On Wednesday morning, Steve Malanga spoke with Varney and Co about lessons provided by places like Ohio, where structural budget changes led to a bond rating upgrade by S&P. That afternoon, the country got a reminder of what years of one-shot gimmicks and perpetual imbalance can do when Fitch downgraded New Jersey.
The rating agency writes,
Last month, I wrote that skipping pension payments for the better part of a decade created more than just a math problem; quickly escalating payments would crowd out other budget priorities and make political compromises arduous.
Despite significant public employee pension and benefit reforms, the state is still in a vicious cycle. Elected leaders decided NJ cannot afford to make the full required pension contribution without unacceptable cuts elsewhere. Therefore, the state will increase its portion of the full contribution by one-seventh each year until full payment is made in FY 2019. However, this exacerbates the problem by making the full payment amount even higher as we approach the end of the decade, and puts additional budgetary pressure on a state struggling to tread water on job growth.
If tax revenues grow by 3% annually, increased pension contributions and transportation funding will consume all of that new money, and Garden State residents already shoulder a heavier state-local tax burden than the rest of the country.
New Jersey must make further structural changes to its budget, including significant reforms to Medicaid and local and school aid formulas, in order to meet future obligations. And some of those changes must be part of a long-overdue conversation on what activities are considered the proper role of government.
The downgrade of the state's (General Obligation) rating to 'AA-' from 'AA' reflects the mounting budgetary pressure presented by significant and growing funding needs for the state's unfunded pension and employee benefit liabilities, particularly in the context of a weak economic recovery, a high debt burden, limited financial flexibility, and persistent structural imbalance.
Despite recent, significant action to contain future growth in the state's accumulated pension liability, continued funding level deterioration is projected through the medium term as full funding of the actuarially required contributions is phased in, resulting in sizeable increases in annually required contributions. Fitch believes that meeting the requisite increases in pension contributions will be challenging and is likely to conflict with other long term challenges, such as property tax relief, school funding, and infrastructure needs. (emphasis mine)
Last month, I wrote that skipping pension payments for the better part of a decade created more than just a math problem; quickly escalating payments would crowd out other budget priorities and make political compromises arduous.
Despite significant public employee pension and benefit reforms, the state is still in a vicious cycle. Elected leaders decided NJ cannot afford to make the full required pension contribution without unacceptable cuts elsewhere. Therefore, the state will increase its portion of the full contribution by one-seventh each year until full payment is made in FY 2019. However, this exacerbates the problem by making the full payment amount even higher as we approach the end of the decade, and puts additional budgetary pressure on a state struggling to tread water on job growth.
If tax revenues grow by 3% annually, increased pension contributions and transportation funding will consume all of that new money, and Garden State residents already shoulder a heavier state-local tax burden than the rest of the country.
New Jersey must make further structural changes to its budget, including significant reforms to Medicaid and local and school aid formulas, in order to meet future obligations. And some of those changes must be part of a long-overdue conversation on what activities are considered the proper role of government.
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