NJ Fiscal Folly

Thursday, March 30, 2006

State Of Disunion

Apparently NJ is under attack. Our #46 ranking in individual income taxes and our #50 ranking in business taxes are not secure. Otherwise, how else to explain a new proposal by the New Jersey Education Association (NJEA) and the Communications Workers of America (CWA), two powerful NJ unions, for a $462 million increase in individual income taxes, and a $300 million increase in business taxes.

Maybe they figure the best defense is a good offense. After all, it's the gluttony of unions like the NJEA, the CWA, and others that is one of the major factors in NJ's current distress. God forbid that they should ever be held accountable for their role in this fiasco. Better to create a diversion and deflect attention elsewhere.

NJ is one of the most heavily unionized states in the country, which is one reason we keep electing zombie Democrats for state and national offices. Lockstep adherence to ever-increasing taxes and profligate spending is destroying the state, and driving both people and businesses away.

When your political philosophy is based on grievances and entitlements, you need a steady supply of "oppressors" and suckers. One day, the NJ unions will wake up and find themselves all alone. Who will they blame then? Who will be left to pay their bills?

Tuesday, March 28, 2006

Criticizing The Courts

Fairleigh Dickinson University conducted a brief poll of NJ voters in late February and early March. The basic topic was courts that "legislate from the bench", that is exceed judicial authority and take on a legislative role. A good example in NJ would be the benchmarks, scope, and expense of Abbott district remedies mandated by the NJ Supreme Court.

One of the questions in the FDU poll asked "In your opinion, how serious a problem is it that New Jersey courts legislate from the bench?"

The answers were as follows:

All Responses
Very Serious (33%); Somewhat Serious (33%)

Very Serious (49%); Somewhat Serious (26%)

Very Serious (22%); Somewhat Serious (36%)

I don't find these results as suprising as the answers to another question "In your opinion, how serious a problem is it that New Jersey courts rule on the basis of what their political party wants?"

All Responses
Very Serious (59%); Somewhat Serious (21%)

Very Serious (64%); Somewhat Serious (20%)

Very Serious (55%); Somewhat Serious (23%)

In other words, even NJ Democrats, who benefit from politically-motivated judicial activism, recognize the corrosive effects of such a philosophy, effects which diminish judicial credibility for everyone.

Friday, March 24, 2006

You're Going To Love This

How Liberals Go Broke (Part 2)

Is Corzine sleazy, or just incompetent?

In July 2005, Gov Codey signed a bill that expanded the NJ FamilyCare program (S2236 / A3724). When I researched this bill, I came across some very interesting information.

The Office of Legislative Services (OLS), which provides professional, nonpartisan staff support services to the NJ Legislature, analyzed various costs related to the NJ FamilyCare program (go to page 6 of this June 2005 Senate Budget Committee report). The OLS found that the state spends $113 per month for each child in the program. For every additional 10,000 children, the gross annual cost (paid with both state and Federal funds) would be $13.6 million. Thus, the cost of an additional 50,000 children would be $68 million per year, not $14.3 million as Corzine claims in his proposed budget.

Let's see, off by over $50 million. So much for the Wall Street wizard. So much for Corzine's credibility.

Thursday, March 23, 2006

How Liberals Go Broke

Gov Corzine wants to add 50,000 children to NJ FamilyCare, a health insurance program. This may in fact be a laudable idea.

However, he tells us it will only cost $14.3 million (including $9.3 million in Federal funding). This is laughable, not laudable.

As I noted in a prior post, the NJ Hospital Association estimates that NJ hospitals spend $250-300 million per year providing medical care to illegal immigrants. Since there are approximately 350,000 illegal immigrants in NJ, this works out to about $785 per person per year.

Let's be conservative, and assume $500 per child per year. Multiply $500 by 50,000 and you get $25 million per year.

Now the difference may not seem like very much, but the program's financial requirements will only grow in the future. Medical costs are difficult to control (would $500 cover your child?). Politicians and interest groups will constantly push to expand enrollment. Unless Corzine can guarantee that Federal funding will continue to cover 65% of program costs forever (anybody want to make that bet?), NJ is once again increasing the fixed cost base.

Good intentions and bad math are a ruinous combination.

As I said, Corzine's idea may be laudable. But let's start with a realistic estimate of program costs, and let's identify the spending cuts elsewhere that will make this program affordable on a continuing basis.

