Alaska Prepares, Municipalities Brace for $3 Billion Pension Contribution

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Most of the news coming out about pension contributions lately has centered on states who aren’t paying enough. But this news item is different–this is about a state going above and beyond the call of duty to try and fund its struggling pension system. That state is Alaska:

Moving to preserve the state’s top credit ratings, Republican Governor Sean Parnell signed legislation last month that takes the unprecedented step of tapping Alaska’s budget-reserve account to pay unfunded pension liabilities. It will pull $3 billion from the pool to reduce a $12 billion gap.
Home to the nation’s third-largest onshore oil reserve, Alaska gets 90 percent of its operating budget from crude-production taxes and royalties. It’s been saving oil proceeds for decades for when the wells run dry. Alaska is just one of nine states with top scores from Moody’s Investors Service and Standard & Poor’s, and it’s seen how pension deficits have hurt the credit standing of states such as New Jersey and Illinois.
“A year ago when I went to New York City and spoke with the rating agencies to make sure that we maintained our AAA financial credit rating on our bonds, they identified our unfunded pension liability as the single biggest risk,” Parnell said during a signing of the bill June 23 in Juneau.

In all, Alaska will put $1 billion in its PERS fund and $2 billion in its TRS fund. The system, which sports a funding ratio of just under 60 percent, is one of the unhealthiest in the United States.

It’s already figuring out where to put the PERS money. According to Pensions & Investments, $400 million will go to international managers, $200 million to a State Street Advisors Russell 1000 Index Fund, and a combined $400 million will go to fixed-income investments.

Alaska’s money-shifting is just one change to the state’s pension landscape. The other: a recently implemented law that extends the amortization period to 2039 and requires future contributions to be calculated based on level pay amortization. The goal: to boost the funding levels of PERS and TRS to 68.8% and 73.3%, respectively. But state municipalities don’t quite share that vision, mostly, they say, because much of the cost will fall to them.

Extending the amortization period, the time over which that debt would be paid, is comparable to the difference between a 15-year and a 30-year mortgage, [Alaska Retirement Management Board member] Kris Erchinger said. Essentially, the longer period allows lower monthly payments, but at a much greater total cost.
“It’s a better deal for the folks who have to balance the budget today because they have to pay less today,” she said.
“But projections of decline in oil production — oil revenues — does not bode well for our ability to pay those costs in the future,” Erchinger said.
While retirement board member Martin Pihl of Ketchikan joined Erchinger and others in praising the $3 billion, he doesn’t like the Legislature’s cost shift.
“I do have deep regret over what I feel is the unnecessary extension of the amortization period, bringing huge, huge, additional cost — like more than $2.5 billion to the people across Alaska — and forcing even greater numbers into state budgets down the line,” Pihl said.

That increased cost for municipalities stems from a 2005 deal in which state and local government officials negotiated a way to pay off the unfunded liability. It called for municipalities to pay an extra 22 percent of their payroll toward the back debt until it is paid off. Extending the amortization term by nine or 10 years increases the cities’ share while reducing the state’s share of that cost.

Board member Sam Trivette of Juneau said the level-percent-of-pay method adopted by the Legislature will result in less money going into the retirement trust funds initially, weakening them and driving up costs in the long run.
“That’s why we supported level-dollar,” he said. “A shorter amortization period saves everybody billions of dollars.”

Alaska’s oil revenues have allowed it to keep two rainy-day funds stocked with cash. The plan was always to use the funds to cover revenue shortfalls in years when oil prices drop, and to provide payouts to residents. But using the money for paying down pension obligations is a first:

One [rainy-day fund] is the $52.7 billion Alaska Permanent Fund, created in 1976 as the trans-Alaska pipeline neared completion. The pool was established to accumulate and invest oil-tax and royalty money in case the state runs out of crude and to give residents annual dividends. The payout was $900 in 2013 for every man, woman and child who met the residence requirement.

