New Jersey and Pennsylvania are caught between a rock and a hard place: The budget shortfalls that make deferring pension fund contributions so tempting, and the credit downgrades that await them if they skip more scheduled payments on ballooning pension debt.
Pennsylvania and New Jersey are sister-states when it comes to their public pension systems. Both have systems of similar size (roughly $130 billion), with a similarly-sized unfunded liability (between $46-47 billion). Both states also face eye-popping budget gaps, imperiling the money needed to stay on a payment plan for the debt.
New Jersey Gov. Chris Christie said last week he wants to postpone payments on his state's $46 billion debt in order to bridge a budget gap of more than $2 billion over the current and next fiscal years. Credit rating agency Fitch Ratings responded with a warning that such a move would prompt a credit downgrade, making it more expensive for New Jersey to borrow money.
Pension expert Richard Dreyfuss said Pennsylvania and New Jersey are in a "race to the bottom" to underfund their pension plans. In a recent interview, Dreyfuss, an adjunct fellow with the Manhattan Institute and consultant to the conservative Commonwealth Foundation, said what both states need are "funding reforms."
"Which means, trying to make these plans sustainable and simply putting in what the actuaries and professional who study pension plans suggest we should," Dreyfuss said. "Accompanied by what I would consider to be a more realistic expectation in terms of what the funds will be able to produce in terms of investment returns, long term."
A proposal by Gov. Tom Corbett would reduce pension fund contributions by about $175 million — far less than the $2.4 billion deferral over two years proposed by Christie in New Jersey.
Lawmakers in both the House and Senate have said the proposal isn't likely to pass unless it's accompanied by a reduction of pension benefits offered to future state and school employees. Spokesmen for the House and Senate majority leaders were noncommittal Friday on the chances either set of changes will pass before the General Assembly's traditional summer recess.
Rating agencies have already warned Pennsylvania could get a credit downgrade if it doesn't shore up its pension funds.
A March report by the Pew Charitable Trusts finds states' pension funds are in bad shape largely due to missed payments and poor investment returns.