Aside from perhaps the question answering itself, Fortune/CNN drills into the case of New Jersey, a state that makes California seem well-governed:
In June 2008 the state estimated that the plan—one of the nation's largest, covering teachers, state employees, firefighters, and police—had $34 billion less than it needed to meet its obligations. Since then the market value of the plan has dropped from $82 billion to $56 billion (a new estimate of underfunding is due in July).
Wha happen? The pension fund gambled on dot-com stocks, hedge funds, and other equity plays. The state cut contributions based on formulae that assumed such nonsense as an 8.75 percent annual return. Then, against that backdrop, this:
Meanwhile, the obligations keep mounting: Even while they were neglecting pension contributions, New Jersey politicians were sweetening the pot. In 2001 benefits for the state's two largest groups of workers, government employees and teachers, were increased by 9%, creating an additional $4.2 billion in liabilities. In 1999 the state approved a "20 and out" measure that allowed firefighters and local police to collect pensions equal to 50% of their pay after 20 years of service—a perk previously available only to the state police. Benefits added since 1999 have increased liabilities by more than $6.8 billion, according to official estimates.
Today New Jersey seems locked in a downward spiral. "New Jersey and many other systems have negative cash flows, meaning that contributions are less than the benefits we pay out," says William Clark, director of the New Jersey Division of Investment, which manages the pension fund. "You can't make your money back when it's flowing out of the system."
What do the public sector unions have to say for themselves?
"We believe reopening contracts should be a last resort as we seek to find other ways to free up money," says Anthony Miskowski, secretary of CWA Local 1033. "If we budge on the contracts, the unions are dead."
But if the unions don't budge, something even more important might die:
If New Jersey reaches the point where one or more of the funds in its system runs out of money, the state will have to pay retirees out of annual revenue, adding another burden to the budget. That's how the state covers retiree health-care costs, expected to hit $1.1 billion this year. […]
It would then have to slash services or boost taxes to balance the budget, a pair of ugly options. The Tax Foundation says New Jersey charges the highest state and local taxes in the country, the highest residential and commercial property taxes, and some of the highest sin taxes in the nation on cigarettes and alcohol.
If union concessions, cost cutting, and higher taxes are not enough, then what? Inevitably, New Jersey and other states would turn to Uncle Sam for help.
You read all about this nightmare in our terrific February cover story, "The Next Catastrophe" (pictured).