Footnote: Some participants in NJ FamilyCare pay small monthly premiums. Corzine's budget commentary does not indicate that this would be true for his new initiative.

Wednesday, March 22, 2006

Up In Smoke

According to pages 47 and 55 of the Corzine budget, raising the cigarette tax to $2.75 per pack will generate an additional $80 million in revenues.

According to the revenue schedule on page 104, total cigarette taxes will decrease from $640 million in FY 2006 to $491 million in FY 2007.

Maybe they should lower the tax instead.

Update: Great minds think alike. Enlighten New Jersey has a similar post on this topic.

Update: An explanation has emerged. Back in FY 2005, the state sold $2.5 billion in bonds to "balance" the budget. The bonds were backed in part by future cigarette taxes. The FY 2007 budget includes the first bond payments of $211 million, which reduce total cigarette tax revenues.

NJ Debt Update

In a prior post below, I estimated that long-term debt already incurred by the state and various funding agencies was at least $20-25 billion. Well, the "at least" part was correct.

Page 4 of the Corzine budget reveals that NJ bonded debt reached $30 billion in FY 2006. This figure does not include further borrowings for new transportation projects (at least $6 billion) or incremental Abbott district school construction (at least $10 billion).

The comparable figure in June 2003 was $18.6 Billion. LT debt has increased 61% in three years!

Corzine Budget And Abbott Districts

Continuing my rant from yesterday, Gov Corzine forecasts $11.62 Billion from individual income taxes in FY 2007. However, page 26 indicates that total state aid to the Abbott districts (including preschool) will reach $4.25 billion.

In other words, 37% of potential property tax relief has been confiscated from the majority of NJ communities to benefit a select few.

Update: FY 2007 state aid figures by county and by school district are now available at this site. It's not clear to me whether or not these numbers include $243 million identified for Abbott preschool programs, but I think not.

Tuesday, March 21, 2006

The Black Holes Of NJ

Black holes swallow light and matter. Abbott school districts swallow NJ taxes.

According to the NJ State Constitution (Article VIII, Sec I, Par 7), individual income taxes can only be used to reduce or offset property taxes. The money is usually returned to taxpayers through school aid, municipal aid, or property tax rebates. In FY 2006, these three categories will total roughly $11.5 billion.

Unfortunately, the constitution allows wide discretion in establishing formulas for the distribution of such funds. As a result, there is nothing to prevent a massive redistribution of money from some communities to others. Abbott district spending is the inevitable result.

The largest component of school aid is direct payments to school districts. In FY 2006, these payments should total $6.9 billion.

According to the NJ Department of Education, the 31 Abbott districts will receive around $2 billion in FY 2006 for "parity aid", "supplemental aid" and preschool programs. Until recently, given the size of the number, I assumed that this figure pretty much covered everything for these districts, except for construction costs, which are handled separately.

However, acting on a hunch, I went back and added up all of the direct school aid payments to these 31 districts . It turns out that the Abbott districts will receive over $3.8 billion in FY 2006, 55% of all direct payments and 33% of total school aid, municipal aid, and property tax rebates. The largest recipients include Newark ($687 million), Jersey City ($420 million), Paterson ($362 million), Elizabeth ($246 million), and Camden ($244 million).

Gov Corzine is starting to beat the drum for consolidation and/or regionalization of municipalities and school districts. His basic argument is the need for consolidation cost savings to offset property tax increases. This may be a valid reason, but it's also somewhat misleading. The massive redistribution of funds from many NJ communities to the Abbott districts is a major contributor to financial pressures at the local level. Consolidation cost savings won't make a dent in property tax burdens unless Abbott district spending is also brought under control.

Update: The FY 2007 Corzine budget proposal that was released this afternoon contains revised estimates for FY 2006. The figures above were based on previously available information. The new estimates are generally similar to the prior ones, and do not change my basic thesis.

Monday, March 20, 2006

Pension Plan Update

In a prior post below, I commented on NJ's unfunded pension liability. In a subsequent update, I calculated that the "official" figure of $12.1 billion should be at least $5 billion higher. It turns out I was an optimist.

