Op-Ed: Federal Reserve Loans Will Set New Jersey Back
The Federal Reserve recently ad that it would lend money to the 50 states, including New Jersey, in the form of short-term loans. These loans will need to be repaid within three years, but given New Jersey’s financial condition prior to the current crisis, the state may never be able to repay the increased debt associated with the loans. This new debt will therefore have a negative impact on the State’s finances in the long term.
Before the coronavirus crisis, New Jersey was more than $ 209 billion in debt, which amounted to a per taxpayer share of $ 65,100. Although this debt calculation includes $ 99 billion unfunded pension debt and $ 92 billion of unfunded retiree health care debt, it does not include capital debt and is offset by fixed assets.
For years, New Jersey state lawmakers and governors have called for balanced budgets as the state’s debt continuously grows. The State was unfortunately not prepared for any crisis, much less for the dramatic one we are currently experiencing. Public pension systems are massively underfunded, with New Jersey having only 34 cents for every dollar in pension benefits promised and virtually no money set aside for health care benefits promised to retirees.
While these Federal Reserve loans will help in the short term give New Jersey money to pay for essential services and benefits, the loans will most likely harm the state and its taxpayers in the long term. The state does not have a mechanism in place to manage the real surpluses needed to repay the debt. In the past, New Jersey has balanced its budgets by borrowing for the future and not providing the necessary contributions to properly fund its retirement and retiree health care benefits. These practices are like people claiming to have balanced their budgets by taking out loans or not making minimum payments on their credit cards. To achieve a true surplus, the state should generate enough revenue to pay for current expenses and should provide the money needed to properly fund its pension systems.
Since this is unlikely given the financial difficulties ahead, in order to repay the Federal Reserve notes, New Jersey will most likely have to borrow money from other sources and / or further underfund its systems. of retirement. If governments choose to underfund their pension systems, getting back on track to properly fund pension systems will prove even more difficult as pension systems are currently experiencing investment losses. Although the benefit amounts will remain the same, the government will need more money to compensate for the investment losses.
While most people think these temporary loans are necessary, citizens should understand that this new debt is likely to permanently damage New Jersey’s finances. Taxpayers will pay interest on this debt or on new debt that must be issued to repay Federal Reserve loans; future services and benefits may be reduced and less money may flow into the pension and retiree health care systems; and, most likely, taxes will have to be increased.