New Jersey Governor Chris Christie has been in the news a lot lately for his handling of the Garden State’s budget crisis around government-worker benefits. The New York Times did a piece earlier this week on a confrontation between Christie and teacher Marie Corfield around cuts to education funding, and 60 Minutes featured Christie in a wide-ranging piece on the state of state budgets. Neither of these stories has fully gotten to the heart of why the state now has a $20 billion liability for teacher pensions, and neither of them mentions the fact that only eight years ago the state had a teacher pension fund surplus.
So what happened? A stock market crash certainly hurt, but the state has made its own problems along the way. Through a combination of low contribution rates and benefit enhancements, New Jersey starved the pension beast.
Traditionally, Starve the Beast has been employed by fiscal conservatives to force budget deficits, which in turn lead to demands for reductions in the size of government. The argument goes that if the government spends more than it takes in, it should stop spending. As the chart below shows, this tactic has certainly been employed in New Jersey’s Teachers’ Pension and Annuity Fund. The blue line represents what the state’s actuaries have told the legislature it needs to invest in order to cover its future teacher pension obligations. The red line represents what it actually put in. In only one year of the last 13 did the state meet its actuarial obligation, and it only met it that year, 1997, because the state issued pension obligation bonds to help retire previous underfunding debts. In two years, 2001 and 2002, the state actuary decided the fund required no contributions, and the state gladly complied. In the other ten years, the state has failed to invest enough to cover its teacher pension obligations. Collectively, the difference between what New Jersey should have invested and what it actually put in–the difference between the blue and the red lines–is $5.2 billion.
This is the classic Starve the Beast tactic: Make government programs look unsustainable by not providing enough money to cover their costs. Over time, they look worse and worse.That’s exactly what’s happened, but that’s not the end of the story.
Teachers unions and their Democratic legislative advocates are to blame as well. In 2001, thinking the fund was running a surplus, the state passed legislation increasing government pension benefits by 9 percent across the board. Following the lead of the state contributions, legislators cut teacher employee contributions by a third. In 2003, the state legislature passed another new law adding an early retirement incentive and enhancing teacher pension and health care retirement packages that led to a 13 percent increase in liabilities in 2004 alone.
The combination of low contribution rates and simultaneous benefit enhancements happened in states all across the country, and Governor Christie and leaders like him are now seeking to roll back these increases. Christie still refuses to fund the pension system, arguing that the “totally unsustainable” public sector pensions should be replaced by a 401k-style system. There are plenty of reasons New Jersey and other states should seek to change their pension structures. But the financial messes states are in are of their own doing. The current financial problems of state pension plans are a manifestation of the worst impulses of Republican and Democratic politicians, and it won’t be easy to repair the damage. Understanding how we got here is the first step on the road to recovery.
This blog entry first appeared on The Quick and the Ed.