An article in yesterday's NY Times included a brief section on how NJ's pension situation affected the upcoming budget. In the article, Orin Kramer, the chairman of the council which oversees the pension funds, provided some additional infomation:

"Mr Kramer declined to put a number on the deficit in an interview last week. But recently, using more conservative assumptions about the return on investments than the governor's panel did, he estimated the deficit at more than $30 billion."

That's "Good News #1".

Here's "Good News #2".

The estimation of future pension payments is fairly straightforward compared to the estimation of future post-retirement health care benefits. The current "official" estimate of NJ's unfunded health care liabilities is at least $20 billion. Given the uncertainty of the unfunded pension liability, who wants to place a bet on the real number for health care? $40 billion anyone?

Friday, March 17, 2006

Haste Makes Waste

Gov Corzine set up a committee to review the NJ School Construction Corp, our latest state fiasco. They have just released their first report, which includes this summary:

"The speed with which a [school facilities] project could be constructed became the primary driver for the Corporation’s activities. Management, accountability, reporting, cost control and transparency all took a secondary priority, if recognized at all, to speed. The result is also well known."

Criminal stupidity. Our new state motto.

Thursday, March 16, 2006

Quinnipiac Poll Results

FYI, Quinnipiac University has just released the results of a recent NJ poll. Since I'm not a poll pundit, I'll just point you to the appropriate link.

Federal Taxes And Federal Spending

The Tax Foundation has published an update to their annual state-by-state comparison of Federal taxes paid versus Federal spending received. I had previously posted about this topic below.

For the fourth consecutive year, NJ ranked #50 (ie, worst). For every $1 in Federal taxes paid, NJ received $0.55 in Federal spending. For FY 2004, NJ's "balance of payments" deficit was $34.6 billion, a big deal given our current financial situation.

As the report notes, "Thanks to a steeply progressive federal income tax, states with higher incomes pay vastly higher federal taxes, payments that are unlikely ever to be matched by federal spending directed to those states. Ironically, most of these high-paying states are the so-called blue states that have generally elected politicians who support a more steeply progressive tax system even though their own constituents bear a greater share of the burden as the code gets more progressive." To be blunt, Democratic grandstanding on income taxes ("tax the rich") ultimately hurts NJ residents.

There's another reason NJ residents get hurt. States like NJ, NY, and Massachusetts suffer from an excess of politicians with national ambitions. As a result, they spend too much time campaigning for higher office and too little time representing their states. They never stay in place long enough to acquire sufficient seniority or expertise to increase Federal funding for their states. They seek out TV exposure rather than more mundane responsibilities with greater practical impact. They do a poor job of organizing effective coalitions with other politicians from similar states. Corzine is a perfect example. The irony now is that Governor Corzine must deal with the consequences of Senator Corzine's shortcomings.

(Lautenberg's problem isn't national ambition. He's just ineffective.)

Update: The next worst state on the list was Connecticut, which received $0.66 in Federal spending for every $1 in Federal taxes paid. If NJ only reached that level, we would receive over $8 billion in additional Federal funds every year.

Tuesday, March 14, 2006

Lautenberg's Good Idea

One of Washington's regular food fights involves increasing the national debt limit. The dispute is largely pointless, but provides ample opportunity for partisan grandstanding.

Amidst the usual bickering, NJ's Senator Lautenberg (D) actually came up with a good idea: federal debt would have to be disclosed on federal tax forms.

I propose the same idea for NJ. All NJ tax forms would have to prominently disclose the amount of outstanding state debt, unfunded pension and health care liabilities, future obligations for Abbott district construction and transportation projects, etc.

I'll bet that $70+ billion in liabilities on our tax forms would get some attention!

NJ Democrats should follow the lead of their colleague in Washington.

Monday, March 13, 2006

We Want Your Input

Both Gov Corzine and the NJ Legislature provide online forms for NJ residents to comment on the budget, taxes, or other topics. This is a good idea.

So why are the input boxes for comments roughly the size of postage stamps?

Could it be that they really don't give a damn what you think, and the online forms are just a cynical PR stunt?

Personally, I could never believe such a thing.

Prof Sabrin's Recommendations

Murray Sabrin, a business professor at Ramapo College, publishes his recommendations for NJ's finances.

I don't think all of them are practical, but many of the ideas are good.

