Now that the slot machines are shut down, the majority of people who don’t read the newspapers may have noticed that New Jersey, the richest state in the country, a state that therefore has a low social service burden and a large tax base, is nonetheless bankrupt. Some may be wondering how this could have happened. The answer is that the State of New Jersey has pursued many of the future-destroying policies of the State of New York, but to a greater extent and with a lower tax rate.
The City and State of New York reduced their contributions to their employee pension funds, allowed employees with 10 or more year’s seniority to stop contributing themselves, and drastically increased benefits by adding an inflation adjustment that was retroactive for those already retired. As a result, required pension contributions have soared, leading to year after year of service reductions and higher taxes. Moreover, some of the additional contributions New York City will be forced to make have been deferred, leading to even greater contributions in the future. We’ll start paying for some of the 2000 pension deal in 2010.
The State of New Jersey pursued similar pension policies. And it actually borrowed money from the pension fund to spend up front, expecting stock market returns to make up the loss. And it has gone on failing to contribute enough money to the pension funds year after year, even as those funds fall deeper and deeper into the hole.
The State and City of New York essentially stopped contributing to the MTA Capital plan, endorsing massive borrowing by that agency to pay for just a few years of ongoing normal replacement instead. Soon all those dedicated MTA taxes we pay will just be going to pay off past debts, leaving no money to actually maintain the system. And, having created a transportation trust fund made up of transportation taxes, the State of New York immediately started spending that money on other, more politically powerful priorities. The State had the transportation agencies borrow money to pay for maintenance, pledging future tax revenues, to make up the difference. As a result, one-third of that trust fund now goes to pay past debts rather than to maintain the roads today.
The State of New Jersey has a transportation trust fund too – financed by a much lower gasoline tax. Rather than increase that tax, the State of New Jersey also had its transportation agencies borrow against future tax revenues. As a result all of its transportation revenues are going to pay debts right now, leaving nothing to maintain its roads and transit systems. Their present disaster, our future disaster.
In the part of New York State outside New York City, spending on public schools is far higher than the national average. In response to objections to the resulting high property taxes, the State of New York hit upon the STAR system, which holds that as long as you aren’t the low-spending City of New York, the more you spend on your schools the more offsetting state aid you get. The result – even more spending by those who were spending a lot to begin with, and an even lower share of state aid for the city’s schools.
Pataki stole this idea from the State of New Jersey, a pioneer of cutting checks instead of cutting spending. In the past, year after year, public school spending in New Jersey had been just slightly above the national average as a share of income. And the money was used efficiently, with an above average number of instructional staff relative to students and higher instructional staff pay (even adjusted for the higher cost of living there), offset by a lower than average amount of non-instructional staff. With a “the more you spend the more you get” state aid plan in place, however, New Jersey’s public school employment has soared relative to its population, and its public school expenditure soared relative to income – its is now 17% higher than the national average. Rather than raise taxes, NJ borrowed to pay for it.
Now what do they (and we) do?
New Jersey Democrats in the state legislature are focused on the public response to the past policies of former Governors Florio, Whitman and McGreevey. Florio raised taxes to confront a fiscal meltdown in the early 1990s, and was turned out of office – along with the Democrats in the legislature. Whitman sold out the future, and became popular, allowing Republicans to control the legislature. McGreevey also sold out the future, allowing the Democrats to retake the legislature. That’s the lesson: people are selfish and shortsighted, so tell them what they want to hear and defer the consequences.
Governor Corzine now wants New Jersey to face its problems, but he ran for office promising all gain and no pain, a happy message for a public that is going deeper and deeper into debt in their personal lives and is willing to fall for one “get rich quick” scheme after another. Governor Corzine wants an in-your-face tax increase, along with service cuts, to solve the problem. The legislature is afraid to endorse it, and instead wants a series of small measures that will not fully solve the problem in the hopes that no one will notice.
Wrong.
By mixing together the taxes required to pay for current services, and the taxes required to pay for past fiscal sins, the Governor and Legislature will allow the people of New Jersey to blame them for the seeming bad deal they are getting, rather than blaming themselves and their former leaders. It is essential for the political survival of the current leadership, and public support for avoiding a repeat of past fiscal mistakes, that the consequences of those mistakes appear somewhere people can see it. Not in the newspaper that no one reads.
Instead of raising the general sales tax rate, or imposing lots of little tax increases, the State of New Jersey should cut taxes to level required to fund services today. And it should then impose a specific, in-your-face surcharge on top of those taxes to pay for any leftover fiscal baggage from the past.
· A new transportation trust fund should be created, funded by regular taxes and sufficient to maintain the infrastructure. The cost of the existing debt should be funded by the surcharge.
· Regular taxes should pay for those pension contributions that would be required if the pensions were fully funded. The catch up contributions from the sins of the past should be covered by the surcharge.
· All those debts run up in the past 14 years should also be covered by a surcharge.
Moreover, the State of New Jersey has to shift the incentives in its property tax relief program from the more you spend the more you get to the more efficient you are the more you get. Rather than cutting public school aid across the board, reducing spending in more efficient districts and less efficient alike, the State should impose a soft “maximum” spending per student and reducing state aid by one dollar for each dollar spent over the maximum. And only those school districts spending over the maximum should be required to have their budgets endorsed by referendum.
This is good advice for New York State and the federal government as well. Every attempt is being made to obfuscate, defer, and cover over the fact that we face ongoing deficits, service and benefit losses, and higher taxes as a result of the fiscal evil bequeathed to us by the Credit Card generations. Eventually, however, things will get so bad that new leadership, possibly of the same generations, will be put in place.
That leadership will be tempted to go down the previously successful path of promising something for nothing, cutting deals, sucking out future revenues, deferring current costs, and papering over consequences. In the end, however, this will no longer be possible. Whoever is in office then will take the blame not only for their own actions, but those of their predecessors. I say let the predecessors take the blame, in New Jersey and elsewhere.