The second fund, the $12.7 billion Constitutional Budget Reserve, was created in 1990 as a rainy-day fund. Initially seeded with settlements from tax and royalty disputes with oil companies, the reserve plugs budget holes in years when oil prices drop and is supposed to be replenished in surplus years.
“Having an oil trust fund like that is unique,” said Keith Brainard, research director for the Lexington, Kentucky-based National Association of State Retirement Administrators. “I am not aware of a state that has dipped into reserve like this, at least in a substantial way like this, to pay down an unfunded liability.”

 

With Deadline Looming, Pennsylvania Gov. Refuses to Sign Budget Without Pension Reform

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While most of the world was sleeping last week, lawmakers in Pennsylvania were scrambling to put the finishing touches on the state budget before the constitutionally-mandated midnight deadline. A little more than an hour before the clock struck 12, a budget was finally put on the desk of Pennsylvania Governor Tom Corbett. Only one problem: he won’t sign it. From the Philadelphia Enquirer:

Gov. Corbett refused late Monday to sign a $29.1 billion budget that the Republican-controlled legislature scrambled to deliver to him just 90 minutes before the midnight deadline.

The legislature approved a plan that includes some increased money for schools, and would not raise any taxes or impose new ones.

But Corbett, a Republican facing a tough reelection battle in the fall, signaled disappointment that the legislature was unable to deliver on one of his priorities: a measure that would change pension benefits for new employees.

“The budget I received tonight makes significant investments in our common priorities of education, jobs, and human services,” the governor said in a statement shortly before 11 p.m. “It does not address all the difficult choices that still need to be made. It leaves pensions, one of the largest expenses to the commonwealth and our school districts, on the table.”

He added: “I will continue to work with the legislature toward meaningful pension reform. I am withholding signing the budget passed by the General Assembly while I deliberate its impact on the people of Pennsylvania.”

It was unclear how long Corbett, who has often boasted of his record of delivering on-time budgets, would hold out. A protracted stalemate could affect the state’s ability to pay bills or workers.

The decision between funding pensions and funding the rest of the state is a difficult one. The ordeal has put Gov. Corbett in between a political rock and a hard place, and its unlikely he will come out of this process unscathed–at least in the electorate’s eyes:

Down by double digits in public opinion polls, Republican Gov. Tom Corbett has few good political choices when deciding by Friday whether to sign the state budget — except some high-risk options of taking on the Legislature, analysts say.

“None of them are great options for the governor in an election year,” said Christopher Borick, a professor and pollster at Muhlenberg College in Allentown. Corbett of Shaler trailed Democrat Tom Wolf of York by 22 points in a Franklin & Marshall poll last week on the November election.

And what are his options, exactly?

Corbett now could:

• Sign the budget;

• Let it become law without his signature on Friday, because a governor has 10 days to consider legislation before it automatically becomes law;

• Veto the entire bill;

• Veto some spending in the bill, including the Legislature’s funding.

Corbett could call a special session, which requires lawmakers to gavel into session, but he cannot compel them to consider pension reform if they return.

Over the years, special sessions have had mixed success, experts say. The governor sets the agenda. Topics have included gun control, crime, transportation and property tax reform.

Lawmakers can gavel out of special session and into regular session to consider anything they want.

“It seems like a no-win situation,” said Michael Federici, a political science professor at Mercyhurst University in Erie. “The closer you get to an election, the less willing Republicans will be to sign on” to pension reform.

Gov. Corbett needs to make a decision by Friday–if he doesn’t veto the bill, it will automatically become law.
Photo by Keith Ramsey via Flickr CC

Survey: Public Employees More Confident They’ll Have Comfortable Retirement Than Private Sector Counterparts

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It’s a question that goes through the mind of everyone: Will I have enough money saved to live comfortably and securely when I retire?

