In 2010, Governor Chris Christie confronted New Jersey’s crisis of affordability by successfully enacting a strengthened property tax cap and a budget with no tax increases. These Christie initiatives were necessary to begin reducing the tax burden on middle class New Jerseyans, a burden contributing to increasing personal bankruptcy in the Garden State.
In 2011, it is the government of the State of New Jersey itself – and not just its citizens – that may be facing a future bankruptcy. Unless the legislature enacts Governor Christie’s pension reform initiatives, New Jersey is certain at some point after 2018 to become the first state to file for bankruptcy of its pension funds under any future federal statute that gives states the power to file bankruptcy.
The Christie pension reform plan consists primarily of the following three initiatives: 1) rolling back a 9 percent increase that was granted for 2011; 2) raising the retirement age to 65; and 3) requiring that all employees pay 8.5 percent of their salary to the pension. To help fulfill the massive $66.8 billion unfunded promise to future and current employees for lifetime health benefits, the Governor proposes that employees pay 30 percent of their health care costs by 2014, up from the current level of 8 percent, but still below the 34 percent that the average federal worker pays.
In order to understand the urgent need for passage of the Christie proposals, it is necessary to consider the current condition of the pension funds of New Jersey and other states as well.
On Thursday, December 23, 2010, the New Jersey Department of the Treasury released a report stating that the unfunded liability of the state’s pension plans is now $53.9 billion, having grown by $8.05 billion between June, 2009 and June, 2010.
In considering options regarding this massive shortfall, State Treasurer Andrew Sidamon-Eristoff said last March that he had actually researched the idea of sending the state pension system into bankruptcy. Since there is no federal bankruptcy statute authorizing a state bankruptcy filing and discharge, Eristoff determined correctly that bankruptcy was not legally possible.
Eristoff is not America’s only state treasurer to contemplate a state pension fund bankruptcy filing. According to a study by Northwestern University’s Kellogg School of Management, America’s states have an estimated $3.3 trillion in unfunded pension liabilities.
Based upon the data in the Kellogg report, Congressman Devin Nunes (R-California), the principal author of the Public Employee Pension Transparency Act and a rising star nationally in the Republican Party, issued his own report, stating that ten states will exhaust their pension money by 2020, and all but eight states will by 2030. The Nunes report specifically states that New Jersey will exhaust its pension funds by 2018.
As I stated in a previous column, there are two possible solutions to the national shortfall in state pension funds: bailout or bankruptcy.
A federal bailout of the $3.3 trillion state pension shortfall will never happen. This would entail the largest tax increase in the history of the United States of America, and the new Republican U.S. House of Representatives will not consider for one nanosecond such a proposal. After 2012, Congressional passage of such a bailout is even more unlikely, given the high likelihood that Republicans will capture control of both the U.S. Senate and House of Representatives in that election year.
The enactment of a federal statute giving states the power to file bankruptcy also will not happen as long as Barack Obama is President. He maintains a close alliance with the public employees and teachers unions, who understandably fear the enactment of any statute that would grant federal bankruptcy judges the power to rewrite contracts and reduce employee benefits. Thus, Obama would certainly veto any such legislation. He is likely to be reelected in 2012, and therefore, the enactment of any statute giving states the power to file bankruptcy will have to wait at least until after the election of 2016.
In the absence of a
bailout, bankruptcy, or passage of the Christie pension reform initiatives, only two possible circumstances can save New Jersey’s pension funds from running out of money in 2018. The first would be an increase in the value of New Jersey’s pension assets caused by a rise in the Dow to 20,000. That is never going to happen. The second would be the passage of a major New Jersey tax hike. That would be ruinous to the economy of New Jersey, and Governor Christie would never sign such foolhardy legislation.
If New Jersey defaults on its pension obligations in 2018, the leadership of the New Jersey Education Association (NJEA) and the Communications Workers of America (CWA) will, in political terms, echo the war cry of the French revolutionaries on the streets of Paris in 1848 – “Aux Barricades! (To the barricades).” These leaders are foolish, however, if they do not realize that the Christie reforms represent the best hope for continued solvency of the pension funds and maintenance of a high level of benefits.
Chris Christie’s blunt, up front style may not always sit well with everybody. Nobody can deny, however, that he has the courage to dare and the will to do. His bold pension reform proposals are a classic example of sound policy, visionary thinking, and political courage.
Alan J. Steinberg served as Regional Administrator of Region 2 EPA during the administration of former President George W. Bush. Region 2 EPA consists of the states of New York and New Jersey, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and eight federally recognized Indian nations. Under former New Jersey Governor Christie Whitman, he served as Executive Director of the New Jersey Meadowlands Commission. He currently serves on the political science faculty of Monmouth University.