NJ Fiscal Folly

Tuesday, February 28, 2006

Fool's Paradise

Testifying yesterday in Trenton, Acting Transportation Commissioner Kris Kolluri made the following statement about Corzine's stopgap transportation proposal, which includes new borrowing:

"What this five-year plan does, it doesn't take away the ability of the Legislature and the governor to meet to decide what the long-term fix is. What that revenue fix is, folks like you will have to decide."

First of all, the ability to fix a problem isn't helped by deliberately and rashly making the problem worse. When you find yourself in a hole, stop digging. When you find yourself insolvent, stop creating new liabilities.

Second, Kolluri basically takes the position that transportation spending and funding is totally isolated from any other decisions about NJ spending and funding. This is a world without resource constraints, priorities, or tradeoffs, a politician's paradise. Unfortunately for Corzine and Kolluri, NJ residents are smart enough to know that "revenue fix" is not the road to paradise.

Friday, February 24, 2006

Pension Plan Pretend

According to the NJ Benefits Review Task Force (December 2005), NJ's public pension plans (for both state and local employees) have an unfunded liability of $12.1 billion.

True or false?

Almost certainly false. The real number is bigger, maybe much bigger.

First of all, the liability figure was calculated as of June 30, 2004. The chance that this number has decreased since then is lower than your chance of winning the lottery.

Second, and here's my real point, the calculation of the unfunded liability involves a major dubious assumption: the future investment return on pension plan assets.

If an actuary assumes that future investment returns on current plan assets will be high, then future pension plan contributions may be reduced. Of course there's a day of reckoning if investment returns fall below your assumption, and pension plan contributions have to be boosted to make up for a shortfall in plan assets.

NJ's public pension plans currently assume a future investment return of 8.75% per year. This rate was mandated by the State Treasurer in 1992. However, back in the real world, investment performance has been quite a bit lower. Over the last seven years (FY 1999 through FY 2005), the actual cumulative return has been around 4.46% per year (4.29% per year lower than assumed). If the total market value of plan assets is now roughly $75 billion, a similar shortfall in future investment performance would add billions per year to the unfunded liability, unless offset by dramatically increased pension plan contributions.

Pension plan valuation and accounting is a complex area. Small changes in key assumptions have a dramatic financial impact. Actuaries and accountants use various smoothing techniques to handle fluctuations in investment return and plan assets. And, as you've also heard, "past (bad) performance is no guarantee of future (bad) performance". Nevertheless, an investment return assumption of 8.75% per year would be considered aggressive (to put it kindly) anywhere in the private sector. Given NJ's dismal record in all things financial, it's little short of delusional.

The unfunded pension liability of $12.1 billion is way too optimistic. A more realistic investment return assumption would increase the number, maybe by a lot.

Update: Based on a rough calculation, an investment return assumption of 8.00% per year would increase the unfunded pension liability by more than $5 billion.

Wednesday, February 22, 2006

And Your Point Was?

A few comments to elaborate on my post immediately below.

As my growing list of links should indicate, there is a tremendous amount of data available regarding NJ state and local finances. In fact, the volume is overwhelming, primarily because too many details are presented as little more than a massive data dump accompanied by standard bureaucratic commentary that explains very little. As a result, trying to locate and isolate key financial indicators is a major undertaking. Although I have private sector experience with complex budget analyses, I doubt that many other NJ residents would be able to figure this stuff out.

On the other hand, I don't think you have to be a rocket scientist to identify 20 - 30 key variables that would give NJ residents a very good overview of the state's financial situation, including trends over the last few years. The two variables I selected below, total state debt and total unfunded pension and healthcare liabilities, are pretty basic. The failure to make this kind of data easily available is one way politicians and bureaucrats avoid accountability.

Another problem is the lack of appropriate summary reports. The NJ state government is a complex organization, but that's no excuse for failing to aggregate financial data into more comprehensible units. If you review the currently available reports, most of the top level summaries still include long lists of detailed items, and intermediate level summaries frequently don't exist. There's no way you can analyze and manage the state's financial situation if all the data is presented simultaneously, and you constantly have to flip back and forth between various reports and schedules to try to assemble the relevant pieces in your own mind.

My final point for today is the need for more timely financial information. If you look at some of the dates in my link list you can see that the most recent figures for many kinds of data are 2 - 3 years old. Now I understand some of the reasons for delays in the accumulation of data and publication of financial reports. But I also understand that failure to produce timely reports is another way to evade accountability. This is true in both the public and private sectors. There's no reason to trust our state government if they're unable to provide an accurate description of our current situation.