A new survey from Pew Charitable Trusts asked that very question. Turns out, when it comes to retirement, the minds of public sector employees are more at ease than the American workforce on the whole:

According to a survey from The Pew Charitable Trusts, 69% of public employees said they were very or somewhat confident they would have enough money to live comfortably in retirement, compared with 55% of [private and public sector] Americans surveyed for the Employee Benefit Research Institute’s (EBRI) 2014 Retirement Confidence Survey. Female public employees were less likely than men to express confidence in their retirement situation: 63% of women said they were very or somewhat confident, compared with 77% of men.

But perhaps the most shocking reveal of the survey was that one of every five public employees didn’t know what kind of retirement plan was offered by their employer.

One-fifth of state and local workers polled said they did not know what type of retirement plan their employers offer. Women were more likely to say this (23%) compared to men (15%). In addition, workers younger than 50 were more likely to report that they did not know what type of retirement plan they have than were workers 50 or older.

 

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Graph courtesy of Pew Charitable Trusts

Other interesting tidbits from the survey:

Slightly more than half (54%) of state and local public workers said they expected to retire at age 65 or later. Of this group, 25% said they expect to retire at 65, and 29% said they expect to retire after 65. An additional 4% of respondents volunteered that they do not ever expect to fully retire. These results are similar to findings in the EBRI survey.

And how plan design affects retirement decisions:

State and local employees said retirement plan design affects decisions about when to stop working. Eighty percent said they think some government employees who want to leave their jobs keep working until retirement age so they will not lose retirement benefits, including 60% who said they think this happens a lot. Fifty-six percent said they think some workers retire earlier than they would like in order to maximize retirement benefits, including 31% who think this happens a lot. Overall, 88% of respondents said they think workers either work longer or retire earlier than their preference in order to maximize retirement benefits, including 48% who think both things happen.

Many employees also think their plans are in need of changes, whether they be minor tweaks or major overhauls:

Thirty-five percent of respondents said their employer’s retirement system needs changes, including 12% who said it needs major changes. Sixty-one percent said they think their employer’s retirement system should be kept as it is. Those with lower confidence in their ability to live comfortably in retirement were more likely to say they would like to see changes. So were women (38%) compared with men (30%).

 

Photo by Robyn Lee via Flickr CC

Illinois Supreme Court Ruling Casts Bad Omen on State’s Pension Reform

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While the rest of the country celebrated Fourth of July weekend, members of the Illinois pension sphere got to watch some fireworks of their own. A key Illinois Supreme Court case was decided over the weekend, and the decision does not bode well for the state’s landmark pension reform. (The full court opinion can be read at the bottom of this page.)

According to the 6-1 decision, the pension protection clause — which says that retirement benefits are a contractual agreement that “cannot be diminished or impaired” — applies to other retirement benefits, not just pensions. That overrode the state’s argument that its emergency powers, in dealing with its budget crisis, justified an increase in what retirees must pay for their health benefits.

The court rejected the state’s argument that health care benefits are not covered by the pension protection clause, finding that there is nothing in the state constitution to support that. The only question now is whether the reduction in the state’s health care subsidies constituted an impairment or diminishment of those benefits.

Although the ruling doesn’t directly apply to pensions, the writing seems to be on the wall.

“If the justices can read the pension clause of the constitution to protect health benefits, they certainly would use it to protect pension benefits,” former state Budget Director Steve Schnorf said.

“This bodes very, very ill” for the pension cuts the Legislature approved for state workers, and for a similar set of trims Mayor Rahm Emanuel wants for his workforce, he added.

Time after time, without finally resolving the issue, the court seemed to go out of its way to knock down any changes not agreed to by workers unions, and perhaps by each individual worker.

For instance, one argument defenders of the new pension law have offered is that unfunded pension liability now is so large — $100 billion in the state funds, and at least $32 billion in the city funds, for instance — that government has a right to order changes, using its so-called police powers, to set spending priorities. But, said the court, “In light of the constitutional debates, we have concluded that the (pension) provision was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

In other words, pony up.

