NJ.com: Borrowing is not the solution to New Jersey’s $10 billion problem - Garden State Initiative



NJ.com: Borrowing is not the solution to New Jersey’s $10 billion problem

June 15, 2020


By Regina Egea and Thomas J. Healey

New Jersey is on the brink of a budgetary crisis that rivals the healthcare emergency wrought by COVID-19. With revenues collapsing from shuttered businesses and out-of-work employees, the state is confronting a $10 billion shortfall before the end of next fiscal year that amounts to almost a third of its current budget.

While there is virtually no disagreement in government circles about the magnitude of the problem, there is little evidence Gov. Phil Murphy and his administration have developed a serious, sustainable plan to address it. Instead, the governor has defaulted to a fiscally lax and irresponsible approach that treats the enveloping crisis as a short-term cash crunch, one that can be fixed through the collective magic of federal grants and loans, outsized borrowing and, once again, deferring the annual required contribution (ARC) to the public pension system, already one of the worst-funded in the United States.

What the governor fails to realize is that there is an alternative to borrowing billions of dollars and saddling every citizen of New Jersey, especially our children, with repaying the huge tab. It’s called belt-tightening, and to date Gov. Murphy has been conspicuously absent from the movement by chief executives across other states to take bold cost-cutting steps in the wake of COVID-19. Instead, New Jersey is focused on plans to permit up to $14 billion of borrowing — including immediate authorization of $5 billion of state bonds — without undertaking any serious discussion about reducing the bloated cost of state government.

The disarray in Trenton has been on full display in recent weeks as Gov. Murphy has floated a number of options to finance his ambitious spending plans without so much as a nod to the state’s mounting structural liabilities, primary its indebtedness. As a backdrop, New Jersey’s overall bonded and nonbonded debt is well above $200 billion, roughly five times the state’s annual budget. The majority of that is pension and health care obligations to public employees and teachers. Indeed, nowhere is New Jersey’s non-competitive cost structure and the fiscal tightrope it perpetually walks more evident than in the public employee benefits category, where the state’s cost of health and retirement benefits for the public sector is 50% higher than the average for all other states.

State Treasurer Elizabeth Maher Muoio was anything but reassuring when she appeared last week before several budget committees to promote a $5 billion bond offering to fund operating expenses through the end of September. She failed to convince anyone that spending restraints and alternative fiscal strategies were being considered, and was unable to even clarify what the carrying costs of the enormous added debt burden would be. Truth is, taxpayers will be required to foot the bill through an increase in the sales tax and/or an additional property tax surcharge.

Be assured that voters are taking note of the lack of leadership that typifies this administration, and opinions are coalescing quickly around where they want the state headed. In a recent poll by the Garden State Initiative (GSI), 44% of respondents, when asked about closing large budget deficits at the state and large city levels, chose financially prudent measures like realigning public employee benefits to mirror modern private employer pension and health benefit plans (23%), and uncovering cost reductions in government operations, including layoffs, furloughs, and salary freezes (21%). These were clearly preferred over issuing bonds (17%) or raising taxes (7%).

In lieu of billions of dollars of borrowing, Gov. Murphy should be following the lead of other states like Oregon, which has directed all departments to cut 17% of spending, or Ohio, which has ordered a hiring freeze and $775 million in cuts, or California, which is pursuing 10% pay cuts for state workers.

All it takes is leadership. COVID-19 has delivered an unmistakable wake-up call to New Jersey – that it’s time to recognize the folly of running government year-after-year on mountains of accrued debt. That will require Gov. Murphy to disabuse himself of the short-term fixes he seems to thrive on and get serious about the need for fiscally responsible, long-term solutions. Converting the state’s pension system to a modernized, hybrid structure that would ensure benefits to some 800,000 active and retired public workers would be a great start. So would rationalizing the state’s overly generous healthcare insurance provided to teachers and public employees, an approach that could be legislatively implemented this summer and drive positive impact in fiscal year 2021.

Other states have bitten the bullet in this extraordinarily challenging period. It’s time for New Jersey to do the same.

Thomas J. Healey is a senior fellow at the Kennedy School of Government at Harvard University and coordinated the work of the bipartisan New Jersey Pension and Health Benefit Study Commission.

Regina Egea is president of the Garden State Initiative, an independent research and educational organization dedicated to promoting new investment, innovation and economic growth in New Jersey.