Long Term Budget Woes

I spent part of a day recently at a conference called Facing Our Future, a bipartisan group of leading citizens who have produced a clear document that outlines the magnitude of the New Jersey’s fiscal mess. It depicts the total spending by state and local governments, and shows the sources of revenues.

The authors suggest that we need to take radical steps to align spending and taxation. The annual state budget has a gap of $4 to $10 billion, depending on whether you count or ignore the pension contributions that actuaries say are required to sustain the state pension funds. That is an annual figure that gets larger with each year ahead.

We have to climb out of a deep hole as we address that budgetary problem because New Jersey already has at least $100 billion in unfunded liabilities. That consists of outstanding bonds issued for different purposes, pension promised to state workers, and post-retirement health care benefits also promised to these workers. Post retirement health care benefits alone are estimated as a $58 billion liability.

The document summarizes government spending as follows. The state budget is about $30 billion per year. School districts spend another $23 billion. Municipalities spend about $12.5 billion. Counties spend another $7 billion. There is some double count here, because about $10.6 billion of the state budget goes to aid for schools and another $1.4 billion goes to aid to municipalities. Spending on schools is about 40 percent of overall government spending in New Jersey.

Those who have crunched the numbers understand that there is no single step that can get us out of this mess. The report states: “We can no longer fund government services at the level we’ve known.”

As I sat at the conference, it was clear that this point has not really sunk in. Most of the suggestions would raise or save only a tiny fraction of what is needed, and there were not enough of those suggestions to make a serious difference.

Some advocate a millionaires tax. That would probably raise $600 to $800 million in the short term, which fills somewhere between 6 and 20 percent of the budget gap. Then what? Moreover, we don’t know at what point higher tax brackets affect job creation or lack thereof in our state; we have begun to lag national and regional employment trends in recent years. It is a little like debating global warming, we may not know until it’s too late. I remember when progressives advocated for an income tax with a top bracket of 2.5%; that would solve all of our problems. Since the 1970s, just a percent or two more on the top rate every few years would fix everything. Oops.

To be clear, the millionaires tax argument is reasonable from an equity viewpoint. But we should not be fooled into thinking that this alone would come anywhere near solving our fiscal problems. One concern is that those most able to pay may start planning their exit if they start to fear that an ever greater burden will fall on a smaller and smaller group. We could face at the state level the same loss of tax base that occurred in our cities in the 1960s. A short-term plug could become a long-term drain.

Audience members suggested other ideas such as municipal consolidation and shared services. But experts who have studied the issue carefully say that consolidation may save 3 to 5 percent in a local budget. That is potentially helpful, but not a big dent. Moreover, the much-ballyhooed consolidated fire district in Hudson County has by most accounts wound up costing more than before. Your guy gets to be chief, my guy at least has to get a pay raise.

Conference participants talked about better land use decisions and even biking to work. Great thoughts, but they don’t cut our structural deficits.

The point is that few people want to confront the need for tough decisions in the billion dollar range. We are still operating under the delusion that we can solve this mess by saving a million here and a million there. And some still want to spend more money. One elected official talked to me about the need for more spending on education and said: “Don’t worry about the money; the money will take care of itself.” I wish it were so. But that kind of thinking is part of what got us into this mess. The state supreme court, in ordering more education spending, has the luxury of assuming that the money will take care of itself.

Only one major cost saving idea was even put on the table. A retired education official said that New Jersey’s student teacher ratio is 12.1, compared to a national average of 15.4. He noted that if we moved to the national average, we would save over $1 billion per year. A former state treasurer expressed the same thought to me privately some years ago, saying that we would never solve our property tax problem without addressing class size. But this has dire consequences, and not too many parents (or teachers) will back this option.

The point is that it will take a number of large, controversial measures to right the ship. Gov. Christie deserves credit for his sober approach. He has begun to confront these budgetary challenges with a structural approach, rather than trimming around the edges. For example, we reduced unfunded pension liabilities by $17 billion by modifying the rules governing cost of living increases in pensions. The property tax toolkit and property tax caps will also result in big ticket savings. Even with these steps, more bold and politically difficult initiatives are needed. The Facing our Future group promises a menu of serious options to be presented late this winter.

I hope they are serious. They need to look at what other revenue options exist. We have crumbling infrastructure that is not accounted for in the projections above, but politics has precluded even five cents on the gas tax, which would raise $200 million annually. That is a big number, but a drop in the bucket compared to our infrastructure needs. What about extending the sales tax to services? Let’s see the lawyers in the legislature vote for that. What about taxing sales on the internet? I cannot project how much those measures might bring in if adopted.

On the spending side, we have to look at both the level of services offered as well as the cost per unit of service. That means a careful review of salaries; there are places where our pay scales are considerably higher than even neighboring states. What savings can be achieved with salary rationalization? Should suburban police forces be regionalized? Do we combine many police and fire functions into one public safety officer job?

We need to talk about productivity in education, even though some say that cannot be done. Do we keep the number of school administrators? Should unproductive teachers remain in the classroom just because they got tenure 10 or 20 years ago? Can we do more with technology in the classroom?

What about retirement benefits? Can they remain as they are? Some states offer no post-retirement health care benefits at all. Should people be able to collect a pension at age 50 or 55, or should the start date be later? Should there be a ceiling on the dollar amount of a pension? There certainly should be more reforms to eliminate pension padding schemes.

We will face many very tough questions. Are we keeping too many non-violent offenders in prison? The list goes on. Hopefully, the Facing our Future group will put price or revenue estimates on many proposals, so that we will at least have an intelligent basis for determining optimal outcomes.

Some say that the only way out is substantially increased aid from the federal government. There are good arguments that Washington should pay for its own mandates in education, Medicaid, and elsewhere. But I’m not holding my breath.

None of this is pleasant, nor was it fun to write. But we need to face reality before the situation gets too much worse. I admire the Facing our Future group for raising tough issues with clarity, and for having the courage to stimulate a dialogue.

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