A familiar story
Tuesday, Jul 11, 2006 - Posted by Rich Miller
Governing Magazine’s blog has two great posts about why New Jersey’s finances have tanked. It’s eerily familiar. I’m probably excerpting way too much, so I hope they’ll forgive me.
From Part One, we pick up the story after Democratic Gov. Jim Florio is drummed out of office for raising taxes and Republican Christy Todd Whitman is elected on a promise to cut income taxes by 30 percent.
Cut taxes she did, becoming a national star for her party in the process. To pay for the cuts, she took up the bad fiscal habits of prior governors (including Florio). For one thing, she emptied out a retirement health trust fund, taking some $300 million out of the kitty and turning it into a pay as you go program. She also eliminated the state’s annual billion-dollar appropriation to pay for pensions.
During her second election year, in 1997, the pension fund needed money, but rather than reverting to the habit of making contributions from the state budget, Whitman sold some big pension bonds — and also got legislation allowing surpluses from pension investments to be used to cover the state’s ongoing obligations.
More tax cuts were in store, notably property tax cuts. All the cutting left the state without the funding necessary to comply with a state Supreme Court decision on school finance. New Jersey eventually floated a $12 billion school construction bond. As with the pension bonds, though, legislators and the governor failed to set aside enough cash even to make payments on the debt they incurred.
That meant that Jim McGreevey, the Democrat who opposed Whitman in 1997 and succeeded her in 2001, inherited a deficit of $6 billion. During that latter election year, the legislature gave a 9 percent pension increase to retired and current workers — shades of a pension bonus Kean doled out on his way out of office.
McGreevey raised some taxes and made some spending cuts, but for the most part resorted to a variety of new gimmicks to fill the gap. For instance, he twice borrowed money against tobacco settlement dollars. The state was still neglecting its required payments to the pension system, so it continued its neat trick of taking money out of the system to make payments back into it. Eventually, the state Supreme Court ruled that the state had to stop borrowing money to pay for operating costs.
Read the whole thing. Part Two can be found here.
- vole - Tuesday, Jul 11, 06 @ 5:58 am:
Rich,
Amazing how these politicians all read from the same, failing, playbooks.
Amazing how politicians will hollow out essential government programs and indebt future generations for the sake of a tax cut (or a refusal to consider tax increase).
Amazing how politicians will totally ignore or reject potential revenue sources like taxing internet sales or even a token tax on ag equipment and ag production input purchases (got to admit, Blago tried the ag tax angle and got his butt handed to him).
Amazing how politicians cannot reduce the size of government via performance and effectiveness audits to weed out unproductive programs or employees.
Amazing how politicians jack up the salaries of state employees or provide short term promotions to higher positions shortly before their retirements, greatly impacting the burden on the pension system.
Why do I feel that we are living in a house of cards and that the card sharks are running the show? How can we continue to accept such a losing hand?
- Leroy - Tuesday, Jul 11, 06 @ 6:26 am:
‘All the [tax] cutting left the state without the funding necessary’
We certainly don’t have to worry about that problemb here in Illinois…
- DOWNSTATE - Tuesday, Jul 11, 06 @ 7:12 am:
Tighten your belt it’s coming to Illinois.Within 3 to 5 years doing what we are doing this state will be shut down.The only redeeming thing is the Democrats get the blame.
- Ravenswood Right Winger - Tuesday, Jul 11, 06 @ 8:11 am:
excellent read, lots of parallels to what’s going on here. Funny how one-party leadership can be as much a taffy pull as split control.
- Bluefish - Tuesday, Jul 11, 06 @ 9:32 am:
The similarities were eerily familiar (Dems in charge fighting amongst themselves) except for one major detail - Gov. Corzine was pushing for a responsible budget that included a tax increase to help close the structural deficit in NJ while the legislative leaders preferred more slight-of-hand budget tricks. Blago is the one who keeps pushing for the slight-of-hand here.
- Anonymous - Tuesday, Jul 11, 06 @ 1:36 pm:
The scary thing is look what happens - the “leader” who irresponsibly pushes the problem into the future comes out with their reputation intact (Whitman), and the successors who try to clean up the mess are the ones who incur the voters wrath. Not much incentive for being responsible, is it? (or disincentive for punting problems into the future)
- Downstater - Tuesday, Jul 11, 06 @ 1:41 pm:
I commented in an earlier post about the similarities of the New Jersey/Illinois situations. Illinois is headed down the same road as NJ as all this expanded health care will not come cheap and will have to be paid for somehow either with a tax increase or a reduction in spending, but don’t look for that to happen as long as the Dems control the show. Brace yourselves folks, with the huge increase in healthcare spending and the huge and ever growing pension debt the taxpayers of Illinois will soon be in for a rough time as well as the forseeable future.
- Anonymous - Tuesday, Jul 11, 06 @ 2:35 pm:
Downstater - I’m not sure there’s a partisan difference here. After all, Judy Barr is pretty much in the Christie Todd Whitman school of Republican - social liberal, fiscal moderate. I wouldn’t be surprised to see a Topinka administration continue the same financial path.
- NumbersGuy - Tuesday, Jul 11, 06 @ 3:20 pm:
Folks, I can’t speak intelligently to some of the other aspects of the IL/NJ comparison, but I can add a couple points on the pension matters that may be of interest:
-NJ sold around $3 billion of pension bonds in around 1997. At that time, it was the largest POB sale ever. Things started out fine. Then the stock market crashed in 2000 and the NJ investment office lost the entire $3 billion. Some of the “funding raids” which took place thereafter basically had to be done in order to deal with the simple fact that NJ had most of that $3 billion to service and the entire asset base on which they planned to service it was gone.
-NJ was handicapped for decades by its archaic investment laws which required all state pension funds be managed in-house; of course, civil servants are cheaper than Merrill Lynch, goes the argument. They were also foridden from investing in alternative investments, even real estate. They also had some interesting policies in their investment office; my personal favorite was the “we only trade on Tuesday” rule. That made bookkeeping a lot easier, but when WorldCom cratered in 2002 on Wednesday, NJ lost millions by next Tuesday when it was time to sell.
Cumulative investment underperformance has been a billion dollar plus additive to NJ’s pension woes.
(We have this problem a couple places in Illinois, too. but nobody likes to talk about it..)
Recent legislation has undone some, but not all, of the restictions.