Monday, May 9, 2016

NJ's Pension System was Always Unsustainable

One thing that bugs me about attempts to explain the causes of NJ's pension catastrophe is that they are never deeper than "the governors raided the pension funds," with the accused governors being
every governor from Whitman forwards or every governor from Florio forwards.

This guest column in the Star-Ledger "6 N.J. governors, including Chris Christie, are to blame for state's pension crisis" by Sean Rutherford represents this kind of thinking:
As a teacher, I have contributed every dime I was supposed to into my pension. Yet, for some reason our state government hasn’t. Where did this all start? Gov. Christine Todd Whitman. She took office in 1994 and decided that in order to achieve a balanced state budget, as required by law, she would reduce the amount of money contributed to the pension fund. In 1997, she decided the state should borrow $2.75 billion from the fund and use it elsewhere. As time went on, she contributed a mere fraction of what was necessary to replace those funds and meet the needs of the pension system. For the next half decade, the state as a whole contributed an average of $23 million per year. The calculations and formulas showed the state should have contributed an average of $600 million per year to keep up with the demand. This trend continued with each new governor that took office: Donald DiFrancesco, James McGreevey, Richard Codey, Jon Corzine, and our current governor, Chris Christie.

Ok, the above has sections which are factually not true.  Pension underfunding began with Florio, not Whitman (see left).  Whitman didn't borrow $2.75 from the funds, she borrowed $2.75 for the funds in order to invest that money in the stock market and earn a better return.  It was a move that the public sector unions at the time supported.

It's true in a superficial sense that NJ's governors starting with Florio or Whitman made inadequate pension contributions, but it ignores the political pressures our governors were under and the roles of the NJ Supreme Court through its Abbott mandate and the venality of the legislature.  The unions themselves in bringing New Jersey to insolvency through their demands for even more generous pensions and the lack of taxpayer organization to defeat them.

Anyway, what the "governors raided the funds" argument misses the critical fact that NJ's pension funds were always unsustainable.  In order to exist, NJ's pension funds required two things of uncertain dependability.

1.  An ever-growing state economy.
2.  An ever-growing teacher corps in order to increase employee contributions.

As we know, neither of the preceding is guaranteed.

People in the 1980s and 1990s knew that pension costs were growing faster than inflation.  During the Kean administration, the cost of NJ government doubled, but pension costs tripled.

Anyway, I wanted to share this letter to the editor from 1990 with you.  In the letter a resident of Maplewood, NJ writes that Governor Florio's attempt to pay for Abbott by offloading pension responsibilities to 220 affluent and middle-class districts would lead to disaster.  The writer aptly calls the pension system a "ticking time bomb."

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