NJ Fiscal Folly

Wednesday, May 31, 2006

MSM Is Late To The Party

The MSM is finally reporting that Gov Corzine's budget proposal to expand NJ FamilyCare severely underestimates the cost of providing health insurance.

I had previously posted on this topic May 3 and March 24.

Tuesday, May 30, 2006

The Cost Of Amnesty For Illegals

The Heritage Foundation has published a disturbing paper with the lengthy title "Amnesty and Continued Low-Skill Immigration Will Substantially Raise Welfare Costs and Poverty".

The paper's main points include the following:

(1) The net additional cost of amnesty for the 10-12 million illegal aliens already in the US would be approximately $16 billion per year.

Most of the current illegals have low education levels and low skill levels, which are highly correlated with high welfare utilization, high rates of out-of-wedlock childbearing, high rates of child poverty, high crime rates, future shortfalls in educational attainment, and future welfare dependence, including successive generations.

(2) Once the illegals receive permanent residence, and later citizenship, they are allowed to bring spouses, children, and parents to the US. The estimated cost of "family chain migration" would be an additional $30 billion per year. (Many of these immigrants would be net consumers of government and social services rather than potential taxpayers.)

(3) Amnesty, citizenship, and welfare benefits, combined with a lack of border security and other forms of enforcement, would serve as a magnet to accelerate the flow of low-skill illegals into the US, and would further increase the costs to US taxpayers, as well as other social problems.

As the study notes, current amnesty proposals would be the largest expansion of the welfare state in 35 years. If the illegal immigrant population becomes entitled to citizenship benefits, while simultaneously growing due to "family chain migration" and the "magnet effect", the costs to US taxpayers would be truly staggering.

I would add two other points to the paper.

First, even though immigration policy is determined at the Federal level, many of the costs associated with amnesty would be incurred at the state and local level, without benefit of offsetting Federal funds. For example, NJ hospitals currently spend $250-300 million per year providing Federally mandated medical care to illegal immigrants. There is no Federal compensation for this care, and these costs are eventually passed on to NJ residents, through higher medical fees, higher medical insurance rates, or higher taxes. NJ government is already broke, and can't possibly afford any expansion of such uncompensated services.

Second, the issue of immigration policy is intimately tied to the concepts of national sovereignty and national identity. Many amnesty supporters believe that "progressive, transnational values" trump any national policies that might preserve US sovereignty or national identity. These supporters do not concede (a) that immigration is a privilege, not a right; (b) that the US has a right to regulate the rate of immigration; or (c) that English should remain the primary language of the US. The rest of us believe otherwise.

I'm not against immigration, but amnesty plus open borders is a formula for disaster.

Update: Back in April, the Federation For American Immigration Reform estimated that NJ currently spends about $1.7 billion per year for just three categories of illegal immigrant costs: emergency room medical services, education, and incarceration. This figure seems pretty high to me, but I could easily believe at least $1 billion per year after you add in other social services plus increased state and local government costs. In general, illegal immigrant costs will greatly exceed any taxes paid by low skill workers.

Wednesday, May 24, 2006

The Good News Never Ends

One of my favorite topics is NJ's liability for post-retirement health care benefits for public employees (sometimes designated PRM, for post-retirement medical). This liability is a form of debt, a future obligation to be paid by NJ taxpayers. Unlike pension obligations, there are no assets set aside and invested to pay for these future expenses.

It should also be noted that NJ public employees have generous health care benefits, especially PRM, that most private sector employees can only dream about.

Back in December, the Benefits Review Task Force Report made a rough estimate that NJ's PRM obligation was at least $20 billion. I expressed skepticism about that figure in a prior post, and suggested that a more realistic number might be as high as $40 billion.

Today, I came across an interesting tidbit buried in an OLS analysis of the proposed budget for "Interdepartmental Accounts", a cost center which contains state funded employee benefits. The OLS analysis includes a background paper on "Other Post Employment Benefits" (OPEB, essentially the same as PRM).

Here's the good news hidden away in the OLS paper (see page 40):

"Notwithstanding the unofficial estimate of $20 billion for New Jersey's OPEB liability, Mercer Consulting, a global corporate consultant firm, estimates that OPEB liability will be 40-60 times an entity's annual medical expenditures. This suggests that New Jersey's OPEB liability is in the $40 billion to $60 billion range."

NJ currently spends about $1 billion per year for retiree health care benefits. This expense category is projected to grow by more than 22% per year over the next four years.

