NJ Fiscal Folly

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.


At 7:50 PM, Anonymous Bob said...

To be fair to Corzine, he stated at the southern version of his tour that the numbers are even more bleak than presented.

At 6:20 PM, Blogger PN said...

That's a little like saying that the Titanic actually had more than one leak. Technically correct, but fundamentally misleading.


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