After simultaneously skipping payments entirely while increasing benefits for the better part of a decade, the state has obligated itself to contribute one-seventh of the full payment this year. The contribution increases by one-seventh each year, until the state fully funds the pension program in FY' 19. The state, which saved $22 million under the phased-in reforms this year, will now pay $484 million into the fund as part of its $29.7 billion FY'12 budget.
The savings will grow over time, but so will the contribution requirements. That is the other lesson for legislatures across the nation: skipped payments and false promises create more than a mathematical problem. By skipping payments, legislators and governors not only created a higher contribution for future taxpayers, but wreaked havoc on the budget process. A $3 billion contribution is significant under any circumstances, but it becomes politically impossible when it is effectively a "new" spending item, crowding out other budget priorities. This is why the "one-seventh compromise" was necessary as the state lurches toward full payment.
A New Jersey Press Media analysis found if state tax revenues grow by 3 percent annually, increased pension contributions and transportation funding alone would consume virtually every dime of new money, forcing pensions to consume a larger and larger share of the state budge.
So, while the bi-partisan reforms passed last month may be a national model of how to begin to address a crisis, future New Jersey budgets will still remind national observers how bad behavior creates one in the first place.