Furthermore, due to new government accounting regulations, NJ will have to start reporting the OPEB liability on a yearly basis. The bond rating agencies will begin to include this data in their evaluations of the state's finances, which will affect future borrowing costs. I wouldn't bank on any credit rating upgrades, particularly when the OPEB liability is combined with current state debt ($33 billion and growing), unfunded pension liabilities (at least $18 billion), and endless Abbott spending requirements.

Like so many other components of the state's finances, PRM costs are out of control. However, it's a pretty good bet that feckless politicians and public employee unions will do nothing to change course as our car accelerates straight over the cliff.

Tuesday, May 23, 2006

NJ Economic Development

Although NJ desperately needs to reform fiscal management and state government, we have no future without economic growth. You only have to take a look at a high cost, declining, Rust Belt state like Michigan to see one possible future if NJ can't stimulate growth and diversify the economy.

The National Governors Association Center For Best Practices recently released a study which reviews economic development initiatives in various states over the last year.

Quoting the study's Executive Summary:

"Most of the states’ major new economic development initiatives focused on enhancing state and regional "clusters of innovation" -- fast-growing groups of businesses that share markets, labor, new ideas, and products. To enhance these clusters and exploit the unique advantages of the region’s labor pool, educational resources, and research capacity, most development initiatives emphasized one or more of the following strategies:

-- Promoting research and development by leveraging public funds and encouraging partnerships

-- Building a skilled workforce by providing training and education to meet industry needs

-- Supporting entrepreneurs by providing seed funding and incentives for job creation

-- Developing rural areas by supporting innovations in agriculture and supporting business development

-- Supporting tourism through state funding, campaigns, and training programs

-- Improving business attraction through revitalization activities and quality of life initiatives

-- Marketing the state’s businesses through outreach campaigns and international missions and offices."

Although NJ is not mentioned in the study, we seem to be following much of the standard game plan above.

It should be noted that many other states are also targeting three industries identified in NJ's "High-Tech Recovery Plan": life sciences and biotechnology, nanotechnology, and renewable energy. Economic development is not a zero sum game, but it is competitive, and some states (and countries) will do better than others. For example, NJ's traditional strength in pharmaceuticals has been eroding over the last few years as other locations have gotten stronger.

However, economic development is not an excuse to squander money. The full speed charge into NJ's new stem cell research program already looks like a replay of the political buffoonery and plunder that characterized the spendthrift Schools Construction Corp. Is it really necessary to commit $250 million to three new research facilities at this point? Why not start with one facility in New Brunswick, the logical location, and see how that goes?

NJ is a rich state, with many talented people and other resources critical for growth. However, economic development is not a quick fix, and it is not a substitute for improving NJ fiscal management or reforming state government.

Monday, May 22, 2006

State Revenue Updates

State Treasurer Bradley Abelow and the NJ OLS today released revised revenue projections for FY 2006 and FY 2007. The two sets of numbers have not been totally reconciled, but these types of revisions are normal for any large, complex budget.

The most important revelation is that Abelow now expects FY 2007 revenues to be $441 million lower than previously forecast. The primary reason for this shortfall is a lower growth rate in gross income taxes (GIT), which are substantially affected by a small number of taxpayers with less predictable incomes (eg, capital gains). The revenue shortfall also results from lower corporate business taxes (CBT) than previously forecast.

Abelow's FY 2007 figures still include the sales tax increase, and apparently still include the controversial hospital bed tax ($215 million for the state).

Wednesday, May 17, 2006

New Jersey Has No Power

As I've noted previously, NJ ranks 50th (ie, worst) in a state-by-state comparison of Federal taxes paid versus Federal spending received. For every $1 in Federal taxes paid, NJ receives $0.55 in Federal spending. This is partly due to NJ's ineffective Congressmen.

Today, I discovered a web site that ranks Congressional power, by Congressman and by state. As you might expect, NJ ranks 49th in terms of Congressional power. Sen Lautenberg ranks 97th in the Senate (Sen Menendez was not ranked). In general, NJ Republican Representatives ranked higher than NJ Democratic Representatives.

No wonder New Jersey never gets a fair share of Federal funds.

Roberto at DynamoBuzz also has a similar post on this topic today.

Wednesday, May 10, 2006

NJ State Debt Disclosure

One of the many reasons NJ financial management is so poor is because NJ financial disclosure is so poor. Like the managers of a badly run company, NJ politicians and bureaucrats like to avoid any form of reporting that might be used to hold them accountable.