First Suggestion

As I noted back on February 9, the NJ Legislature is soliciting suggestions re NJ spending and (my interpretation) related matters. I sent the following ideas this morning.

"NJ residents can't assess whether or not budgets are reasonable without more "transparency" and "timeliness" in the state's financial reporting.

Too much key financial data is scattered across numerous state departments and reports, or buried under a mountain of extraneous details. There should be a single web site that is easily accessible to all NJ residents that summarizes key financial indicators, or provides links to appropriate summary reports.

For openers, I would like to see the following items included at such a site:

(1) An up-to-date presentation of the consolidated outstanding debt of the state and all other debt-issuing enitities such as the Economic Development Authority, the NJ Schools Construction Corp, the Transportation Trust Fund Authority, the Educational Facilities Authority, the Higher Education Student Assistance Authority, etc. The presentation could look like the following out-of-date report: link 1.

(2) An up-to-date presentation of the consolidated, actuarial, unfunded pension and healthcare liabilities for all past and current public employees covered by the state, including PERS, TPAF, PFRS, SPRS, SHBP, etc. The currently available data is out of date and scattered across multiple reports: link 2.

The site should also include time series data (eg, last three years) to show the relevant trends for all key financial indicators."

Friday, February 17, 2006

We're All Doomed, Doomed I Tell You!

The NJ Department of Education has just released the FY 2005 Annual Report on the School Facilities Construction Program. It's a pretty long report, and I'm still working my way through it. However, I already know the punchline.

According to the DOE, it will take a minimum of $12.8 billion in additional spending, over and above the $6 billion already committed, to complete Abbott District school construction. Furthermore, Abbott Districts currently receive $2 billion per year in state aid for operating expenses.

Pretty soon the State of New Jersey will be renamed Abbott Take All.

Wednesday, February 15, 2006

Trenton Twaddle

The Corzine transition team report on property tax reform is a cynical piece of work. The basic thrust of the document is how to steer "reform" past the legislature, a state constitutional convention, and the voters. There's also an element of "bait and switch" involved: the enticement of slightly larger rebates is used to divert attention from the notable absence of specific reform proposals. "Pay no attention to the politicians behind the curtain!"

However, the most outrageous feature is the attempt to preclude any discussion of state spending simultaneously with tax changes. The document alleges that all state spending is already adequately covered by annual budget reviews, and therefore further discussion is unnecessary. This is simply not true.

For example, "Abbott school spending", which currently exceeds $3 billion per year, is based on a NJ Supreme Court interpretation of the "thorough and efficient" education clause in the NJ Constitution. Abbott spending is not subject to review or control by annual budgets. The only way to balance Abbott requirements against the state's financial resources is through a constitutional amendment.

Since funding and spending are intimately related, and since property tax reform would require a state constitutional convention anyway, why is it so illogical to consider spending issues like Abbott at the same time? Says the transition team, "combining the spending side with fundamental tax reform will doom the effort".

Maybe so, but let's get real. First of all, despite soothing phrases like "revenue neutral", "tax reform" is a code name for "tax increase", maybe not today but certainly tomorrow. The preferred method is usually some form of built-in escalator that lacks any trace of legislators' fingerprints.

More to the point, you don't cure a drug addict by giving him better funding. With an addict, lack of self-control destroys conduct and credibility. With NJ politicians, a history of disastrous financial practices nullifies any right to limit debate or obtain unconditional tax revenues.

Monday, February 13, 2006

NJ Healthcare and Unfunded Mandates

Unfunded mandates occur when the Federal government imposes certain statutory or regulatory requirements on a state or local government without providing any funding for the related costs. Since this happens so frequently, the term "unfunded mandate" usually only refers to those situations where the unfunded costs are particularly large.

Most of the time, state or local governments incur the costs directly (eg, by hiring new employees to comply with new requirements). However, state residents can also absorb the costs of unfunded mandates.

One relevant example in NJ is the provision of healthcare to illegal immigrants.

Federal law requires hospitals to treat anyone who enters an emergency room, regardless of the ability to pay. There is no requirement to verify whether or not the patient is a citizen or legal resident. Furthermore, many immigrants use hospital emergency rooms as primary care providers.

In theory, the Federal government enforces immigration law, to minimize the number of illegals. In fact, the Federal government does almost nothing to enforce the existing law these days.

The most reasonable estimates of the number of illegal immigrants in NJ are somewhere around 300,000-400,000 individuals, roughly 4% of the state's population. NJ hospitals spend a minimum of $200 million per year to treat this group (and the true figure could be much larger). The Federal government only provides around $6 million in yearly funding.

