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DEFINED BENEFIT

N.J. pension, budget woes test resolve of governor, lawmakers

New Jersey State House, Trenton, N.J.
New Jersey State House, Trenton, N.J.

Like the swallows' annual return to San Juan Capistrano, New Jersey legislators are flocking to the state capital in Trenton to address the annual dilemma of the state budget and the health of the $73.6 billion New Jersey Pension, Trenton.

This year's budget-pension adventure has more moving parts than usual, and each moving part plays a role in the financing and/or management of the pension system.

The legislature must approve and Gov. Chris Christie must sign a balanced budget by June 30 — a state constitutional requirement. For the fiscal year starting July 1, he has proposed a state payment for the pension system of $2.51 billion, up from the $1.86 billion for the fiscal year that ends June 30.

The New Jersey Pension Fund's overall funded ratio was 56.5% based on a July 1, 2016, actuarial valuation, according to the state's Treasury Department. The overall pension fund combines a state component, which has a funded ratio of 44.7%, and a local government component, which has a funded ratio of 73%.

The overall unfunded actuarial accrued liability was $66.2 billion as of July 1, of which $49.1 billion was the state's responsibility.

Other key issues, such as the governor's proposal to use the state lottery to help finance the pension system, do not have a rigid deadline. Aside from the balanced budget, some observers doubt there will be much action on any pension, tax and budget issue until the unpopular, term-limited Mr. Christie leaves office in January.

During his tenure, Mr. Christie has angered public employee unions by withholding some scheduled state payments to the pension system and winning court challenges to withholding payments and to suspending of cost of living adjustments for public employees in the pension system.

“The unions can wait” until next year, hoping voters will elect a Democratic governor and retain Democratic majorities in the General Assembly and Senate, said Carl Golden, senior contributing analyst with the William J. Hughes Center for Public Policy at Stockton University. “A lot of things Christie blocked could be signed by a Democratic governor.”

In his February budget message, Mr. Christie warned that a rising state payment to the pension system “eats up so much of our revenue,” adding that unless there are reforms to state pension and health-care spending, “there is going to continuously be enormous pressure on the state budget.”

Credit concerns

Credit rating agencies agree with the need for pension and budget reforms, but they are also dismayed that the Democratic-controlled Legislature and the Republican governor haven't found enough ways to improve the pension system and the state's budgeting process.

In March, Moody's Investors Service cut the general obligation bond rating by one notch to A3 from A2, citing “continued negative impact of significant pension underfunding, including growth in the state's large long-term liabilities, a persistent structural imbalance and weak fund balances.” The A3 rating is the lowest rung in the “upper-medium-grade” category. The outlook is stable.

In a follow-up report on May 25, Moody's reaffirmed its rating and its concern that the state is relying on “optimistic assumptions about pension investment returns and economic and revenue growth” — a strategy that adds “budget risk.” Rising annual payments to the pension system plus “uncertain” revenue and pension system investment returns could produce a budget gap of $3.6 billion by the 2023 fiscal year, the report said.

S&P Global Ratings gives New Jersey an A- rating with a negative outlook, the second worst state to Illinois' BBB rating and negative outlook. S&P cut the rating by one notch in November, predicting heightened budget pressures in future years and pension liabilities that “will remain a source of downward pressure on the rating.”

S&P hasn't seen much improvement since then, David Hitchcock, senior director for U.S. public finance, said in an interview. “They have consistently overestimated revenues in past years,” he said. Payments to the pension system “are starting to squeeze out other payments.”

Revenue slips

State records show that actual state revenues often fall below original budget estimates — five times in the last seven fiscal years.

The Moody's May 25 report noted the state recently cut its fiscal year 2017 revenue growth forecast from the previous fiscal year to 2.9% from 5.3% in the original budget. State Treasurer Ford Scudder told legislators in mid-May that revenue would fall short of estimates by $527 million for the fiscal year that ends June 30.

The lower the overall revenue, the bigger the impact of the state's rising schedule of pension system payments will be on all state services. The non-partisan New Jersey Office of Legislative Services predicted in an April report that projected revenue for fiscal 2018 will be $213 million less than the governor's budget had forecast.

Legislators also must determine how to reconcile future projected gaps in operating fund revenues — the source of state pension payments and other benefits — thanks to a deal made earlier this year between the governor and the Legislature.

They agreed to cut certain taxes to offset an increase in the gasoline tax that supports the state's transportation trust fund, which provides money for road, rail and other transportation infrastructure projects.

The agreement was equivalent to “kicking the can down the road,” said Marcy Block, senior director, U.S. public finance, Fitch Ratings. The firm estimates that the trade-off will remove $8.4 billion from total operating fund revenues over eight years. The gas-tax money cannot be used for general operations.

Fitch maintains an A rating/stable outlook for New Jersey, but it warns that “state inaction to address the operating fund stress” caused by the tax cuts “will pressure state operations and crowd out other priorities beginning in fiscal 2020,” according to its latest report, issued in April.

“The steady deterioration in the funded status of New Jersey pensions has been and remains a negative rating factor,” the report said. “The progress toward fully funding the pension (actuarially required contribution) provides some offset, albeit over an extended time period.”

Legislators also must decide how or if they support a recent proposal by Mr. Christie that would make the state lottery an asset of New Jersey Pension Fund, boosting the funding ratio for the state's component of the New Jersey Pension Fund to 58.9% from 44.7%, according to the Treasury Department.

Making the lottery a pension fund asset would inject an immediate reduction in long-term liabilities of $13.54 billion and provide approximately $37 billion to the pension fund over 30 years, the Treasury Department said.

The state attorney general issued a ruling that the proposal was constitutionally valid, protecting the recipients of lottery funds such as education and health services. No legislator has yet introduced a bill supporting the governor's proposal, which would require using general funds to finance items now embodied in the state constitution's requirement for lottery receipts.

“It's hard to comment if (the proposal) doesn't move ahead,” said Ms. Block. “We don't take it on its face. We have asked for more information about their basic assumptions.”

While ratings firm analysts wait for the legislators' and Mr. Christie's next moves, Stockton University's Mr. Golden, a long-time political aide and observer, has little doubt about the future. “It's not a pretty picture for the post-Christie era,” he said. “The new governor will have a boatload of fiscal problems.”