NJ Flailing in Deep Waters

New Jersey has a deep pension-funding crisis.

New Jersey has some of the highest debts, lowest credit ratings, highest tax rates, lowest citizen satisfaction rates, and highest out-migration rates of any state. Its responses have proven futile or counterproductive. While the pension crisis has arisen largely from a lack of citizen oversight, the state has recently increased government-worker control. While it has failed to fund its pensions, it has recently made a cosmetic dedication of lottery revenues that will only serve to hide—not correct—underfunding. And while the state already shows signs of tax-base flight, it contemplates enormous tax increases. New Jersey’s future likely requires its officials to reduce pension promises for work not yet performed and to trim some already-granted pensions that run in excess of earnings during working years and reasonable New Jersey compensation levels.
Introduction to Mercatus Working Paper: The New Jersey Pension Crisis

Other notable excerpts (FYI – ‘sclerotic’ means rigid and unresponsive; losing the ability to adapt.)

It has the highest taxes,  the worst business climate (or one of the very worst), the second-lowest credit rating, and one of the most sclerotic state governments of any US state. (page 3)

Meanwhile, these figures fail to account for the fact that the state has never paid its full normal costs, plus full annualized deficit-reduction contribution, in any year and has no plausible plan to do so. The real pension-funding shortfall already runs to about $200 billion (or closer to $300 billion if healthcare benefit promises and local-government obligations are included) if the state uses a risk-free rate matched against current “closeout” obligations. And as ludicrous as these numbers are now, they compound every year, while something less than the full amortized underfunding payments are made. (page 6)

The government of New Jersey, then, has shown no inclination to begin limiting or reducing pension benefits—likely the only effective solution available to it. Rather, it has focused only on patches. These include dedicating the state’s lottery profits to pension funding for 30 years, a plan to which Governor Chris Christie and the general assembly had agreed in 2017; raising taxes (ostensibly, for now, preponderantly on wealthier taxpayers); and the already-referenced transfer of additional authority, without responsibility, to government-worker unions. None of these proposals, though, are even real patches—the type that hold things together for a little while until some permanent solution can be reached. Rather, they are either essentially cosmetic (which is the best possible face to put on the lottery-revenue dedication) or they are actively harmful, like the other two proposals. They are political expedients that obscure the problem and deter its genuine resolution for as long as possible. And each of them demonstrates a fundamental, structural flaw in New Jersey’s government-employee benefit system that the state needs to confront—but that these initiatives not only ignore but also exacerbate. (page 8)

New Jersey faces no real choice but to begin to revise and reduce some of its pension promises; it would be well for the state to act quickly, as further delay only increases the likelihood of more pervasive and less equitable cuts later on. Suggested limitations on pension promises include switching from defined-benefit to defined-contribution pension benefits for work not yet performed (by both current and future employees), installation of payment caps on the largest pension payments, and related cost-cutting measures—all designed with both affordability and equity to all parties in mind. (page 9)

In short, the dedication of the lottery proceeds in New Jersey for 30 years to pension funding was at best an empty, cosmetic gesture. At worst, it facilitates additional underfunding by the state and raises the risk of further unaffordable retirement-benefit increases—increases that, once granted, have proven immensely difficult to withdraw. (page 27)

Disinterested parties generally agree that New Jersey will be extremely hard pressed to fulfill the pension promises it has already made, even to the employees already covered. Nevertheless, the new administration appears set to continue on the current path for as long as it can. Delaying the reckoning will not soften it, however; it will only in crease the likelihood of a still greater crash a bit farther down the road. (page 28)

In New Jersey, then, the only bars to comprehensive pension reform—i.e., reform to bring benefit promises in line with financial possibility and voter tolerance—are statutory. And what statute grants, later statutes can withdraw. (page 29)

19 responses to this post.

  1. Posted by PS Drone on January 3, 2019 at 1:56 pm

    This is way too bleak. We must always remember that while NJ is broke, we are, blessedly, a sanctuary state, will assist illegal immigrants with legal costs if apprehended by ICE, will be increasing the minimum wage toward $15/hr., will hopefully have universal pre-K and free community college and have instituted a State health insurance mandate that flies in the face of the wretched Republican attempt to destroy Obamacare. And, of course, we have, thank God, the strongest teachers’ union in the Western Hemisphere and our beloved first responders are the most highly paid and benefited in the good ole’ USA.

