New Jersey Governor Chris Christie has been in the news a lot lately for his handling of the Garden State’s budget crisis around government-worker benefits. The New York Times did a piece earlier this week on a confrontation between Christie and teacher Marie Corfield around cuts to education funding, and 60 Minutes featured Christie in a wide-ranging piece on the state of state budgets. Neither of these stories has fully gotten to the heart of why the state now has a $20 billion liability for teacher pensions, and neither of them mentions the fact that only eight years ago the state had a teacher pension fund surplus.
So what happened? A stock market crash certainly hurt, but the state has made its own problems along the way. Through a combination of low contribution rates and benefit enhancements, New Jersey starved the pension beast.
Traditionally, Starve the Beast has been employed by fiscal conservatives to force budget deficits, which in turn lead to demands for reductions in the size of government. The argument goes that if the government spends more than it takes in, it should stop spending. As the chart below shows, this tactic has certainly been employed in New Jersey’s Teachers’ Pension and Annuity Fund. The blue line represents what the state’s actuaries have told the legislature it needs to invest in order to cover its future teacher pension obligations. The red line represents what it actually put in. In only one year of the last 13 did the state meet its actuarial obligation, and it only met it that year, 1997, because the state issued pension obligation bonds to help retire previous underfunding debts. In two years, 2001 and 2002, the state actuary decided the fund required no contributions, and the state gladly complied. In the other ten years, the state has failed to invest enough to cover its teacher pension obligations. Collectively, the difference between what New Jersey should have invested and what it actually put in–the difference between the blue and the red lines–is $5.2 billion.
This is the classic Starve the Beast tactic: Make government programs look unsustainable by not providing enough money to cover their costs. Over time, they look worse and worse.That’s exactly what’s happened, but that’s not the end of the story.
Teachers unions and their Democratic legislative advocates are to blame as well. In 2001, thinking the fund was running a surplus, the state passed legislation increasing government pension benefits by 9 percent across the board. Following the lead of the state contributions, legislators cut teacher employee contributions by a third. In 2003, the state legislature passed another new law adding an early retirement incentive and enhancing teacher pension and health care retirement packages that led to a 13 percent increase in liabilities in 2004 alone.
The combination of low contribution rates and simultaneous benefit enhancements happened in states all across the country, and Governor Christie and leaders like him are now seeking to roll back these increases. Christie still refuses to fund the pension system, arguing that the “totally unsustainable” public sector pensions should be replaced by a 401k-style system. There are plenty of reasons New Jersey and other states should seek to change their pension structures. But the financial messes states are in are of their own doing. The current financial problems of state pension plans are a manifestation of the worst impulses of Republican and Democratic politicians, and it won’t be easy to repair the damage. Understanding how we got here is the first step on the road to recovery.
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Maryann,-Tried to see why you had a cut–couldn’t find any article on cuts to those already retired. This is what explains why they are 20 billion in the hole–what was done in the early 2000’s and the stock market down–seems they need to cut some things for future retirees–need to pay more in and also contribute to medical–remember the salary is in the 80 plus thousands and that would be a tremendous pension and funds are not there. This should not affect you. Can’t figure why you were cut–they should have given you an explanation for this.
I agree completely with this analysis. I only wish it had been placed into the New Jersey media that have covered Christie. The governor has done some necessary steps to put the state back on sound fiscal footing–school aid cuts would have happened regardless of whoever was governor, as would an attempt to exclude the newest state employees, including teachers, from the pension fund and moved them into a 401-K type retirement plan.
Christie’s problems are his “Jackie Gleason” mannerisms and the ways in which he has degraded teachers and public employees. I do not blame him for attacking the teacher’s union president for earning $300,000+ (the governor earns $175,000); any politician of either party would do that in the Garden State. But citing all teachers as “greedy” and “privileged” while refusing to increase taxes on the highest wage earners does not help for sound labor relations.
The state needs to make up at least part of the unfunded liability; quite likely the courts will decide that while Christie is still in office. However, in order to do that, there will need to be some serious restructuring within state government and county/local public school systems. New Jersey has more public school districts than it has municipalities and is administratively top-heavy with duplicate county and local positions. This is not something our citizens can afford much longer. However, they will be receptive to a governor and legislature that tries to hold the line (not cut) property and income taxes while making palatable spending cuts.
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