Tuesday's ruling is largely hailed as a political victory for the governor, who will announce whether he's running for president later this month. It's also a temporary financial victory for New Jersey. But there are many more reasons why the win is fleeting and will ultimately place more pressure on a financially beleaguered state that can ill afford it. Here's why:
New Jersey still has a really high pension liability.
Although the court said New Jersey wasn't contractually required to put aside the actuarially recommended state contribution each year, that doesn't mean it gets out of what it owes to retirees. The roughly $90 billion unfunded pension liability across the state's three major plans will likely increase next year if the state doesn't start putting in enough money to pay down that debt. Incidentally, thanks to new pension accounting rules, New Jersey's pension liabilities jumped dramatically this year precisely because of the state's history of skipping pension payments.
Both Moody's Investors Service and Standard & Poor's credit rating agencies issued statements that cut short any celebration of the ruling, noting that the decision helps the state avoid a credit crunch for now. But Baye Larsen, Moody's lead analyst for the state of New Jersey, warned that it also "perpetuates severe pension underfunding and rapid growth of state liabilities." And S&P noted that Christie and the legislature "are far apart on how to manage the long-term pension liability," and that not finding a solution will only accelerate the state's liability growth.
New Jersey could still get downgraded. Again.
The three major credit ratings agencies have cut the state's general obligation bond rating three times over the past five years. Its "A" rating is the second-lowest of all 50 states, behind only Illinois. Ratings agencies generally like New Jersey's pension reform law, because it instituted some fiscal discipline for a state that had not consistently contributed to its pension fund since the turn of this century. "Today's decision certainly provides the state with some increased budgetary flexibility, but if the past is any indicator, flexibility around pension payments does not bode well for New Jersey's liability position and is a key contributor to the state's current pension funding situation and deterioration in credit quality," S&P said. If the state does not find a solution to pension and other post retirement liabilities, the agency added, "budget and credit pressure will accelerate and the state's rating could be vulnerable to further downgrade."
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Retirement security for New Jersey state employees is now in doubt.
If New Jersey's retirees and about-to-be-retirees weren't worried about their pensions, they should be now. The state has set aside roughly one-third of the money it said it would give them and has no plans to start making up the difference. The insolvency of New Jersey's pension system could be a real issue in the next year if lawmakers can't resolve this crisis. Speaking at a summit on retirement security this week in Washington, D.C., Steve Kreisberg, the director of collective bargaining for the American Federation of State, County and Municipal Employees, called the court ruling the unfortunate result of a "dysfunctional political system."
To make matters worse, recruitment is at stake, warned Kreisberg. "We find that our younger members value pensions every bit as much as our older ones," he said. Although there is certainly a trend among younger workers in public and private sectors to not stay at their jobs as long as previous generations, many drawn to government are lifers: teachers, police officers and firefighters, for example. "They're not looking to move on necessarily," Kreisberg said, "so pensions really are a good fit for this workforce."
New Jersey still has other big budget problems.
As outlined by a Volcker Alliance report Monday, an outsized pension liability is just one of several overwhelming problems facing the Garden State. New Jersey, the report found, suffers from a "chronic inability" to match its expenses to revenues. In addition to a pension funding gap, the state is also short about $1 billion this year in education funding required under the State Funding Reform Act. And it has insufficient funds to address the state's growing infrastructure issues, in part because the state has been transferring money from those funds to balance the budget in recent years.
The report noted New Jersey's frequent use of budget gimmicks to balance the budget. It is a practice that's been going on since the 1990s, and it's allowed the state to mask a deep-seated fiscal imbalance. "Long term," said Moody's Larsen, "this reinforces the state's ongoing reliance on one-time budget solutions and will perpetuate large structural imbalances and a rapidly increasing pension burden."