And as far as Cost-of-Living Adjustments:

Another argument offered by reform proponents is that annual cost of living adjustments in pensions are not protected by the state constitution in the same way that a person’s original pension is. In other words, a worker who initially got, say, a $3,000-a-month pension is entitled to get it and no more in the future, regardless of inflation. COLAs are far and away the biggest element in the retirement-funding crisis.
But, ruled the court, “Under settled Illinois law, where there is any question as to legislative intent and the clarity of the language of a pension statute, it must be liberally construed in favor of the rights of the pensioner. ”
So, the current 3 percent guaranteed annual COLA would appear to be here to stay.
Ironically, such an interpretation would apply both to the pension reform bill pushed by Gov. Pat Quinn that’s working its way up to the Supreme Court and to an alternative plan offered by his opponent Bruce Rauner. The GOP gubernatorial candidate proposes moving workers to a defined-contribution system that caps state funding.

Many believe lawmakers should now be scrambling to come up with a Plan B to reform pensions in a way allowed by the courts:

State and local lawmakers had better get working on a Plan B. Illinois needs alternatives to the state pension-reform law passed in December and to the Chicago pension-reform law passed in May. The options are limited — it may come down to a constitutional amendment — but the state’s best minds better get cracking.
It isn’t an exaggeration, even in the slightest, to say Illinois’ future depends on it.

There is now but one key question: Does a viable pension reform alternative exist? A bill pushed by Senate President John Cullerton, considered an alternative by many, is now almost certainly off the table. That bill gave workers a choice between full pension benefits or subsidized health care — choose pension benefits and health care would be cut. Given Thursday’s ruling, that now seems highly dubious.
One possibility would be to amend the constitution to modify the pension protection clause — not eliminating it but weakening it some. However, this is a lengthy process and may still not protect the state legally if it reduces benefits already promised.

Read the court’s entire opinion here:

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Photo by Mr.TinDC via Flickr CC

Reform Watch: Australia To Raise Retirement Age to 70

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The world is now watching Australia as the country readies itself for a bold shift in pension policy: raising the retirement age to 70, which would be the highest retirement age in the developed world.

Australia’s workers had previously been able to retire at 65. The five year increase will be phased in over many years, and will take full effect in 2035. The plan was announced by Australian Treasurer Joe Hockey:

Hockey is part of the Liberal-National coalition that won power in September, pledging to end what he called the nation’s Age of Entitlement and repair a budget deficit forecast to reach $49.9 billion AUS this fiscal year. Australia is leading the charge for a group of advanced economies from Japan to Germany that are pushing the retirement age higher to head off a gray disaster caused by a growing army of pensioners and a declining pool of taxpayers.

The ratio of working-age Australians to those over 65 in the world’s 12th-largest economy is expected to decline to 3-1 by 2050 from 5-1 in 2010. In Japan it’s already below 3-1 and in Germany it’s close to that level, according to the International Labor Organization.

“While Australia may be the first to raise the age to 70, it won’t be the last,” said Steve Shepherd of international employment agency Randstad Group in Melbourne. “The world will be watching this.”

Australia’s 2.4 million state-retirement-age pensioners draw about $40 billion AUS a year, making it the largest government spending program. That’s forecast to rise 6.2 per cent a year over the next decade, according to an independent review commissioned by Prime Minister Tony Abbott. The program provides the main source of income for 65 per cent of retired Australians.

Failure to rein in the program would put a greater onus on younger workers to fund it through increased contributions and taxes. Raising the pension age may also mean more competition for those just starting in the workforce. Unemployment among those aged 15-24 reached a 12-year high of 13.1 per cent in May, more than double the national average of 5.8 per cent.

It’s also interesting to note the results of a recent study on retirement age:

Research shows many people struggle to work until they are 60, let alone 70. The Household, Income and Labour Dynamics in Australia (HILDA) Survey shows that the average retirement age from 2003 to 2011 for men was 62.6 years old and for women it was just under 60. While that is rising, it is still well below the current retirement age of 65.

And the HILDA data shows, for men, nearly half of all retirements are involuntary with most due to poor health. Women are more likely to retire on their own terms but still 43 per cent retire due to reasons such as ill health, losing their job or having to care for others.