There was a story in yesterday's news that NJ's total state debt has now increased to $33 billion, up 11.5% from last year. However, we get this information from Moody's Investors Service, not the NJ State Treasurer. In all likelihood, the Treasury Department provided the data to Moody's, but not to any NJ taxpayers.

The Public Finance Division of the Treasury Department has a web site which contains two reports related to state debt. However, the reports are incomplete and way out of date. There are no schedules in the Corzine budget proposal with more current information.

I have two recommendations.

First, the State Treasurer should be required to maintain current information on total NJ state debt on the Public Finance web site. The format of the schedule labeled "State of New Jersey Debt Analysis" is particularly useful. The web site should also include current bond ratings for benchmark state bonds from all major ratings agencies. Any links to rating agency reports would be valuable too.

Second, there should be a requirement that all budget proposals and approved budgets include detailed information and summaries of total NJ state debt (including debt service requirements for the next 3-5 years). The best figures would be outstanding debt as of the December 31 immediately preceding the next budget year (eg, 12/31/05 data for the FY 2006-07 budget year). This kind of information is standard in any large private sector budget.

Current information on total NJ state debt is easily available. There's no reason that Moody's should receive this data but not NJ taxpayers.

Friday, May 05, 2006

Pension Deficits Are Local Too

Yesterday, State Treasurer Bradley Abelow indicated that a new estimate shows that the state's public employee pension system has a deficit of $18 billion. Altough I think this figure is still too low, it's certainly more realistic than the prior estimate of $12 billion, which was a total fiction based on wildly optimistic assumptions, such as inflated investment returns.

The state's pension system consolidates the pension obligations of both state government and local governments. Based on the last available details (as of 6/30/04), the local government component of the total pension deficit is roughly 30%, or $5.4 billion.

The two main pieces of the local government pension deficit are police and firemen (PFRS; 80%) and other employees (PERS; 20%). Teachers are considered a state obligation, not a local one.

As the NJ League of Municipalities has pointed out, "the cost to local government for one PFRS member is approximately three times more than the cost of a local government PERS member". Local government pension liabilities for police and firemen are driven by higher salaries, generous pension benefits (ie, income replacement ratios), and early retirement options.

The cost of local government pension liabilities is ultimately paid by local property taxes. Thus, while it's currently convenient (and mostly appropriate) to focus on the state's overall financial problems, and the shortcomings of Gov Corzine's proposed budget, taxpayers should also remember that there are major liabilities and cost drivers a lot closer to home.

Wednesday, May 03, 2006

Confirmation And A Warning

In a prior post below, I noted that Gov Corzine's budget to add 50,000 children to the NJ FamilyCare program seriously underestimated the costs. The Office of Legislative Services (OLS) now agrees with me.

The OLS analysis of the proposed budget for the Department of Health and Senior Services includes a section on the proposed NJ FamilyCare expansion (see pages 44-45). The OLS focuses on the first year of the expansion, where enrollment increases month by month, rather than the full year costs once all 50,000 additions are in place (my earlier post).

The OLS calculates that the incremental first year cost of the expansion would be approximately $40-45 million, not $14 million as Corzine claims. Under the best case scenario, NJ's share of this total would be at least $14-16 million, not the $5 million figure included in the FY 2007 budget.

But here's the kicker (quoting the OLS):

"Federal funding is available for NJ FamilyCare (Children) at a 65% matching rate, but federal funds are capped and do not increase with enrollment or expenditures. The State's annual federal allotment is approximately $90 million. However, in past years, the federal government has reallocated unexpended federal funds from other states to support the State's program. The amount of federal funds that have been reallocated from other states to New Jersey has decreased in recent years as other states programs are now expending more of the federal funds that have been allocated for their programs."

"The FY 2006 recommended budget already assumes that over $140 million in unexpended federal funds from other states will be reallocated to New Jersey to support the current program without any increase in the number of children who are enrolled in the program. Thus, if an additional 50,000 children enrolled in the program, the entire cost may have to be paid with State funds if the federal government does not reallocate sufficient unexpended balances from other states to New Jersey."

In other words, due to lack of federal funds, Corzine's program expansion might end up costing New Jersey $40-45 million next year, not $5 million (and at least $67 million per year thereafter). Furthermore, a large portion of federal funding for the current program may also be at risk. NJ taxpayers would then have to absorb a greater share of current program costs as well.

As I said previously, Corzine's idea may be laudable. But let's start with a realistic estimate of program costs and funding sources, and let's identify the spending cuts elsewhere that would make this program affordable on a continuing basis. Otherwise, good intentions and bad math will be a ruinous combination.