Underfunded NJ pension prompts tough choices -Volcker group

Thu Dec 13, 2012 10:42am EST

Dec 13 (Reuters) - Fixing New Jersey's nearly $85 billion funding gap for public pension and retiree healthcare benefits will "crowd out" future budget items and prompt tough decisions, according to a report by a national task force on Thursday.

"Balancing the state budget on an annual basis will remain a very daunting challenge, as program needs will continue to increase at a rate and an amount greater than current revenues," the report said. "Long range challenges are even greater."

The report was one in a series released by the nonpartisan State Budget Crisis Task Force, led by former Federal Reserve Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch.

New Jersey, like other states across the country, is facing growing pension requirements and increasing costs for employee and retiree health benefits.

Those costs add to the already heavy burden of Medicaid and education spending, the two biggest spending items in New Jersey and many other states.

Spending on Medicaid, school aid, health benefits and pension costs combined will grow by a projected $9.2 billion over the next five years in New Jersey, the report found, based on current spending patterns.

That's more than the state's total projected revenue growth over the same period, according to the report.

New Jersey has made changes to its pension system aimed at lowering costs in the future. But the underfunding problem was years in the making, with the state failing to contribute what it was supposed to for two decades.

Republican Governor Chris Christie doubled the state's contribution to the pension funds, putting in $1 billion in fiscal 2013. But that was still only about a third of the state's actuarially required amount, Standard & Poor's Ratings Services has said.

New Jersey's seven state-level pension funds covered about 777,000 members as of June 30, 2010, the most recent data available.

LONG-TERM BUDGETS, OTHER IDEAS

Other uncertainties also loom over state budgets, including talks in Congress to reduce the federal deficit. If talks are unsuccessful, large spending cuts and tax hikes will start to go into effect on Jan. 1.

Any deal could also reduce some federal aid to states. New Jersey gets on average nearly $12 billion a year from the federal government.

That means that even a 10 percent reduction in aid to states would leave New Jersey with $1.2 billion less in federal funds, the report noted.

Ravitch and Volcker formed the task force in June 2011 in response to concerns over persistent state budget imbalances.

Their July 2012 task force report focusing on California, Illinois, New Jersey, New York, Texas and Virginia found that rising health care and pension costs, along with volatile tax revenue and federal budget cuts, threatened state budget stability.

New Jersey would be better able to make tough budget choices if it enacts some new measures as it tries to fix its pension problem, the report found.

The state should include in its budget the projected expenditures and revenues for five years into the future. It should also reinvigorate its rainy day fund, which ran dry in 2009, with overages now being put in to the state's general surplus instead.

Unlike most other states, New Jersey also does not include federal funds and dedicated revenues as part of its formal budget, but it should. Doing so would show that the state's fiscal 2013 spending budget is closer to $48 billion than $31.7 billion, the report found.

Christie should also create a citizen commission to review the state's entire tax code - a progressive one that can lead to sharp upturns when times are good, and hard downturns when the larger economy sours, the report said.