Most of the "blue" states, and a few of the "red" ones, have unsustainable defined benefit pension plans for public employees; but the problem has been well hidden from the voters by the politicians who put these things in place. By the time the problem gets fully recognized, the hole is really deep. And don't expect any help from the public employee unions in getting out of the hole -- they will gladly bankrupt their state to fight for the last penny for the pensions. Hey, that's their job.
The recent stock market run-up has temporarily rescued many of these plans from immediate crisis, so the issue has somewhat receded from the news. But not in New Jersey, home of some of the worst problems. There the pension issue has been at the heart of the recent budget battle between Republican Governor Christie and a Democrat-controlled legislature.
While New Jersey's plight may not be the worst among the states (Illinois and California come to mind), its situation is pretty bad. Here is a roundup of the official asset and funding status of New Jersey's various plans from the website ballotpedia. It seems that New Jersey governors and legislators have several times adopted the expedient of skipping required pension contributions in order to close what otherwise would be budget deficits. Recently, only 32% of the 2010 payment was made. This is a very good way to get your pension plan into a death spiral. The status per most recent official numbers is 64.54% of obligations funded, leaving $47.2 billion of unfunded liabilities. This against a total state annual budget of $32.5 billion.
If you are interested in inter-state comparisons, ballotpedia cites data from Moody's as ranking New Jersey 4th worst among the states in the ratio of unfunded pension liabilities to annual state revenue (137.2%) and 8th worst in the ratio of unfunded pension liabilities to state GDP (13.0%). Of course, that's if you believe the official numbers for pension liabilities, using discount rates of about 8%. A group called State Budget Solutions (SBS) has helpfully done a recalculation of New Jersey's liabilities at a very conservative interest rate of 3.2%, and they come up with unfunded liabilities for New Jersey of $171.7 billion (cited in the ballotpedia article). That would make the unfunded liabilities a good 5.3 times annual state revenue, and the funded ratio of the plans more like 32%.
Christie put through what was labeled as a big pension reform in 2011, described here in a Wall Street Journal article by Josh Dawsey and Heather Haddon on July 1. Under that reform supposedly the state was going to contribute around $2.25 billion per year to gradually catch up. Well, according to SBS here, Christie's just-signed budget includes only $691 million for the pensions. According to Christie, revenue came in below projections, and there just isn't enough money for the pension catch up funding.
Needless to say, the public employee unions are up in arms. They promptly filed a suit and sought an injunction, but a state judge has already given preliminary approval to Christie to do what he is doing. The solution offered by the unions and by prominent Democrats in the state legislature has been to raise the tax rate on high earners yet again. The legislature passed that, but Christie vetoed it.
But the question is, what is the right answer here for New Jersey? The Democrat/union proposal of higher taxes may work for one year, but New Jersey is highly likely to be in a pension death spiral situation already. Unless the stock market performs miracles, the supposedly required pension contributions will keep increasing year after year, probably faster than the economy can hope to keep up. In this kind of situation, can you increase the taxes on the same people year after year and expect them to stick around?
I submit that if you should find yourself in a Ponzi scheme, the best thing that can happen is to have it crash as quickly as possible. And the biggest mistake you can make is to keep feeding it as you dig deeper and deeper into a hole from which you can never get out. This would imply that it is actually a sensible strategy to quit making the pension contributions, thereby accelerating the crash. The crash will come when there is still a large productive economy in New Jersey, and as the crash approaches, the public employees will be forced to the negotiating table to accept retirement contributions at a sustainable level. Defined contribution plans anyone?