Audit showed $40B surge in state debt

Credit: (NJGOV)
Long-term bonded and non-bonded obligations for fiscal years 2107-2021 (expressed in billions)

New Jersey’s recent string of positive fiscal news was interrupted several weeks ago by a new audit that indicated overall debt rose across the board during the last fiscal year.

For starters, the audit recorded a year-over-year increase in New Jersey’s bonded debt, putting the total at a record $48.2 billion.

That increase, however, was expected. New Jersey sold bonds during the first year of the COVID-19 pandemic to offset projected revenue losses — losses that never fully materialized. And efforts are already underway to retire some of the state’s overall bonded debt.

But the audit also revealed a big increase on the “non-bonded” side of New Jersey’s debt ledger during the 2021 fiscal year. That category includes the state’s long-term public-worker pension obligations, as well as other, often overlooked, retirement benefits that can add up to a significant liability for the state and, ultimately, its taxpayers.

In all, the audit released late last month indicated there was a more than $40 billion year-over-year increase in New Jersey’s non-bonded debt.

That big increase — which pushed the state’s grand total for debt close to $250 billion — is beginning to raise eyebrows in Trenton as Gov. Phil Murphy and legislative leaders decide what to do with an immense budget surplus built up in recent months amid an unprecedented surge in tax collections.

A ‘snapshot in time’

Department of Treasury officials said the audit represents only a “snapshot in time,” and they are suggesting the numbers will start to look better once their changes, including big state pension-funding increases, begin to get baked into the long-term debt math.

But the latest debt totals are fodder for Republican lawmakers long critical of how Murphy, a second-term Democrat, is handling the state’s finances. And they’re now using the audit to claim Murphy’s administration is not being completely forthright when it comes to the scope of the state’s fiscal challenges.

New Jersey has long ranked as one of the nation’s most indebted states due to its significant bonded debt and a grossly underfunded pension plan.

Sciortino: ‘Future liability estimates will reflect updated factors including fully funded pension contributions and updated health benefit trends.’

But in recent years, Murphy has made full funding of the state’s pension obligations a top priority. And last year, Murphy and Democrats who control both houses of the Legislature also agreed to use nearly $4 billion to retire bonded debt early, and to fund more capital projects on a pay-as-you-go basis to avoid more borrowing.

They are expected to build on those efforts in the new state budget being negotiated that must be enacted by July 1.

In fact, already baked into the budget for the 2023 fiscal year is a nearly $7 billion pension contribution. That’s a sum that actuaries would consider to be enough to cover the state’s “full” employer pension obligation, marking the second straight year that such funding has been prioritized after more than two decades of governors and lawmakers falling short of that standard.

Surprise increase in state’s pension liability

That’s why it came as somewhat of a surprise that the audit released in late May showed the state’s net-pension liability, which appears in the non-bonded category, actually increased by about $4 billion during the 2021 fiscal year.

Asked to explain the increase, Treasury spokeswoman Jennifer Sciortino said the auditors had to use figures from the 2020 fiscal year when compiling their assessment of New Jersey’s long-term pension liability. At the time, the state had yet to reach full funding of its annual pension obligations.

Moreover, the auditors also assumed state pension funding over the next several decades would total much less than the 100% actuarially determined pension contributions that are now occurring as a matter of course, according to Sciortino.

New Jersey has long ranked as one of the nation’s most-indebted states due to its significant bonded debt and a grossly underfunded pension plan.

“This assumption was the main driver of the increase in pension liabilities,” she said.

But the big reason the state’s total for non-bonded debt surged above $200 billion during the last fiscal year was not related to the health of the pension system, which has long been one of the state’s leading fiscal concerns.

Instead, the audit indicated there was a $36 billion year-over-year increase in the state’s total for what are known as OPEBs, or “other post-employment benefits.” That category of non-bonded debt includes the long-term cost of providing health benefits promised to retired government workers in addition to their pensions.

According to Sciortino, the OPEB increase reflected in the fiscal year 2021 audit was caused, in part, by a “reduction in the index used to discount liabilities.” It was reduced from 3.5%, as of June 30, 2019 to 2.1% as of June 30, 2020, she said.

Higher health insurance claims

Also playing a role were increased benefits claims as COVID-19 restrictions were eased, as well as “premium experience” that’s reflected in a snapshot used to assess the overall benefits liability, Sciortino said.

Higher-than-expected Medicare Advantage claims were also captured in the actuarial estimates and were “assumed to continue for several more years,” she said.

“Future liability estimates will reflect updated factors including fully funded pension contributions and updated health benefit trends,” Sciortino said as she addressed general questions about the state’s non-bonded debt.

During a round of budget hearings in mid-May, as Treasury officials highlighted the recent efforts to retire bonded debt, they told lawmakers the Murphy administration has “substantially reduced our debt load while securing real savings for taxpayers.”

Republicans fire back

Those comments didn’t sit well with some Republican lawmakers at the time, and again after the audit came out just before the Memorial Day holiday weekend and indicated a big, across-the-board increase in overall debt in fiscal year 2021.

Last week, Sen. Michael Testa (R-Cumberland) sent a letter to Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen) that said the audit “made a mockery of” the claims that Treasury officials made last month.

In the letter, Testa also urged Sarlo to bring Treasurer Elizabeth Maher Muoio back before the budget committee to explain a “gross misrepresentation of the State’s long-term debt.”

Asked to respond, Sciortino said, “the Fiscal Year 2021 audit offers a snapshot in time from a point nearly two years ago.”

“Senator Testa should know that this Administration has been keenly focused on reducing debt,” she said.

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