    Reply

    • Posted by boscoe on January 3, 2019 at 2:31 pm

      “Everything happens for the best, in this best of all possible worlds.” Bonus points for attribution….

      Reply

      • Posted by stanley on January 3, 2019 at 7:00 pm

        I was going to say Voltaire, but I had to look it up to be sure. Candide? Right?

        Reply

        • Posted by boscoe on January 3, 2019 at 11:37 pm

          We have a winner. Candide’s ever-optimistic teacher, Dr. Pangloss, never saw a disaster or misfortune he couldn’t rationalize into something wonderful.

          Reply

    • And, of course, we have, thank God, the strongest teachers’ union in the Western Hemisphere and our beloved first responders are the most highly paid and benefited in the good ole’ USA.
      LOL… I rhought yo were talking about Krazee KA, I missed the NJ part. We appear to be twinsies!

      Reply

  2. Posted by geo8rge on January 3, 2019 at 2:29 pm

    “New Jersey’s future likely requires its officials to reduce pension promises for work not yet performed” Let’s say pensions and post-retirement benefits were eliminated for all new workers. Would those workers demand and get large upfront pay increases while NJ would still be paying the pensions of retirees?

    “and to trim some already-granted pensions that run in excess of earnings during working years and reasonable New Jersey compensation levels.” Would more than a ‘trim’ on more than ‘some’ pensions be necessary? How about trimming some bonds?

    The Mercatus Center and the Yankee Inst have a bias that does not allow them to recommend bond defaults. Although it is not clear that there are enough bonds outstanding are enough to make a much of a dent in the unfunded liabilities.

    https://en.wikipedia.org/wiki/Mercatus_Center
    https://en.wikipedia.org/wiki/Yankee_Institute_for_Public_Policy

    Reply

    • Posted by Tough Love on January 3, 2019 at 8:34 pm

      Quoting …………..

      “Would those workers demand and get large upfront pay increases while NJ would still be paying the pensions of retirees? ”

      While it’s difficult to see how we can get out from under PAST service accruals (until a Court allows us to do so in order to meet “essential service” needs), as to the part …. “Would those workers demand and get large upfront pay increases” …….. just say NO, and if you think (with your Public Sector do-the-minimum-with zero-accountability mindset, and desire for cradle-to-grave security) you can do better elsewhere, “good luck” !

      Reply

      • Posted by geo8rge on January 4, 2019 at 8:43 am

        “just say NO” – What if the state workers declare a ‘General Strike’.
        https://en.wikipedia.org/wiki/General_strike

        A General Strike Is Possible
        https://www.jacobinmag.com/2017/02/general-strike-womens-march-may-day-rosa-luxemburg-mass-strike/

        The problem with cutting actual worker salaries is they can actually not work. Cutting retiree benefits can only result in retirees not retiring, aka working.

        The opposite of the General Stike is Ayn Rand’s ‘Going Galt’ where the capitalists leave exit. This may be happening in a sense. I am meeting many working retirees who have changed allegiance to FLA for more than half a year of working and then ‘vacation’ in NJ when the humidity makes being an older person less fun in FLA. The work they do is sort of like pre-retirement consulting, training, mentoring, sort of telecommuting and sales trips. None of which requires being in the home office. FLA is a particularly easy place to fly in and out of.

        Also interesting is that in France it seems ordinary people are disrupting the system, forcing tax rollback not through elections but street actions. Search on Gilets Jaunes (use google translate to read French coverage) and Yellow Jackets.

        “Court allows us to do so” There is a constitutional collision between the legislature’s power of appropriation, contracts, and bankruptcy. I don’t know how it will resolve itself but the weakest parties are bondholders.

        Reply

        • Posted by geo8rge on January 4, 2019 at 9:48 am

          Search on: LAUSD Strikebreakers and LAUSD Strike for job negotiations in bankrupt school districts Like LA unified.

          Reply

        • Posted by PS Drone on January 4, 2019 at 1:37 pm

          No one would notice for about a month if there was a “general” strike. After that, it would be a series of minor inconveniences. Half of the drones are just useless paper shufflers anyway.