The rest of the world will be happy to sit on the sidelines and watch this fascinating policy shift play out.

The Last Half-Decade of California’s Pension Contributions, Visualized

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California actually has a good track record making its payments to CalPERS — unfortunately, the same can’t be said for CalSTRS. Even so, the state’s track record on both fronts got better last week when lawmakers upped its 2014 payment to the two systems by a combined $1 billion.

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Contributions to CalPERS aren’t the problem; the state has made good on their Actuarially Required Contribution for years now (although, if we’re being honest, the fund could always use more state dollars. And there’s no rule against paying more than 100% of an ARC). But CalSTRS is another story.

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California took a step forward last week by increasing its contribution for FY 2014-15. But there is still much work that needs to be done.

 

A Former CalPERS CEO Is Finally Pleading Guilty to Conspiracy Charges, So Let’s Take Stock of the Damage He Did

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Pictured: Former CalPERS CEO Fred Buenrostro

For years, CalPERS—the largest public pension fund in the country— was a hotbed of backdoor scheming, shady dealings and outright fraud.

That was thanks to two long-time friends, Fred Buenrostro and Alfred J.R. Villalobos, who we now know (well, allegedly) profited greatly from greasing the wheels on billions of dollars of CalPERS investments from behind the scenes in 2007-2008, and probably years before.

Buenrostro was CalPERS’ CEO from 2002-2008, and Villalobos sat on the fund’s Board from 1993-1995.

The story starts in 2007 when Villalobos, acting as a placement agent, was hired by the investment firm Apollo Global Management to secure investment business from CalPERS.

And, with the help of Buenrostro, he would get it, although not by legal means:

The two men created a series of fake letters on CalPERS’ stationery to make sure Villalobos got paid millions in commissions by a Wall Street private equity firm that was investing the pension fund’s money.

Buenrostro created phony letters on the pension fund’s letterhead after another CalPERS official refused to sign the disclosure documents. After receiving the letters, Apollo was able to obtain $3 billion in CalPERS investments between August 2007 and April 2008.

Villalobos, by the way, earned around $50 million worth of commission from those deals, according to CalPERS reports.

But Buenrostro made out well, too: after he retired from CalPERS in 2008, he was allegedly gifted a free Tahoe condo and a cushy job at Villalobos’ investment firm.

Thankfully, it didn’t take long for their scheme to unravel:

In March 2013, former California Public Employee Retirement System CEO Fred Buenrostro was indicted by a San Francisco grand jury and charged with conspiracy in connection with a scheme involving fraudulent documents related to a $3 billion investment by the retirement system in funds managed by Apollo Global Management.

Now, over a year after charges were filed against the two men, it seems one of them has finally admitted to himself that the gig is up—Buenrostro’s lawyer told a judge Monday that he plans to enter a guilty plea and cooperate with authorities. That includes assisting the government with its case against Villalobos.

Buenrostro’s plea bargain isn’t yet final, so it isn’t clear how much jail-time he is now looking at.

The True Cost?

This isn’t nearly the first time corruption and fraud has made its way in the public pension system, and it won’t be the last. That’s why its important to assign some numbers to these news stories—if only so we can appreciate the tangible costs that this type of cronyism incurs to the system, its members and taxpayers on the whole.

CalPERS had been putting money in Apollo funds for years—at least as far back as 2002. But the alleged misconduct supposedly happened between 2007 and 2008, when CalPERS put quite a lot of money in the hands of Apollo.

Those investments included at least six Apollo funds: Apollo Investments FD III LP; Apollo Group Inc Cl A; Apollo investment Fund VII LP; Apollo Global Management LLC; Apollo Real Estate Investment Fund; and Apollo Euro Principal Finance.

CalPERS still has all of those funds on the books as of 2013 except for two: Real Estate Investment and Europe Principal Finance. The system offloaded those two in 2012 with mixed results—Real Estate Investment Fund had lost $19 million of its book value, a 32% loss. Meanwhile, Europe Principal Finance had fared well, and saw its value increase 23% by the time CalPERS got out.