So who pays the rest? NJ residents ...... either directly through higher medical fees or indirectly through higher medical insurance premiums.

The only good news is that NJ hospitals are in somewhat better shape than hospitals along the US/Mexican border. Many of them are nearly bankrupt.

The US is a land of immigrants, but uncontrolled immigration imposes tremendous costs. If the Federal government won't enforce immigration law, it should at least provide adequate funding to deal with the consequences.

For further details, go to this link.

Update: The NJ Hospital Association estimates that NJ hospitals spend $250-300 million per year providing medical care to illegal immigrants.

Saturday, February 11, 2006

Jon Corzine and Florio's Legacy

David Rebovich has an interesting post today, "Jon Corzine And The Legacy Of Jim Florio".

While he makes the case that tax increases are probably inevitable, he omits one critical reason for NJ residents' antipathy to any "logical solution" to our state's financial mess: a well-founded skepticism that any additional funds raised won't be pissed away yet again.

I once read that the keystone to our "voluntary" tax system is the citizens' belief that taxes are fairly collected and wisely spent. Few people in NJ believe the latter.

Friday, February 10, 2006

NJ Subsidizes Arizona and Virginia

In 2003 (the latest available figures), NJ paid nearly $20 billion more in Federal taxes than it received in Federal spending, and ranked #50 among all states. In fact, since 1981, NJ has consistently ranked #49 or #50 in this category.

By contrast, Arizona received $10 billion more in Federal spending than Federal taxes paid, and Virginia received $35 billion more in the same year.

Some of the differences in state performance can be explained by factors such as the presence or absence of large retiree populations (think Social Security and Medicare payments), large numbers of Federal employees, or large numbers of military personnel or defense installations.

However, the fact remains that the State of NJ and NJ's Congressmen have done a lousy job in obtaining Federal funds for the state. This "balance of payments deficit" is a tremendous financial drain on the state.

There is also another responsible party, NJ voters who consistently vote Democratic.

Consider the situation from a Washington perspective. If you're a Washington Democrat, there's no reason to help NJ, because you know you'll always get the votes regardless. If you're a Washington Republican, there's no reason to help NJ, because you know you'll never get the votes, so why bother.

New Jersey's interests would be better served if NJ voters were less predictable and both parties actually had to compete for votes.

Thursday, February 09, 2006

Help Cut NJ Spending

The NJ Legislature has set up a web site where residents can send suggestions on how to cut NJ spending. The pessimists among you will probably assume this is political grandstanding. However, I' m going to take an optimistic viewpoint and send in a few ideas (to be outlined in a future posting).

In addition to direct spending by the state, it might also be useful to suggest changes to state laws and practices that drive up local spending. In my community, for example, one of the fastest growing categories of school spending is "special education". I have no problem with legitimate special ed spending, but my sense is that excessive state regulations and overly broad screening criteria are inflating the costs.

(This topic was also noted by DynamoBuzz and Enlighten New Jersey.)

Wednesday, February 08, 2006

(b) We're Number 42

In November 2004, the Pacific Research Institute published another comparison of states, the US Economic Freedom Index 2004 . The report focused on state and local government actions as they relate to "the right of individuals to pursue their interests through voluntary exchange of private property under a rule of law".

In this study, New Jersey ranked #42 overall.

Similar to the BHI analysis below, PRI used 143 variables grouped into five sectors:

-- fiscal (eg, taxes, state/local government expenditures)
-- regulatory (eg, labor laws, environmental laws)
-- judicial (eg, tort reform indicators, elected or appointed judges)
-- government size (eg, number of government employees)
-- welfare spending (eg, amounts redistributed through direct transfers)

Within each sector, states were sorted into groups of ten. The highest rank group received 5 stars; the next group, 4 stars; and so on.

NJ's sector scores were as follows: fiscal (1 star), regulatory (2 stars), judicial (3 stars), government size (4 stars), and welfare spending (3 stars).

(a) We're Number 37

Back in December, the Beacon Hill Institute in Boston released a study called the State Competitiveness Report 2005. As described in the press release, BHI defines competitiveness as "the policies and conditions that ensure and sustain a higher level of per capita income and its continued growth".

New Jersey ranked #37 overall.

The report assigned 42 variables to eight categories:

-- government and fiscal policy
-- security (eg, crime rates)
-- infrastructure (eg, high-speed lines, housing costs)
-- human resources
-- technology (eg, R&D, scientific/engineering labor force)
-- business incubation (eg, available funding, new firm formations)
-- openness (eg, foreign direct investment, residents born abroad)
-- environmental policy

Although some of the variables seemed a little quirky (air passengers per capita?), most were reasonably conventional. The eight categories were then combined into a single "competitiveness index".

