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Posts Tagged ‘pensions’

Restoring fiscal sanity in New Jersey

Posted by Richard on February 17, 2010

Newly elected New Jersey Governor Chris Christie addressed the legislature last week on the state's budget crisis, and I finally got around to reading the speech*. Wow. It's a humdinger — refreshingly honest, with no punches pulled and no shying away from the tough decisions. Christie quickly made clear just how dire the state's situation is:

New Jersey is in a state of financial crisis. … For the current fiscal year 2010, which has only four and one-half months left to go, the budget we have inherited has a two billion dollar gap. The budget passed less than eight months ago, in June of last year, contained all of the same worn out tricks of the trade that have become common place in Trenton, that have driven our citizens to anger and frustration and our wonderful state to the edge of bankruptcy.

What do I mean exactly? This year’s budget projected 5.1 % growth in sales tax revenue and flat growth in corporate business tax revenues. In June of 2009, was there anyone in New Jersey, other than in the department of treasury, who actually believed any revenues would grow in 2009-2010? With spiraling unemployment heading over 10%, with a financial system in crisis and with consumers petrified to spend, only Trenton treasury officials could certify that kind of growth. In fact, sales tax revenue is not up 5%, it is down 5.5 %; and corporate business tax revenue is not flat, it is down 8%. Any wonder why we are in such big trouble? Any question why the people don’t trust their government anymore and demanded change in November? Today, we must make a pact with each other to end this reckless conduct with the people’s government. Today, we come to terms with the fact that we cannot spend money on everything we want. Today, the days of Alice in Wonderland budgeting in Trenton end.

Our Constitution requires a balanced budget. Our commitment requires us to begin the next fiscal year with a prudent opening balance. Our conscience and common sense require us to fix the problem in a way that does not raise taxes on the most overtaxed citizens in America. Our love for our children requires that we do not shove today’s problems under the rug only to be discovered again tomorrow. Our sense of decency must require that we stop using tricks that will make next year’s budget problem even worse.

Christie cut spending in 375 state programs — practically everything he could legally cut by executive action — in order to close the $2 billion current-year shortfall. Then he took aim on the years to follow and made it clear that biggest problem is an absurdly generous pension and benefit program for the state's unionized workers: 

I am encouraged by the bi-partisan bills filed in the Senate this week to begin pension and benefit reform. … 

These bills must just mark the beginning, not the end, of our conversation and actions on pension and benefit reform. Because make no mistake about it, pensions and benefits are the major driver of our spending increases at all levels of government—state, county, municipal and school board. … 

Let’s tell our citizens the truth—today—right now—about what failing to do strong reforms costs them.

One state retiree, 49 years old, paid, over the course of his entire career, a total of $124,000 towards his retirement pension and health benefits. What will we pay him? $3.3 million in pension payments over his life and nearly $500,000 for health care benefits — a total of $3.8m on a $120,000 investment. Is that fair?

A retired teacher paid $62,000 towards her pension and nothing, yes nothing, for full family medical, dental and vision coverage over her entire career. What will we pay her? $1.4 million in pension benefits and another $215,000 in health care benefit premiums over her lifetime. Is it “fair” for all of us and our children to have to pay for this excess?

The total unfunded pension and medical benefit costs are $90 billion. We would have to pay $7 billion per year to make them current. We don’t have that money—you know it and I know it. What has been done to our citizens by offering a pension system we cannot afford and health benefits that are 41% more expensive than the average fortune 500 company’s costs is the truly unfair part of this equation.

New Jersey isn't the only state being sunk by public employee unions and the politicians who buy their votes and support with future taxpayers' money. As Doug Ross pointed out, California, New York, Illinois, and Massachusetts, to name just a few, are in the same leaking boat. And those union workers who think they've got it made now are going to end up all wet.

Herb Stein famously said, "If something can't go on forever, it won't." Retirees collecting more than they ever earned while working, 50-year-olds retiring at 90% of their highest salary (indexed for inflation), employee pension and health plan contributions in the single digits (and declining in some places) while unfunded pension liabilities have grown into the trillions — these things simply can't go on forever. Taxes can't be raised high enough to let this continue. Something's going to have to change, and soon. 

In addition to a more balanced mix of employer and employee contributions and an actuarially sound schedule of benefits, I suggest one simple rule change for all government workers (heck, for everyone with a defined-benefit pension plan): Retire after 30 years if you want, but pension payments don't begin until age 65. If you're only 50, go get another job for the next 15 years (that's what many of them do anyway, collecting both a paycheck and a pension, and eventually getting two pensions). 

* In Firefox 3.5, this website doesn't lay out properly, and some of the text is cut off. It's fine in IE 7. Or you can click Print this page, which opens a new window containing the whole speech. Just cancel the Print dialog and start reading (that trick also saves you a lot of clicking, since otherwise the speech spans 9 rather short pages). 

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