Of the four funds still on CalPERS’ books, three of them are now worth significantly less than their book value: Investment FD III LP is down 43%; Group Inc Cl A is down 57%; and Global Management LLC was down over 8%. All in all, those funds lost about $56 million of their book value. (These are all 2013 numbers—the most recent CalPERS provides.)

However, CalPERS got bailed out by one Apollo fund which did so well it erased all those losses and then some: the Investment Fund VII LP, whose market value in 2013 stood 47% higher than its book value. If CalPERS got out today, they would come out with over $200 million.

With great risk comes great reward. And Fund VII was certainly a risk—it was invested heavily in distressed companies:

In Fund VII, 57 percent of Apollo’s deals involved buying debt of distressed companies or buying distressed companies outright, while only 28 percent were straightforward acquisitions of companies not in distress. Corporate carve-outs of divisions accounted for 15 percent.

It paid off for CalPERS, as Fund VII has been one of the best-performing private equity funds in the world since 2008.

Still, four out of those six funds lost value. If CalPERS had invested that money in other funds, would they have fared better? We’ll never have any idea.

But the point is, these investment decisions were not made on the merit of the investments themselves, but instead on the basis of friendship and monetary gain for the dealmakers involved.

Oh, and the corruption (that we know about) goes back even further than 2007:

In late May 2004, Alfred Villalobos hosted a meeting at his home in Nevada, a few miles from Lake Tahoe and the California border. Villalobos was joined by David Snow, the Chairman and Chief Executive Officer of Medco Health Solutions, one of the nation’s largest pharmacy benefit management (“PBM”) companies, and Fred Buenrostro, who was the Chief Executive Officer of CalPERS at the time.

Soon after the May 2004 meeting at the Villalobos home, Medco agreed to retain Villalobos as a consultant and pay him $4 million.

Buenrostro was married in 2004, while serving as CEO, and allowed Villalobos to not only host the wedding at his home in Nevada, but reportedly also allowed Villalobos to pay for the event as well as lodging nearby for Buenrostro’s guests who attended the ceremony.

In October 2005, the year after Buenrostro got married on Snow’s consultant’s dime, Medco got the CalPERS contract.

That contract was worth $48 million dollars, and you can bet Villalobos got a hefty finders fee for that, too.

One thing’s for sure: he’ll be able to afford a lot of cigarettes in prison.

 

CHART: New Jersey Was Always Bad At Making Pension Contributions, But It Was Getting Better. Until Now.

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This is the first in a series of charts designed to illustrate the context and consequences of New Jersey Gov. Chris Christie’s plan to cut the state’s pension contributions by $2.4 billion over the next two years.

As you’ll see in the chart below, beginning in 2010 New Jersey was slowly paying higher percentages of it’s required annual contributions into the pension system. Its 2014 payment was set to be the biggest yet–but that will no longer be the case.

Stay tuned for more charts on a weekly basis, including New Jersey’s contributions to other systems, what those contributions look like side-by-side with unfunded liabilities, and how Christie’s cuts will affect system liabilities and state contributions going forward.

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In New Jersey, the Pension Tension Is Rising

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By now, you know the story: New Jersey Gov. Chris Christie’s plan to cut pension funding by $2.4 billion over two years has been met with controversy, outrage, a string of lawsuits and numerous legal questions.

The answers to some of those legal questions may come as soon as Wednesday, when Christie’s plan will see its first day in court.

But outside the courtroom, a new bill is gaining steam among state lawmakers—a bill that finally puts a tangible, short-term solution on the table. And even if it doesn’t come without its kinks, it’s the first plan that has been offered up to counteract Christie’s measure. (More on the bill below).

Meanwhile, more data is emerging on the true costs of Christie’s plan. Spoiler alert: the snowball effect is real, and it’s prohibitively expensive.

