Editor's note: This story is the latest installment in a joint initiative by The Associated Press and Associated Press Managing Editors on the fiscal crisis facing U.S. states and cities, how state and local governments are dealing with severe budget cuts and how American lives will change because of it.
TRENTON, N.J. — The nation's financial downturn left many states in such a precarious position that they were forced this year to make tough decisions on expensive but long-untouchable public employee benefits.
Nowhere was this breakthrough more evident than in union-friendly New Jersey, where a Republican governor aided by Democrats enacted sweeping cost-saving changes that touched pensions and health care simultaneously.
Experts say the overhaul is not only significant in scope but also marks a pivotal moment as other states look to defuse the ticking time-bomb employee benefit obligations have become as a result of the recession, government benefits becoming more generous than those in the private sector and poor planning by politicians.
With one bill, New Jersey increased required pension contributions, increased the amount workers will pay for health benefits, raised the retirement age and eliminated automatic cost-of-living increases for current retirees among other things.
The ideas aren't new, experts said, but New Jersey's success in adopting a comprehensive solution rather than taking a piecemeal approach is noteworthy.
"What New Jersey has done is farther-reaching versions of the reforms done all around the country, but all together at once," said Joshua Rauh, an associate professor of finance at the Kellogg School of Management at Northwestern University.
All 50 states have combined unfunded pension and retiree health care obligations that top $1 trillion, according to an Associated Press examination of state balance sheets.
Five states have unfunded public employee pension liabilities of $50 billion or more, and a recent study by the Pew Center for the States found that only 5 percent of states saved toward their obligations for retiree health care benefits.
"The bigger the annual (obligation) bill is for states, the more pressure it puts on them to not spend money on things like education or public safety," said Sue Urahn, the managing director for Pew.
Although New Jersey's powerful public employee unions did not go down without a fight, Republican Gov. Chris Christie and his Democratic allies in the Legislature managed to circumvent collective bargaining without the turmoil that occurred in several other states — most notably Wisconsin.
Unlike Wisconsin though, New Jersey suspended — not eliminated — collective bargaining on health care for four years. And New Jersey had a much larger pension and health benefits problem to solve.
With underfunded retirement systems short of eventual liabilities by a combined $110 billion, New Jersey's retiree obligations are among the biggest in the country and are growing. Some studies estimated the pension fund in the New Jersey, the nation's most densely populated state, would go broke within the decade.
"There is nothing like the absence of cash to focus one mind's on change," said former New York Lieutenant Governor Richard Ravitch, who along with other government officials will serve on a new task force to look into states' current money problems and the extent of their debt.
Illinois and California are also in dire straits with each owing more than $100 billion in promises to state and local public workers. Wisconsin, where public protests raged on for days over the GOP-led elimination of collective bargaining rights, falls in the middle of all states in terms of retiree obligations.
While bigger states have bigger debt obligations, smaller Northeastern states — with more prevalent unions than out West — fared worse in terms of the percentage they have set aside for retirement funds. As in New Jersey, Connecticut, Rhode Island, Maryland and New Hampshire all have pension systems that are underfunded by at least a third, according the Pew Center.
An examination of health care debt reveals an even worse financial picture.
Nineteen states haven't set aside any money toward their health care funds, instead dealing with benefits that far exceed those in the private sector on a pay-as-you-go basis for expenses incurred by current retirees, Pew found.
In 2009, 14 states offered free health benefits to some or all individual state employees, and half as many states also paid for family plans, according to the National Conference of State Legislatures.
What is even more notable than the scope of New Jersey's change to employee benefits is that normally union-backing Democrats — albeit only a handful — helped to pass it. Those who supported it said the state could not wait any longer.
"Unions at the local levels were unwilling to give up any concessions at all," said New Jersey's Democratic Assembly Speaker Sheila Oliver. "I think at some point you have to put politics aside and solve the problem."
Union officials say politicians have been effective at deflecting blame for years of irresponsible behavior, such as skipping pension payments and borrowing against investments in flush years, by using the economic downturn to portray public workers as the problem.
"They flipped the tables to say 'Look at these individuals who have these plans that you don't enjoy anymore and you're paying for it,'" said Harold Schaitberger, general president of the International Association of Fire Fighters, which represents 300,000 career firefighters in North America.
"They use those debt figures to whip up public fear because people aren't paying attention to what politicians are doing," added Bob Master, the political director for the Communications Workers of America's Northeast region.
Master said that increasing health premiums for current state workers will do nothing to shore up the liability for existing retiree obligations.
Michigan tried to address its health care obligation by making teachers and state workers start paying 3 percent of their pay toward retiree health costs last year under Democratic Gov. Jennifer Granholm. Public sector unions sued, and the payments are tied up in court because judges have so far ruled that employees can't be forced to pay for retirement benefits they may never get.
New Jersey unions also plan to sue over the elimination of cost-of-living increases, called COLAs, for current retirees.
Colorado, Minnesota and South Dakota have all tried to reduce COLAs only to face ongoing lawsuits. A few other states have managed to suspend them for a year, but no state has been successful in eliminating them.
Getting rid of the annual increases achieves a large and immediate savings.
In separate district court rulings on Wednesday, judges in Colorado and Minnesota upheld the reduced COLAs — a good signal for New Jersey, which allows for them to be reinstated once the pension account becomes 80 percent funded.
"COLAs needed to be addressed head-on. ... It's a big cost savings," said Alicia Munnell, director of the Center for Retirement Research at Boston College. "It attacks the notion that pensions cannot be changed for existing employees."
But Munnell said the New Jersey legislation was also sweeping for what it gave to unions: the power to sue if the state should once again skip an annual pension payment — a move intended to ensure that the state doesn't get itself back into trouble when the economy improves.