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Report ranks N.J. worst in the nation in terms of "fiscal condition" index

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A new report lends fresh substance to long-acknowledged reality: New Jersey's budget outlook is dire.

The Garden State ranked last in the nation in terms of fiscal condition, according to a study at George Mason University. The school's Mercatus Center developed the "fiscal condition" index by combining four categories that measure ability to meet short and long-term obligations.

Patrick O' Keefe, an economist at CohnReznick, said the report adds to a "heavy and overloaded bookshelf" and should renew debate on how to solve the mess.

"Once again it brings to the fore, the extent to which the state's unfunded liabilities, based on past commitments made to the state's public employees, are beyond its means to fulfill," O'Keefe said.

The George Mason report's four categories are:

  • cash solvency, or the ability of the state to meet short-term obligations;
  • budget solvency, the ability to meet annual requirements without running a deficit;
  • long-run solvency, the ability to meet future demands;
  • and service-level solvency, the ability to meet a community's general health and welfare needs.

Among individual categories, New Jersey also ranked last in budget solvency and long-run solvency. The state ranked 36th in cash solvency and 39th in service solvency.

The report says New Jersey ranks last in budget solvency mostly because of a decrease in net assets of $6.4 billion. The study adds that tax revenues have improved recently but haven't returned to pre-recession levels.

The report also says New Jersey faces long-run solvency problems partly due to nearly 15 years of underfunding state and local pensions. The state has an estimated unfunded pension liability of around $25.6 billion plus $59.3 billion in unfunded liabilities for health benefits of retired teachers, police, firefighters and other government workers, according to report.

Public policy professor Sarah Arnett said the study doesn't cast blame on any politicians or party but should be viewed as part of a longer trend.

"This is the result of decades of poor financial decisions," said Arnett, who authored the report. "That's important to keep in mind. You don't get to the bottom ranking in one year. It takes time and an accumulation of decisions. Just as you don't get to the bottom in one year, you can't just flip a switch and turn things around one year."

In determining the rankings, Arnett said cash and budget solvency weighed heavier because they are less likely to change. Long-term solvency factored less, she said, because those problems can be addressed if political environments and demographic trends change. The report notes that California, long noted for its fiscal crisis, has begun to improve its finances in recent years.

For New Jersey, O'Keefe said there is no magic bullet but many changes can turn the state's finances for the better: an increased retirement age for future retirees, less generous benefits, switching to defined contributions instead of defined benefit plans, and more realistic projections on the rate of return on investment assets.

"The transcendent message is the need for a comprehensive and coherent fiscal policy that better addresses the long-term pension and health care liabilities with the level of benefits promised," O'Keefe said.

"There's no one solution," he said. "It really does require a more comprehensive strategy and the political will."

After New Jersey, the four states with the lowest ranking are Connecticut, Illinois, Massachusetts and California.

The top five are Alaska, South Dakota, North Dakota, Nebraska and Wyoming, states than tend to be resource rich with sparser populations.

The paper is embedded below.

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