It is axiomatic that the overwhelmingly increasing cost of state employee health and pension benefits constitutes the greatest danger to New Jersey’s present and future fiscal outlook.  The state’s liability for its employee pension and retirement health benefits is four times the size of its annual budget, and pension payments are forecast to double over the next four years.  According to a Pew Charitable Trusts study, New Jersey’s pension system for state workers is so underfunded that it could run out of money in 12 years.  Unless reforms are made, New Jersey is on the road to fiscal insolvency. 

Until recently, it was also axiomatic that there was no politically viable solution to this issue, given the power of the public employees and teachers unions within the New Jersey Democratic Party.  Yet there now exists a two-fold proposal that would permanently resolve this issue.  

And there is an opportunity for an historic concordat between Democratic Senate President Steve Sweeney and Republican Senate Minority Leader Tom Kean, Jr. that could provide a veto-proof majority of at least 27 Senators in support of the proposal.  If such a concordat is also reached between Democratic Assembly Speaker Craig Coughlin and Republican Assembly Minority Leader Jon Bramnick, this could likewise result in an Assembly veto-proof majority of 54 Assembly members.

Such veto-proof majorities will be required for the enactment of any genuine pension and health benefit reforms, because Governor Phil Murphy is a virtual tool of the public employee and teachers union.  He is certain to veto any measure that reduces in any way future pension or retiree health benefits.  The governor is the Friedrich Engels of New Jersey and the ultimate practitioner of the FDR style of politics of “tax and tax, spend and spend, elect and elect.” 

The two-fold proposal and the nature of its development is a fascinating story of the recent history of New Jersey policy – and politics.  

This teachers union power and influence has been less true with respect to Steve Sweeney than other Democratic legislative leaders.  He triumphed last November in a political war launched against him by the New Jersey Education Association (NJEA), the major teachers union in the state. In a campaign whose total cost exceeded $15 million, the NJEA contributed over $5 million to Sweeney’s Republican opponent, due to the Senate President’s efforts to contained education costs.  Emboldened by his victory, Sweeney made reform of education costs a major priority.

Towards this end, Sweeney established a bipartisan Economic and Fiscal Policy Working Group, consisting of legislators and outside accounting and finance experts.  Last week, the group released its report. 

There were two recommended measures that are political non-starters.

The first measure is one that would drastically merge school districts into regional districts.  Such a measure may make policy sense, but it conflicts with the home rule political tradition that is so basic in New Jersey politics.

The second is a measure that would pledge the New Jersey Turnpike as an asset to the public employee pension fund -and add toll roads to pump new dollars into the pension system.  This recommended measure is reminiscent of the ‘asset monetization’ proposal of former Governor Jon Corzine, which would have implemented major increases in tolls on New Jersey highways and dedicated the tolls to the pension fund.  This proposal was a major factor in Corzine’s reelection defeat, and accordingly, any proposal to dedicate road tolls to the pension fund will be dead on arrival with the legislature on a bipartisan basis.  

There are, however, two recommended measures that constitute the two-fold proposal that will likely be considered by the legislature.  This proposal constitutes a highly effective financial solution to the high budgetary costs of both the pension and health care plans. 

The first component mandates shifting all employees and retirees from “platinum” health care plans to “gold” plans.  The gold plans are comparable to what the most generous private employers offer. 

The second component involves shifting new and recent employees to hybrid pension plans that include a modest pension as well as a defined-contribution component.  New employees and those with fewer than five years of public employment would have their pension benefits altered as follows: The first $40,000 of their salary would be pensionable, but any salary above that would become part of a retirement plan that acts more like a 401(k) than a pension.  

According to the report, this two-fold proposal would cut increases in pension and health benefit costs by a third.  The proposal is also politically viable – as long as bipartisan agreement is reached in both houses of the legislature. 

The focus will first be on Sweeney, since it is his commission that recommended these reforms.  And this is where Sweeney has a supreme opportunity.  In Tom Kean, Jr., he has a natural highly effective partner to ensure passage of these reforms in the Senate with enough votes to achieve override of any Murphy veto.

I interviewed Kean this week, and he expressed genuine enthusiasm both for the proposal and the opportunity to reach a concordat with Sweeney.  Knowing Tom and his record on these issues as I do, I was not surprised. 

Since becoming Senate Republican Leader in 2008, Tom Kean, Jr. has been an active advocate for state employee pension and health benefit reforms, as has been his entire caucus.  In fact, during the recent budget debate, Kean sent a letter to Murphy, Sweeney, and Coughlin advocating the shift from platinum to gold for state health benefit plans, noting that it would achieve a budgetary savings of $1.1 billion.  The letter was also signed by Republican Senators Bob Singer (Deputy Leader), Steve Oroho (Conference Leader), and Tony Bucco (Budget Officer). 

Phil Murphy is a political hostage of the state employees and teachers union, so he will doubtless default on these issues.  Where Murphy fails to lead, however, Steve Sweeney and Tom Kean, Jr. are well positioned to pick up the mantle of leadership and save the state of New Jersey from fiscal insolvency. 

Alan J. Steinberg served as Regional Administrator of Region 2 EPA during the administration of former President George W. Bush and as Executive Director of the New Jersey Meadowlands Commission under former New Jersey Governor Christie Whitman.