Continued inaction on NJ’s pension crisis risks insolvency: Byrne

Tom Byrne | Asbury Park Press

Show Caption Hide Caption Tom Byrne on pensions Tom Byrne speaks on pensions in this 2016 video.

The state pension crisis registers with most people as distant thunder at most. But just as a hurricane hundreds of miles away begins to roil the ocean water, so too is New Jersey’s pension mess already stirring up problems for beneficiaries and the general public as well. The damage will get much worse as the storm gets closer.

The risk for beneficiaries is direct. There are a wide range of potential outcomes, depending on the uncertainties surrounding investment returns and on whether the state can meet an aggressive schedule of increased contributions.

Certain actuaries say that the state must more than double its contributions to about $6.6 billion annually within the next few years in order to stabilize the system. Other experts believe that the teachers and public employee pension funds may disappear entirely in little more than a decade.

What would happen then?

Most union leaders believe that pensions would then have to be paid directly out of the state operating budget. I wouldn’t bet my retirement on that. We pay about $10 billion annually in benefits directly from the $78 billion in pension funds. It would require huge tax increases to move this obligation to the state’s $37 billion operating budget. That could accelerate the out-migration of individuals and businesses who would find such a New Jersey to be simply unaffordable, thus diminishing the tax base.

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If I were a public employee planning my retirement, I would not rely totally on my state pension. It is the most underfunded state pension system in the country. Even if the federal government were to step in and help, history suggests that they would haircut individual pensions by about 40 percent.

The effect on government functions is less obvious but troubling in other ways. Imagine a pie chart of the state budget. Much of it is consumed by so-called “mandatory” spending on Medicaid, debt service and court-ordered aid to urban school districts. By most measures, discretionary spending is less than $2 billion of the $37 billion annually after aid to suburban school districts. New Jersey is an attractive place to raise a family in part because of good suburban schools. Funding for higher education has already been drastically cut, and similar cuts to suburban public schools and other discretionary priorities could be next even if there are large tax increases.

One might not connect the dots directly between the cost of college in New Jersey and the pension crisis, but there is most certainly a nexus as aid to higher education has been cut in the past decade. Tuition at Rutgers has risen an average of 6.5 percent per year since 2000. Other worthy expenditures are also threatened — whether for direct property tax relief, open space and environmental protection, or public safety.

There is an alternative solution that so far has not been taken seriously in Trenton. The bipartisan Healey Commission on which I served recommended aligning public-sector pension and health benefits with the high end of private-sector plans. The savings would go to increased pension contributions, and be enough to fill the gap in pension funding over time. It involves transferring money from one pocket to the other, and saving the pension system in the process. But the public employee unions saw these proposals as concessions, and decided a better route for them was to elect a sympathetic Democratic governor in 2017. They succeeded.

If we keep raising taxes to pay for outsized benefits, we risk a continued outflow of taxpayers and businesses, and a general weakening of our state’s economy. In recent years, we have suffered a net loss of about $3 billion per year of incomes migrating to other states. That means a permanent loss of $150 million to $200 million in income tax revenue each year. For the past 15 years, New Jersey’s economy has grown at less than a third of the rate of the national economy. Potential job creators in our state must look at our long-term budget mess and wonder if they risk footing too much of the bill if they invest or expand here. And that is part of the reason that we suffer such a large loss of millennials — we don’t have enough capital investment and enough high-quality job opportunities.

The commission’s proposals were straightforward. We said that public employees should be put on a health care plan akin to Obamacare Gold; i.e., the high end of what a Democratic president saw as generous health care coverage. Asking public employees to pay a modest share of their health care costs would save $1.4 billion annually at the state level that could be recycled into increased payments into the pension system. We also said that taxpayers should not underwrite a 7.5 percent annual guaranteed return on pension fund assets, and that pensions should be based on the long-term average of one’s wages rather than a pumped-up income level in one’s last year or years. We calculated that we could recycle another $1 billion annually to increased contributions with these reasonable changes. Those changes plus a modest share of natural revenue growth would get us to full funding.

There is virtually no progress on these proposed reforms in Trenton. In the short term, elected officials avoid taking any heat. But in the long term, inaction is a dangerous proposition — both for public employees and for essential public services and the state’s economy. Politicians may bicker until the last minute when solving a $1 billion budget dispute. But actuarial estimates of the unfunded liability here center on about $100 billion, and that can’t be fixed in a last-minute game of chicken. Our best hope is that a working group on state financial issues appointed by State Senate President Steve Sweeney will forge a consensus among Democratic legislators to take the lead on resolving this crisis.

Tom Byrne was chairman of the State Investment Council for the past three years, served as a member of the New Jersey Pension and Health Benefit Study Commission in 2014-17, and was chairman of the state Democratic Party from 1994-97.