N.J.’s problem is that it still spends too much money, new study finds
Tom Healey and Thad D. Calabrese
October 5, 2021
In particular, New Jersey needs to address once and for all the massive underfunding of its public employee pensions. To that end, our report, which follows up on the 2012 State Budget Crisis Task Force analysis (produced under the direction of Paul Volcker, the former Carter administration treasury secretary, and former New York Lt. Gov. Richard Ravitch), argues that the following critical steps must be taken:
1. Hold the line on taxes in a state where residents and businesses shoulder one of the heaviest tax burdens in the nation. New Jersey already boasts the third-highest income tax rate in the nation and the worst business tax climate nationally.
Indeed, New Jersey’s fiscal problems stem not from collecting too little revenue, but from spending too much.
Among the state’s greatest priorities should be ensuring that the outmigration of high-income individuals does not continue. Taxpayers who earn more than $100,000 annually makeup about 24% of tax returns filed but pay about 86% of all income taxes. As these residents increasingly flee the state, New Jersey faces the daunting prospect of lower income tax revenues and a population unable to support its spending.
The Murphy administration and the state legislature have approved a budget coming out of the pandemic that simply does not do enough to put New Jersey on solid financial footing. Despite the accolades surrounding the significant $6 billion investment in the pension fund, in an analysis we have just completed, we assert the state needs to avoid being lulled into complacency because of one-time Federal COVID financial relief and its $4 billion repayable borrowing.
New Jersey’s political leaders must not be fooled by the optimistic 2020 census data about the growth of our population. An analysis by The Garden State Initiative earlier this year found several factors may have lifted the state’s population count that will not be repeated and will have little or no impact on the state’s general economic climate.
2. Work vigorously to reform the state’s ailing public pension and healthcare systems. Even with this year’s significant payment, the state over the last two decades under the control of both parties has consistently failed to make the contributions recommended by actuaries to its pension systems, leaving the state’s plans with the 2nd worst funding ratio (assets to liabilities) in the nation.
Among the measures that should be considered are raising the benefit-eligible retirement age of public employees and increasing contributions from employees. Retiree health care programs are also in dire need of change. Reforms might include modernizing the present cost-sharing of health care costs between beneficiaries and the state, and transitioning to a defined contribution system of health care benefits where retirees are given a predetermined amount of money to purchase whatever benefits they choose.
3. Invest in infrastructure spending to address an estimated $50 billion need over the next decade – a problem exacerbated by the fact New Jersey ranks at the top nationally for many types of construction costs, which are between four to six times higher than the national average.
Infrastructure improvements are critical to economic development and an enhanced quality of life for millions of citizens. Significantly, as Senate Majority Leader Loretta Weinberg has demanded, New Jersey should cease diverting New Jersey Transit capital funds to operations instead.
4. Refocus spending to achieve a structurally balanced budget relative to revenues that is sustainable over the long term. The state should carefully analyze the entirety of its budget to determine which service areas are less critical and what efficiencies could be implemented in these nonvital services to protect more vital services and ensure the greatest returns to taxpayers. For example, New Jersey has one of the best public education systems in the nation, but it spends significantly more than other states, such as Massachusetts, which also have top-ranked public education programs.
New Jersey received more than $9 billion from the federal COVID relief bill passed in March 2021. The state should view this not as money to establish new spending priorities, but instead as a down payment to fix fiscal problems that have been neglected for decades. Here’s why: In the 12 Key Performance Indicators (KPIs) measured by U.S. News & World Report’s well-regarded annual ranking of U.S. states’ economies measures employment, business environment and growth — all KPIs measured, New Jersey ranked in the bottom 10% of all states in seven KPIs, including low credit ratings, employment rate, fiscal stability, personal income tax rate, property tax rate, state debt per capita, and pension deficit. New Jersey scored in the top 10% in only two categories: the quality of K-12 education and the poverty rate. And, in two of the other three categories — GDP growth rate and employment growth — New Jersey is in the bottom third.
New Jersey’s continued success is far from given as our study shows. It is vital that the next state budget does more to help limit the damage and allow for strong economic growth.
Thomas J. Healey is the founder and managing partner of Healey Development LLC and senior fellow at Harvard University’s John F. Kennedy School of Government.
Thad Calabrese, Ph.D. is an associate professor of public and nonprofit financial management at the Robert F. Wagner Graduate School of Public Service at New York University.