With New Jersey’s Pensions in Crisis, a Question of Fiscal Priorities
To lure Amazon’s HQ2, the Garden State is offering more than double its annual contribution to the public pension system—a system that paid out $5.5 billion more in benefits than it accrued last year.
Gov.-elect Phil Murphy’s desire to reform New Jersey’s pensions should match his predecessor’s enthusiasm to lure Amazon’s new headquarters.
Murphy calls his pension fix “very, very credible,” but has offered few realistic options. He’s also said to “look at the full tapestry” of options for Amazon, but declined to say how he’d weave an offer.
What New Jerseyans know is what’s written in plain English: they’ve offered $7 billion to Amazon and are on the hook for more than $136 billion in pension liabilities. In doing so, New Jersey taxpayers would be giving Amazon a sum that’s more than double its annual contribution to the public pension system—a system that paid out $5.5 billion more in benefits than it accrued last year.
Time is running out. As the state’s own Pension and Health Benefit Study Commission found in its final report last month, “the new Governor, the Legislature, public employees and the citizens of the State as a whole need to act.”
Outgoing Gov. Chris Christie has instead chosen to offer billions in incentive dollars to attract Amazon’s second headquarters. While situating the world’s largest retailer in Newark would no doubt be a boon to the state’s economy, the state has already dug a pension hole—the worst unfunded liability of any state government. New Jersey taxpayers would be giving Amazon a sum that’s more than double its annual contribution to the public pension system.
These dollars are bids in the Amazon Race. One of the world’s largest retailers challenged North America to compete for the chance at winning $5 billion and 50,000 workers in a second proposed headquarters campus. And like any gambler that’s down on its luck, New Jersey doubled down.
“We need to do all we can to make this possibility a reality,” said Vincent Prieto, the State Assembly Speaker, and New Jersey didn’t disappoint. Flanked by U.S. Sen. Cory Booker and Newark Mayor Ras Baraka, Gov. Christie stood at a lectern this September and offered Amazon $5 billion in tax breaks from the state. Newark’s city government chipped in with a property tax abatement worth $1 billion, and another $1 billion in city wage tax waivers for up to 20 years.
Christie’s administration estimated Amazon’s HQ2 would generate $9 billion in economic activity in New Jersey. How they got to that figure and what share of that sum would flow into the state’s coffers is unclear. What is clear is that New Jersey is throwing around money it doesn’t have. One company, Amazon, stands to receive roughly 80 percent of the sum given by New Jersey to 14,655 companies combined since 1996.
Contrast this eagerness with New Jersey’s approach to its pensions problem. The state’s public retirement systems have suffered from decades of unfunded generosity, mismanagement, and shoddy accounting. The state boosted benefits 13 different times between 1999 and 2003—after the stock market collapsed. Then-Gov. Jon Corzine succeeded in quadrupling the state’s pension debt while raising taxes. Reforms in 2011 failed to keep a lid on costs. During Christie’s term alone New Jersey’s bonds were downgraded a record 11 times, primarily due to pensions.
Last year, Christie declared that he had “resurrected the state’s pension system” after ponying up $2.5 billion and future lottery revenues. The only problem is that New Jersey should actually be paying double that amount to even have a hope of paying down its pension debt. Funds will likely dry up in the next decade, leaving taxpayers on the hook for annual payments of $8 billion, which is more than the state spends on anything else. As a forthcoming paper from the Manhattan Institute’s Steven Malanga shows, New Jersey’s underfunded pension crisis will continue to grow with no end in sight unless otherwise fixed.
Phil Murphy’s solution is to boost taxes in a state that’s already among the nation’s most heavily taxed and that now faces further pressure with the capping of the SALT tax deductions. He says he will legalize and tax marijuana, boost the levy on millionaire households, and close corporate loopholes. The resulting revenues of $1.3 billion a year are more wish than reality, even more so after U.S. Attorney General Jeff Sessions threw all state legalization of marijuana into question last week. Even then, billions more are needed to fill New Jersey’s pension hole.
It’s not like New Jersey doesn’t know how to solve its pensions crisis. For the past three years, some of brightest minds in the pensions world have been churning out analyses and plans at the behest of the state. The bipartisan New Jersey Pension and Health Benefit Study Commission found in its final report that “a workable solution is one that preserves benefits earned to date and provides competitive benefits going forward.” “Such a solution is possible,” the report concludes, “as long as there is the will to achieve it.”
Rather than stiffing workers or stuffing taxpayers, New Jersey’s pension funds should be mitigating risk and securing retirements. The commission has called for keeping the benefits already earned by pensioners while creating a new hybrid “cash-balance” retirement plan that gives workers a defined benefit based on the amount in their state-managed accounts.
These experts have also suggested replacing the state’s generous “Platinum-Plus” health plans with the standard “Gold” levels enjoyed by most New Jersey private sector workers, and using those savings to bolster pension funding.
There is a high cost to doing nothing with pensions. Right now, every man, woman, and child in New Jersey owes $15,000 to the state’s pension system. The first rule of pensions is, if you find yourself in a hole, stop digging.
Betting big on the future while neglecting to pay for its past is exactly what got New Jersey into trouble. Rather than gambling with taxpayer dollars to attract Amazon, New Jersey’s incoming governor should be focused on putting his fiscal house in order.
This piece originally appeared at Route Fifty
Michael Hendrix is the Director of State & Local Policy at the Manhattan Institute.
This piece originally appeared in Route Fifty