The decision will be released in a couple of hours and there is speculation about what it would mean for Chris Christie:
A win for the governor in court could provide him with a substantial lift to his standing while a loss would provide ammunition to his detractors who argue that Christie’s often heavy-handed tactics have not yielded a long-awaited recovery in the state’s fiscal and economic fortunes.
I, and apparently Paul Volcker*, see it differently.
If Christie is allowed by the court (through whatever legal gymnastics) to skip making that $1.6 billion pension payment then it will signal that no contract with New Jersey as a party is to be taken seriously and further credit downgrades should be coming.
If Christie is told to make the payment but pleads poverty or invokes emergency powers then that speaks for itself. He is is unable to balance the budget and has led us into a state of emergency. Hardly something to impress New Hampshirites.
The truth is that $1.6 billion represents less than two months of payments out of the system to retirees or about two years of payments to investment advisers. The system will not be funded if this payment is made but rather have a real deficit in the ballpark of $164 billion instead of $166 billion.
* The Volcker Alliance report on Truth and Integrity in State Budgeting was fairly hard on New Jersey. Some excerpts:
In this report, we revisited in more detail three states (California, New Jersey, and Virginia) of the six in the original study to learn if their budgetary practices were responding to the revenue growth provided by a recovering economy. The good news is that California has adopted a number of improved budgeting practices. That has helped the state win four upgrades of its general obligation from Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings since 2013. Virginia, which has a history of more-careful budget management practices, has enacted substantial pension reforms but has struggled with underperforming revenues. In New Jersey, large gaps remain in pension and other programs.
Meanwhile, New Jersey has relied on a variety of one-time maneuvers to balance general fund budgets for the three years studied, including sweeping funds out of accounts earmarked for specific purposes, such as the Clean Energy Program. It has accelerated revenue from future budget years, including front-loading payments for a 15-year contract signed with a private sector company to manage the state lottery. It has drained rainy day fund reserves; delayed property tax rebates; and, to achieve a cash infusion, restructured a bond issue backed by proceeds of the 1997 Master Tobacco Settlement with states.
While states tend to prohibit the sale of general obligation bonds to provide funds for operating costs, the budgets of New Jersey and California have been bolstered by debt in past years. Both states have borrowed substantially against money associated with the Master Tobacco Settlement, which was intended to pay a set sum for years. As a result, that money will not be available in the future to cover spending.
While California has taken aggressive measures to get its fiscal house in order, New Jersey is still seeking lasting solutions. The Garden State’s budget practices under both Republican and democratic administrations dating back at least to the 1990s have produced repeated structural imbalances and deterioration in fiscal flexibility and credit quality; rating agencies have downgraded its general obligation bonds nine times since 2010.74 The budget process is centralized in the governor’s office, and chief executives wield significant power through a constitutional requirement that gives them the job of certifying state revenue.
To produce a balanced budget, New Jersey has counted on shifting resources intended for other programs to the general fund and has increased its reliance on borrowing. It does not issue multiyear budget forecasts, and repeated optimistic revenue estimates have resulted in midyear adjustments that are not subject to the usual legislative budgeting process. Against this backdrop, the need to catch up with the state’s $90 billion in unfunded pension and other retirement liabilities weighs heavily on spending decisions. Unless it is reversed by a state court, the 2014 decision by Republican Governor Chris Christie to block a pension-funding schedule agreed to with the legislature means retirement liabilities will keep rising. That will lead eventually to cuts in existing programs, including education and infrastructure investment, unless new revenue can be raised or pension costs reduced.
Like many municipal issuers, New Jersey has sold securities bearing coupons that are above market levels, say 5 percent, when similarly rated bonds of like maturities are yielding less. Investors typically pay more than face value for such securities, and an issuer, such as New Jersey’s Transportation Trust Fund Authority, uses the premium as revenue for the current fiscal year.81 Such use of bond premiums costs the state more in ongoing interest payments than would have been required if a bond were issued at par, or face value. The state’s declining liquidity has contributed to accelerated issuance of tax and revenue anticipation notes. In fiscal year 2015, a sale took place on the first day, July 1.
For decades, governors of both parties have balanced New Jersey budgets by declining to put aside the amount of money actuaries say is necessary, on an annual basis, to ensure that the state will be capable of covering future promised benefits. Underfunding of New Jersey’s other postemployment benefits (OPEB), primarily retiree health care, amounts to $53 billion, or $5,955 per capita. The 2013 unfunded liability for the state portion of the New Jersey pension system was about $37 billion, giving it enough assets to cover only 54 percent of promised benefits. That is equivalent to $4,191 per person, versus a national median in 2012 of $2,962.91 Wilshire Consulting estimates that the funding ratio for state pension plans nationwide was 75 percent in 2013, up from 72 percent in 2012.92 (By, 2014, the estimate of the funding ratio had risen to 80 percent.)
New Jersey’s performance in annual pension funding is poor compared with other states.