State budget's massive hole: Pension debts

'Unfunded accrued liability' means spending millions a year for decades

Thursday, June 21, 2007

BY DUNSTAN McNICHOL

Star-Ledger Staff Gov. Jon Corzine and Democrats in the Legislature today plan to celebrate the end of a rancor- free budget season by producing a $33.5 billion spending plan that includes big tax rebates.

But tucked within the budget that the Senate and Assembly ex pect to pass is a gremlin that will gobble up hundreds of millions in tax dollars for decades to come: the state's failure to keep up with soar ing pension costs.

The spending plan contributes about $1 billion for public employee pensions. While it's far more than previous governors have included for pensions, it's only about half what actuaries say is needed to keep up on the payments.

Shorting the pension payments by $1 billion leaves more for other budget priories, but that debt does not disappear. Under the complex formulas set up to ensure that pub lic employees' benefits will be funded when they reach retirement age decades from now, the missed payment is added to a growing pile of state IOUs.

"All you're doing is shifting that cost onto future taxpayers," said Bob Kurtter, an analyst who monitors the New Jersey budget for Moody's Investors Services. "Who is going to pay for services that you, as a New Jersey resident, benefited from in 2007?"

The debt, to cover what actuaries call the pension system's "un funded accrued liability," did not exist five years ago, when the retirement accounts had billions more than what retirees were ex pected to get.

But the funds were battered by the collapse of the stock market and financial maneuvering used to support a 9 percent boost in retiree benefits six years ago. Then governor after governor skipped payments to the pension fund as a way to quell budget crises.

Much like an unpaid credit card balance, the debt soared.

In just four years, the annual cost of making up for skipped payments into the state's two largest retirement accounts rose from $38 million to $841 million. That figure is included in the $2 billion now owed; by paying only half that total, the budget to be voted on today is expected to add at least another $67 million to the bill for each of the next 30 years.

Even if the state begins making the full pension contribution, the cost of making up the old debts is expected to climb by 4 percent a year for the next three decades.

“This is a ticking time bomb," said Sen. Leonard Lance (R-Hunterdon), the Senate minority leader. "We should be meeting our pension obligations, and obviously we aren't doing so."

Corzine administration officials bristle at any suggestion that they are not addressing the pension fund's problems.

The budget that passed last year, Corzine's first, included $1.2 billion in pension fund payments. That exceeded the amount paid into the fund in the previous 10 years combined. But even that payment amounted to only 57 percent of the amount that actuaries say the state should have put in.

"This is a budget choice," said Tom Vincz, spokesman for Treasurer Brad Abelow. "While we cannot fund all the items at the level we'd like to, we're proud we made the financially responsible choice of putting unprecedented levels of cash into the pension system."

Vincz said the administration is using a "three-pronged approach" to resolving the long-term pension funding crisis. He said the state will save money in the long run from the benefit reforms included in the new state worker contracts, increased yearly contributions to the fund, and a move to diversify pension investments.

Vincz said it would be unrealistic to expect the state to pay the full $2 billion owed to the retirement funds this year, especially after lawmakers were accustomed to considering budgets that included no money for pensions.

"You're not going to solve the woes of the system in one fell swoop," he said.

But delaying, state records show, makes the solution more costly. Since 2002, state records show, state officials have skipped a total of $5.526 billion in payments owed to the fund, using the cash for other budget priorities.

"In essence, they've made a loan to the state," Kurtter said. "This is an obligation. It's not going away."

Dunstan McNichol may be reached at dmcnichol@starled ger.com or (609) 989-0341.