I am somewhat ambivalent about amending the NJ Constitution. On the one hand, it seems to be the only way to rein in Abbott district spending. On the other hand, I am not confident that the amendment process, once started, has enough built-in safeguards to protect NJ residents from irresponsible politicians and interest groups. I see a great potential to make our financial situation much worse, and little reason to trust any of the likely participants.

Friday, March 10, 2006

One Dimensional Thinking

As you know, Gov Corzine has been leading a series of budget meetings throughout the state this week. One of his staff members, State Treasurer Bradley Abelow, has prepared a presentation to summarize the current situation.

It's not a bad presentation, but as I went through it I realized that it's a very misleading document. In essence, the document tells us that current state programs and projected expense growth exceed the funding base of recurring revenues necessary to support this spending.

This is common knowledge, so what's my objection?

First of all, believe it or not, the presentation actually sugarcoats the problem. There are no figures to indicate the true magnitude of NJ's outstanding debt, unfunded liabilities, and Abbott construction obligations.

Based on available information and my best estimates, NJ is currently obligated to pay at least $65-70 billion for just the following items: (a) long-term debt already incurred by the state and various funding agencies (at least $20-25 billion), (b) unfunded pension liabilities (at least $15 billion), (c) unfunded post-retirement health care benefits (at least $20 billion), (d) incremental Abbott district school construction (at least $10 billion). Even though these costs will be spread out over many years, this is a major problem for a state with only 8.7 million residents.

Furthermore, as the latest transportation financing scheme illustrates, politicians will always take the easy way out. "Pay as you go" will never beat "borrow more money and dump the problem on somebody else in the future".

To use an analogy, NJ has $50,000 in yearly income and a $1 million mortgage. Our monthly payments don't even cover the interest, and the debt is growing continuously. There's no happy ending for a situation like this, and refusing to acknowledge the problem doesn't solve it.

Which brings me to my second point. Abelow's presentation basically takes current programs and expense growth as a given and leaves us to draw the inevitable conclusion: the only solution is higher taxes. Ironically, given the title "Restructuring New Jersey's Future", there is very little in the document about actually restructuring the most significant programs and factors that drive state spending, like the items above.

Now I understand that this week's budget meetings are only the first round in the budget process. Furthermore, Corzine and the legislators are jointly responsible for addressing and negotiating these issues. However, unless Corzine and Abelow show true commitment to major structural change it's never going to happen, and NJ's fate will be more pain but no gain.

Update: A recent Star-Ledger article reports that (e) incremental borrowings for transportation projects will further increase state debt by at least $6 billion, plus billions more in additional interest expense.

Thursday, March 02, 2006

The Circus Comes To Town

Gov Corzine will host three regional forums on March 7-9, to discuss budget issues with NJ residents.

These types of meetings are usually PR stunts, but may be worth attending anyway, as long as you understand the ground rules. I would go if I didn't already have a prior commitment.

Wednesday, March 01, 2006

It's Not Just Property Taxes

The Tax Foundation has just released the latest version of the State Business Tax Climate Index.

New Jersey ranked #49 overall (down from #47 previously). Only New York was worse.

The State Business Tax Climate Index is based on five components:

(1) a Business Tax Index
(2) an Individual Income Tax Index
(3) a Sales and Gross Receipts Tax Index
(4) an Unemployment Tax Index
(5) a Wealth Tax Index

The Business Tax Index is based on business tax rates and the business tax base (including the definition of taxable income). NJ ranked #50 on this index (down from #47 previously).

For the Individual Income Tax Index, NJ ranked #46 (down from #37 previously).

For the Sales and Gross Receipts Tax Index, NJ ranked #27 (down from #23 previously). However, Gov Corzine is apparently considering a gross receipts tax, so our ranking here will probably deteriorate more in the future.

For the Unemployment Tax Index, NJ ranked #27 (down from #26 previously). However, the state's Unemployment Insurance Trust Fund is nearly insolvent, due to constant diversions to fund other state programs. An unemployment insurance tax increase is unavoidable. Hence, NJ's future ranking will deteriorate here as well.

The Wealth Tax Index includes a variety of items, such as property taxes, capital stock taxes on corporations, asset transfer taxes, etc. NJ ranked #46 on this index (a slight improvement from #48 previously).

New Jersey is a state with many resources and talented people, but these are serious numbers. Who will remain to pay the bills when there are so many better alternatives elsewhere?