Cuts Bring Consequences, Now and in the Future

Every passing day brings a bit more clarity as to just how expensive Christie’s plan to cut pension funding by $2.4 billion would be. In a bond disclosure released by the state, the ramifications of the cuts are outlined in four points.

The proposed reduction in contributions…could have the effect of (1) delaying the phase-in of the State’s full actuarially required contribution, (2) increasing the amount of such contribution, (3) increasing the size of the UAAL and (4) decreasing the percentage of the Funded Ratio of the Pension Plans once the phase-in is completed.

Indeed, New Jersey can expect all four of those points to materialize, some sooner than others. And when you attach numbers to them, the urgency of New Jersey’s upcoming fiscal situation really starts to set in. If Christie goes through with his plan, here’s what New Jersey could be facing in fiscal year 2019:

  • The state’s actuarially required contribution would be $4.8 billion—for context, that sum would represent 26 percent of New Jersey’s general fund budget, based on 2012 expenditures.
  • The unfunded liabilities of the state’s pension plans would total $46 billion. Christie could decrease these liabilities by $4 billion if he scrapped his plan to cut contributions by $2.4 billion in 2015-16.
  • The funded ratio of state plans would drop to 48.25 percent. The funded ratio sat at 67.5 percent in 2011.

Rest assured, Christie has seen these numbers—they came from his own financial team.

A New Bill Emerges in the Legislature

On Monday, news broke that New Jersey state legislature had agreed on an alternate budget proposal that would raise enough revenue to cover the state’s full contribution to the pension system, a payment that Christie’s plan had drastically cut.

Sources inside the legislature told the Star-Ledger that Democrats in the state Senate and Assembly had reached a deal to raise more than $1.3 billion in revenue—money that would cover the state’s full annual contribution of $2.25 billion to the pension system. Christie’s plan had cut that payment down to just $681 million.

The revenue would come from tax increases on high-income earners and businesses, among other things. From the Star-Ledger:

Under the Democrats’ budget:

• The marginal tax rate on income above $1 million would rise from 8.97 percent to 10.75 percent, retroactive to January of this year, netting $667 million.

• The corporate business tax would rise from 9 percent to 10.35 percent, yielding $375 million.

• The Business Employment Incentive Program (BEIP) of tax abatements would be suspended for a year, freeing up $175 million.

• A tax hike on income between $500,000 and $1 million that Sweeney had proposed would be scrapped, as Prieto suggested.

In addition, some new taxes or fees Christie proposed would be folded into the Democrats’ budget, such as a penalty for making bad electronic payments ($25 million) and a move to subject all online retailers to the state sales tax ($25 million).

Taxes Christie proposed on electronic cigarettes and the Urban Enterprise Zone program would be cut out of the budget under the Democrats’ deal.

Of course, the deal doesn’t come without its hitches. Despite the bill’s focus on raising revenue, it actually earmarks more money toward several of the areas that Democrats lost out on in the last budget dealings: the new bill restores funding for the Earned Income Tax Credit, nursing homes, legal services for the poor, and women’s health care centers.

Those are all items that deserve funding, but their inclusion makes the bill much less politically palatable to lawmakers on the other side of the aisle. Of course, it was already unpalatable to politicians who, on principle, oppose tax increases.

Indeed, state Republicans are none too happy about the proposed measure.

“It would be suicidal to…New Jersey’s economy,” said Assemblyman Declan O’Scanlon (R-Monmouth) during a Monday morning press conference.

The Democrats would likely be able to overcome Republican opposition. They hold 48 seats (60 percent) in the General Assembly, and 24 seats (60 percent) in the Senate.

The Senate and General Assembly are holding hearings on the bill Tuesday, and the measure is expected pass by vote through the two houses by Thursday.

Still, the chances that the bill becomes law in its current form, or at all, are slim. That’s because the buck stops with Gov. Christie, who has line-item veto power and has repeatedly states he will oppose any tax hikes on wealthy individuals or businesses.

Lawmakers have until July 1 to pass a new budget.

 

Photo by Jim Bowen and Marissa Babin via Flickr Creative Commons License