One year ago, I wrote a column about underfunded pensions being potential time bombs facing most state and local governments. Well, the issue has not only failed to disappear, but with the announcement that Gov. Christie intends to reduce payments to New Jersey's pension plan, the problem has taken center stage.
When it comes to pension-fund stability, it is back to the future, as pension-fund money is once again being used to "balance" budgets.
Christie is facing a budget shortfall of about $1 billion for the current fiscal year that ends June 30, and about $1.75 billion for the next fiscal year. Disappointing growth, spending increases, and aggressive or bad revenue estimates combined to create the shortfalls.
Christie has no choice: He must balance the budget. Unlike the federal government, he cannot run a deficit or borrow, at least from the bond markets. Instead, he must cut spending, raise taxes, or beg, borrow, or steal from other parts of the budget or government. The use of those nontax or spending policies was what got New Jersey into its current fiscal mess.
The budget-balancing option Christie has chosen is to divert funds from the state's pension plan and apply that money to other spending items. In essence, he is reducing spending, but only for one line item: the pension-fund payments that were agreed upon when the legislature passed the pension reform act in 2011.
Past governors have used the supposedly required pension payments to balance their budgets, so Christie is not plowing new ground here.
The decision has both positive and negative implications. Neither tax increases nor spending cuts will be required to balance the budget. But the state's bond rating has already been downgraded, in part because of the poor state of its pension plan, which is underfunded by more than $50 billion. Cutting the pension payments will add to the problem and could lead to future credit reductions, raising the interest rate on the state's debt and increasing its cost of doing business.
This kind of "imaginative" budget balancing creates winners and losers.
The beneficiaries were those businesses and individuals who received the tax cuts or didn't see their taxes rise. Similarly, because some spending reductions didn't occur, those who continued to receive government aid, work on government contracts, get special tax treatment, enjoy government projects such as roadways, or even work for the government, benefited.
In contrast, those whose money was diverted - current and future pension recipients - lost.
As for the politicians, the present and past governors and legislators had the choice of paying their contractual share of the pension plans or using the funds for other purposes. Diverting the pension payments allowed them to increase spending, cut taxes, or deal with economic and financial downturns with less political pain.
But this game cannot go on indefinitely. The fund cannot pay all its liabilities, and the more the pension plan is underfunded, the less will be its ability to pay. Unless something is done, past, current, and future government workers will undoubtedly suffer the consequences for the failure to keep the plan solvent.
Interestingly, citizens who are not government employees have no problem with this budgetary maneuver. That is the case even though the 2011 pension agreement already reduced future pensions and raised costs to government workers.
But the pension reform act, surprisingly, argued differently. By mandating levels of payments, the governor and legislators implicitly agreed that they either had to cut spending, raise taxes, or somehow find the money to meet both their pension fund and other budget responsibilities.
And that is where the rubber has met the road: The governor has refused to raise taxes or cut spending in other parts of the budget and instead is taking all the money, once again, from the pension plan. And that decision has triggered a war between government workers, who agreed to contracts with benefits that were supposed to be funded, and the governor, legislators, businesspeople, and individual taxpayers, who don't want to give up what they got for the money paid for with pension funds.
The bill is coming due. It will be interesting to see who pays: the government workers who already paid for the tax cuts and higher spending levels, or those who were the beneficiaries of that largesse.