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Red flags, but also some optimism, in review of N.J. finances

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New Jersey's state budget got a thorough review this week, and the resulting report raises a number of red flags about the Garden State's finances.

The report, produced by the State Budget Crisis Task Force, found several major trouble spots, chief among them runaway Medicaid and education costs and a massive unfunded pension liability.

Still, the tone of this morning's panel discussion, held in Trenton, was optimistic, despite the adversity.

"I think, and this may sound Pollyannish, but I think there will be enough good people who will emerge in politics to resolve this problem in a consensual fashion," said Richard Ravitch, the former lieutenant governor of New York, and a co-chairman of the task force, along with Paul Volcker, the former Federal Reserve chairman and adviser to President Barack Obama.

New Jersey is one of six states being studied by the foundation-funded task force. Rutgers Professor Richard F. Keevey prepared the New Jersey report. He presented the findings at the Trenton Marriott, joined by Ravitch, Volcker and moderator John Mooney, of NJ Spotlight.

New Jersey spends more than one-third of its budget – $11.7 billion – on aid to school districts, a figure that's expected to increase rapidly in future years. The state also has a pension system under-funded by $84.8 billion, but the fiscal 2013 budget includes only $1.03 billion in pension fund contributions.

The pension problem will be helped, Keevey said, by the pension and benefit reforms passed last year, which will boost the state's pension payments significantly in the coming years, and which also raised the retirement age for most public workers from 60 to 65. Asked if raising the retirement age further would help, Keevey said yes, but only minimally.

"The real saving action in the pension reform was the elimination of cost-of-living adjustments," he said. "So whether you're a current employee, a potential employee or a current retiree, you no longer get cost-of-living benefits. So that had a big impact on improving it, reduced the unfunded liability by 30 percent."

Still, Keevey warned that promising to increase pension contributions and actually doing so are two different things.

"It's going to take yeoman-like effort to make sure that the dollars are put into the budget during the next six years," he said.

The report also cited a shaky tax foundation in the state, where 64 percent of revenue comes from sales and income taxes, two categories that can be sharply affected by recessions.

As dire as the current situation is, the report suggests more bad news down the road. The state has $33.7 billion in debt and needs infrastructure repairs to the tune of at least $133 billion, according to the report. Add in the likelihood that federal aid could drop as lawmakers in Washington consider reducing the national debt, and the report suggests the state has some difficult choices to make.

Volcker said Hurricane Sandy will also affect the state's decisions, but he said it doesn't change the overall theme of the discussion, as "it all comes back to the same question of priorities both on the revenue and on the spending side."

The report does suggest some answers, most involving long-term planning. The task force argues New Jersey should use multiyear budget forecasts to help make smarter fiscal decisions. In addition, 'the report recommends moves to control health care costs, reassess local governments' taxes and spending, and create a strategy to fund critical infrastructure improvements. Finally, the report says New Jersey needs to regularly fund its pension system.

Ravitch said he hopes the report helps spark more public debate about the state budget and the policies that inform it.

"The thing that troubles me the most is that this is a subject matter that does not really engage the public," he said.

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Write to the Editorial Department at editorial@njbiz.com

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