As New Jersey Gov. Chris Christie visits Iowa and New Hampshire, he continues to insist that if he does not get concessions from the state’s public workers his state will go bankrupt like Detroit. Back in the spring in an edition of his monthly radio show “Ask the Governor,” Christie challenged the Democratically controlled Legislature to undertake a second round of pension reforms to stave off the doomsday scenario of state insolvency.
“So until the Legislature can come to grips with the idea that to control property taxes, to control income taxes, to control sales taxes, and to provide services, we can’t continue to sustain a pension and health benefits system that is going to bankrupt us," he said. "And if you need any proof of that, look at the City of Detroit — just went bankrupt — $11 billion in debt versus just $2 billion in cash, and of the $11 billion in debt, $9.5 billion was for pension and retiree health benefits.”
There is only one problem: Under existing law and our federal system, New Jersey, or any other state, can’t go bankrupt. While such over-the-top rhetoric ensures the governor holds the spotlight, it brings more heat than light to a debate that needs less bombast and more finesse. It is much harder than just throwing up your hands and invoking the fiscal apocalypse. The reality is that the state, with or without Chris Christie, will have to sort this out politically, without the help of a federal bankruptcy judge.
“The states are sovereign entities. Each state has its own constitution,” says Paul S. Maco, a partner with the law firm Bracewell and Giuliani. As Maco reads the law, making states eligible for federal bankruptcy would require an amendment to the U.S. Constitution.
Maco is one of the nation’s leading experts on public finance and served as the first director of the Securities and Exchange Commission’s Office of Municipal Securities that led the SEC’s response to the 1994 Orange County bankruptcy.
Professor J. Fred Giertz, director of the University of Illinois’ Institute of Government and Public Affairs, agrees states can’t file for federal bankruptcy protections. “States do not have that option even though bankruptcy does allow an orderly process to insure equity in who gets paid and who doesn’t,” Giertz says.
To be sure, the New Jersey public pension debacle pre-dates Christie’s tenure. Under governors from both political parties, benefits were expanded while the state regularly missed payments. Things happened that probably deserved the attention of a grand jury, but no consequences ensued except a slap on the wrist for the state. Back in 2010 the Securities and Exchange Commission took the unprecedented step of charging the state of New Jersey with materially misrepresenting the status of the state’s pension system in 79 bond offerings valued at $26 billion from 2001 until 2007. Such an act of blatant fraud by a mere mortal would be an indictable offense. In Jersey, it was just part of our landscape.
When Christie, working with Democratic Senate president Stephen Sweeney and former Speaker Shelia Olivier, produced the bipartisan pension reset, which raised the public employee retirement age, increased what workers paid in for their benefits as well as ended the robo cost-of-living increases, there was a sense the state could move forward by finding common ground and shared sacrifice. In the process the collaboration reduced the state’s long-term liabilities by $122 billion.
But this spring Christie invoked the Detroit bankruptcy scenario as political cover for his decision to renege on his pledge to contribute the full $3.8 billion to the public employee pension system that was the linchpin of the deal he cut with the Democrats.
Christie cut the pension payment to $1.38 billion and used the balance to fill a budget gap that was the direct result of his own wildly unrealistic revenue projections.
As an alternative, Sweeney offered a budget plan that generated an additional $1.57 billion in revenue realized by raising taxes on the state’s wealthiest households and corporations while maintaining the pension payment as previously required. Christie dismissed it.
In Christie’s many national appearances and his reelection bid, he hailed the bipartisan pension reform package he negotiated as evidence that Trenton had something to teach a dysfunctional Washington. But when his own budget projections came in so short this year he felt it more important to reject any tax hike rather than keep his part of the pension reform deal. With that choice, Christie undermined his carefully crafted image as a transformational national leader the country so badly needs.
The fate of public employee pensions and their healthcare benefits must be part of the 2016 national conversation. While New Jersey is still looking at more than $100 billion in combined unfunded public worker benefit commitments, it is not alone. Most states are also struggling to meet these obligations. Only 15 states have remained current on making their required annual contributions toward their public employee pension systems, according to the Pew Charitable Trusts.
In a sobering 2013 report from the GAO, the fiscal picture for the states and local governments was projected to remain bleak through most of this century. “That is, absent any intervention or policy changes, state and local governments would face an increasing gap between receipts and expenditures in the coming years,” the GAO concluded.
For the states, unfunded pension and retiree healthcare liabilities loom large even as the federal government continues to reduce its role as a backstop with its robo cuts to domestic spending and local grants that in the past have helped the states get by. Experts concede it still is not clear what impact President Obama's Affordable Care Act will have on the millions of public sector retirees. How much the states are in the hole for both unfunded pension and health benefits ranges from $1.5 trillion to $ 5 trillion depending on which nonpartisan think tank you reference. The key to divining these numbers are varying assumptions the fund managers make about the rate of return they will generate.
State Budget Solutions, a conservative nonprofit think tank, assumes an annual rate of return of 3.225 percent -- which produces that scary $ 5 trillion number. The Pew Charitable Trusts uses the assumptions the states use, which can range between 7 to 8 percent.
Dozens of states have taken significant steps to reduce their long-term liabilities, but the hit they took in the Great Recession did structural damage that Washington is ignoring. The grim reality is that all these social contracts are coming due, whether with public employees or with future Social Security recipients, just as our corporations are figuring out how they can avoid paying U.S. taxes by incorporating overseas.
Christie's decision to not keep his part of the pension deal meant missing a unique opportunity to preside over a pension system turnaround. It could have been a template for a nation very much in need of one. He now says he will unveil another set of proposed reforms by the end of this summer. But had he kept the faith with the first round, he would have been in a much better position to press for additional reforms. Now, no matter what he comes up with, he’s just another ambitious pol angling for his next job.