          Reply

      • Posted by Marcia on January 4, 2019 at 9:03 am

        When my company froze pensions, they replaced it with an increased contribution to our 401k. I would hope we could do that for public employees as well. I wouldn’t want to eliminate post employee benefits.

        Also, I could see a different structure and still do pensions. If you’ve looked at the Wisconsin model, their guaranteed portion of pension benefit is similar to SS then the rest is based on actual investment return (similar to SS plus a 401k return).

        I think there can be reasonable reforms that can still be good for public employees while being fair to taxpayers.

        Reply

        • Posted by Tough Love on January 4, 2019 at 11:44 am

          There are MANY ways that retirement security can be approached, but my advocacy is that Total Compensation (the total “value” of wages + pensions + benefits) should be quite close in Public/Private Sector jobs that require reasonably similar levels of experience, education, skills, and knowledge………. and right now the PUBLIC Sector has a huge Total Compensation advantage.

          And note that I said the “value” of things like pensions. “Value” encompasses not just the dollar amount of the monthly pension payment, but at how young an age one can begin collecting it (w/o an actuarially CORRECT early-retirement reduction). For example, even with identical monthly payments a PUBLIC Sector pension that begins at age 55 has about 2x the “value” (and hence costs 2x as much to properly fund) than a Private Sector pension that starts at age 65.

          And if the pension formula is ALSO 2x as generous (as is the case for MOST Police Officer pensions), it’s easy to see how in NJ Police Officer pensions have a “value” about 4x that typically granted the lucky few Private Sector workers still accruing benefits in a Final Average Salary DB pension……… and assuredly a much HIGHER multiple of the retirement security now commonly provided Private Sector workers via 401K Plans.

          This structure of forcing Taxpayers to grossly OVERCOMPENSATE Public Sector workers (via FAR more generous pension and benefits than what THEY typically get) is patently absurd.

          Reply

          • “…lucky few Private Sector workers still accruing benefits in a Final Average Salary DB pension.”
            ==
            Close to ZERO rank and file private sector employees have a DB pension. Not even the Fortune 500. UAW, UPS, maybe some of the larger aircraft manufactures like Boeing, MAY have a DB for UNION rank and file employees, but they are very few, and they are nothing like gov DB pensions.

  3. Posted by Tough Love on January 3, 2019 at 8:26 pm

    Quoting …………….

    “Disinterested parties generally agree that New Jersey will be extremely hard pressed to fulfill the pension promises it has already made, even to the employees already covered. Nevertheless, the new administration appears set to continue on the current path for as long as it can. Delaying the reckoning will not soften it, however; it will only in crease the likelihood of a still greater crash a bit farther down the road. ”

    Yes, and THAT’s what you get when you elect a Public-Sector-Union-Ass-Kissing Governor (Murphy).

    Reply

    • Posted by PS Drone on January 4, 2019 at 9:03 am

      The non-public sector taxpayer/voters in NJ ceded control of the State to the public sector about 40 years ago. For those taxpayers, it has been downhill ever since. Idiot Murphy is only a symptom of this long-standing situation. Intelligent non-drones simply must leave the State.

      Reply

  4. Posted by NJ2AZ on January 4, 2019 at 7:46 pm

    Fast and loose analysis of the NJ debt situation leads me to believe that even if they completed repudiated all GO debt (i assume they can’t easily welch on ‘secured’ debt), it still isn’t enough to keep pensioners whole.

    unless the state starts selling assets, pensioners are taking a haircut at some point, its just a matter of how much.

    Reply

    • Posted by NJ2AZ on January 4, 2019 at 7:48 pm

      if they are willing to soak bondholders and welch big time on OPEBs, MAYBE they can pay all the pensions

      of course that isn’t considering that defaulting on all that debt would blow other wholes in the budget when you can no longer borrow money to build anything

      Reply

      • Posted by NJ2AZ on January 4, 2019 at 7:48 pm

        ‘holes’

        damnit

        Reply

      • Posted by Tough Love on January 4, 2019 at 7:52 pm

        Dumping ALL OPEB promises (especially ALL retiree healthcare subsidies for those who retire before the Medicare age of 65) who be a great FIRST step.

        It’s about time Public Sector workers/retiree joined the REAL world.

        Reply

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