NJ's category rankings were as follows:

-- government and fiscal policy: #43
-- security: #7
-- infrastructure: #49
-- human resources: #15
-- technology: #24
-- business incubation: #13
-- openness: #12
-- environmental policy: #50

In addition to poor rankings for state & local taxes (#37) and the state budget deficit relative to GSP (#35), NJ also ranked poorly for housing costs (#49), travel time to work (#48), the percentage of the labor force represented by unions (#46), "toxic release inventory" (#42), and carbon emissions (#50).

Update: Due to a data input error, BHI revised the rankings in Feb 06. New Jersey's overall ranking improved slightly, from #37 to #34.

Tuesday, February 07, 2006

NJ Tax and Spending Data

As you can see to the right, I've been able to accumulate a fair number of links regarding NJ tax and spending data, as well as relevant comparisons to other states.

In many cases, the only available figures are a few years old, due to lags in data accumulation by NJ and the federal government. However, these figures still provide a pretty good sense of how the state revenues and expenses fit together (or not), and the general magnitude of the sums involved. The greatest deficiency is the lack of timely and comprehensive data regarding the state's overall debt position as well as unfunded pension and healthcare liabilities.

The relative state rankings are probably pretty stable over the last few years, since the underlying economies, tax policies, laws, etc don't change as quickly as other factors. It's also necessary to remember that there may be significant differences in the relative funding mix of local property taxes, local sales taxes, state sales taxes, and state income taxes. Although NJ's property taxes are higher than most other states, sales tax per capita is lower than many.

Monday, February 06, 2006

Spacing Problem Solved

I figured out how to handle the horizontal spacing problem. I'm almost done with the initial phase of getting this blog up and running. Now it's time to start focusing on more substantive issues.

Struggling With Blogger

I am a total blog novice. For the most part, I'm happy to use Blogger's standard features because I simply don't have the time to learn and construct anything more elaborate. However, I would like to know how to fix a horizontal spacing problem.

I thought the blog's layout was basically OK, until I compared the blog's appearance on my desktop to my wife's laptop. We both use basically the same version of IE. On the laptop, the green vertical borders on the far left and far right are much wider than on my desktop. As a result, the main text section and the sidebar are crunched together on the laptop, and the sidebar links look crappy.

I went to the Settings/Template section, but was not able to figure out what to change. I can sort of figure out the HTML, but I couldn't identify how to shrink the width of the green vertical borders. Can this problem be fixed fairly easily, or am I screwed because I'm using a standard Blogger template style ("Son Of Moto")?

Any help would be appreciated.

Friday, February 03, 2006

Making Some Progress

The link list is growing. So far, I have not been able to find a good breakdown of membership figures for each of the various public sector unions. I know that total union membership for the state (for both public and private sectors) is around 800,000.

I'm also looking for a reasonably succinct explanation of the multiple methodologies used to allocate property tax funds back to the local school districts. I found a budget document from the NJ Department of Education that shows the various allocation categories (eg, Special Education), but not the underlying formulas. Any help here would be appreciated.

Thursday, February 02, 2006

Looking For Links

Although most blogs put the initial focus on commentary, I have decided to first concentrate on building up a "database" of relevant links. I am therefore looking for suggestions.

I am most interested in links related to the following kinds of topics:

-- NJ finances,
-- NJ taxes,
-- NJ debt ratings,
-- "mandatory" versus "discretionary" spending,
-- hidden NJ financial liabilities,
-- the local financial impact of new state regulations,
-- the allocation methods for property tax relief funds,
-- accurate and timely disclosure of NJ financial data,
-- NJ public employee compensation data (salaries/benefits/pensions),
-- NJ economic strength,
-- relevant comparisons of NJ to other states,
-- "regionalization" of municipal services,
-- relevant public policy organizations and papers,
-- independent analyses of NJ's financial situation,
-- "key players" to fix the problems,
-- etc.

Since many NJ bloggers already do a good job of commenting on day-to-day events, I am more interested in links related to longer-term trends and proposed solutions.

I also want to add bloggers (or other commentators) in NJ or elsewhere who focus on these issues.

Please feel free to contact me with any other comments or suggestions.

Wednesday, February 01, 2006

Let's See What Happens

This blog is an experiment, by a long-time Bergen County resident.

The original idea was to provide a focal point for "organized resistance" to the individuals and organizations responsible for NJ's deteriorating financial position. However, it quickly became apparent that the task was too ambitious for a single blogger.

Therefore, my current plan is to begin to accumulate relevant links and commentary on this topic, and then see what happens.