Opinion: New Jersey’s Financial Troubles — Ravitch Was Right

Tom Byrne | January 18, 2013 | Opinion
For years, the Garden State's government has raided various funds to balance the budget, now there's nothing left to borrow

Former New York Lieutenant Governor Richard Ravitch pulled together a bipartisan group of statesmen to issue a stark warning about the finances of many state governments around the country. New Jersey did not fare well. Many have not taken the warnings seriously, because the state has a history of warning residents about budget problems that then magically go away.

Now, the magic may be gone. It consisted of money from pension bonds, billions taken from the tobacco settlement, federal stimulus funds, and raids on state trust funds and the rainy day fund. It would seem that we’ve reached the end of the road on gimmicks and last-minute rescues.

The state spends about $33 billion per year. But nearly 70 percent of all state and local spending is done at the local level — for education, police and fire, public works, and other expenses. Only about $7 billion is for state government operations.

A full $13 billion goes to aid for public schools. Another $4 billion is for our share of Medicaid spending. Other big tickets are healthcare for active and retired state employees (over $1 billion per year) and pension contributions (slated to climb from today’s $500 million to $3.5 billion by 2018). The federal government kicks in about $12 billion for so-called passthrough spending, which means that Trenton lays out about $42 billion overall annually

Broad-based tax revenues have been flat in recent years and can increase only minimally over the next few years. Mandate-driven spending is likely to increase much faster, widening the gap between revenues and expenditures.

The Legislature has mandated an additional $500 million per year through 2018 just for public employee pensions. It costs nearly $1 billion just to keep state and local spending on education even with inflation. And then there is the pressure to increase preschool programs, and to build new schools or fix old ones. Those efforts slowed to a crawl some years ago after a school construction fiasco that spun out of control to the tune of more than $8 billion. Medicaid spending may continue to rise by 7 percent or more.

And the Ravitch study says we have an almost unfathomable $133 billion in unmet infrastructure repairs — ranging from bridges to water pipes.

Between pensions, education, and Medicaid alone, the demands on state government are likely to increase by several billion dollars per year. Pension obligations are mandated by statute. Education spending is clearly essential, and its allocation is mandated by the state supreme court. Medicaid spending is to a great extent the result of federal requirements. So the state doesn’t have much room to maneuver.

Moreover, these problems are not widely understood for several reasons. First, there is the issue of magical thinking. People just assume troubles will get fixed. Second, not too many reporters were math majors, so their eyes tend to glaze over when they have to deal with numbers. Third, news coverage of Trenton is minimal. Thus, it is hard to build public awareness, much less consensus on what ought to be done.

But shouldn’t it be the job of politicians to sit down and figure out some answers? Social scientists such as Nobel laureate Daniel Kahneman teach that it is much harder to take something away than to never give it in the first place. So it is politically tough to cut back on postretirement healthcare for public employees, even though certain states don’t offer it at all.

Even thoughtful and dedicated public servants have trouble deciding on what changes to make. As one legislative leader said to me: “Legislators just love to pontificate.” No single lawmaker bears responsibility, so pontificating beats making hard decisions. Triage is difficult for even the most well-intentioned public servants. But government leaders need to get around a table and agree on some structural changes.

There are some places to start. One is the enormous variance among towns in our state on local expenses. Here’s an example: The newly combined Princetons have nearly the same population as nearby East Windsor. Yet Princeton has a local budget that is three times that of East Windsor. This suggests room to control spending in certain places.

Then there are comparisons with other states. Some of our salary levels are more than double what the same job would command even in nearby states. Many public employees in New Jersey get paid far more than the governor. There should be an overall cap on what any public employee can earn.

I’ve heard some of our most notable political leaders say that the federal government should bail us out. But things may move in the opposite direction as Congress makes spending cuts and increases taxes. Further, I can’t imagine politicians from more conservative states agreeing to bail us out when we offer programs and benefits that don’t exist in their states. If Congress limits the deductibility of state and local taxes, it will be tantamount to a huge increase in our state tax burden. That in turn will further constrain the ability of the Legislature to solve our fiscal problems through higher taxes.

We will be forced to address a myriad of questions. Can we solve part of the pension problem by investing more like top private universities? We appropriately have different risk parameters, but if we had been free to allocate assets as a top university does and had garnered the same returns, there would be no pension shortfall. The legislators I’ve talked to do not believe that we will ever fund the pension plan at the level that they themselves agreed to. The Legislature should mandate a funding source, from either existing or new revenues; if they do not, public employees should take notice that full funding is probably an empty promise.

We need to think about both the level of services that government offers and the price-per-unit of those services. The state and individual towns shouldn’t be reviewing the same land-use and construction plans, especially while applying inconsistent standards. The days of duplication have to end. We have too many cops in some suburban towns and too few in many of our cities. The suburban cops often get paid more for less challenging work. This needs to change. Cities like East Orange have used advanced technology to cut crime; this is scalable.

We have to think about how to make our education system more efficient. The state Constitution says that education must be thorough and efficient, but the latter standard is ignored. We should be able to make much better use of technological resources, such as Khan Academy — the online resource that teaches “almost anything for free.” We should pay more for teachers who specialize in math and science, and less for seniority without superior performance.

Better information technology and preventive care can make a significant dent in health care costs. Camden has been cited as a model for doing so.

There is so much more to discuss. But just as government needs to impose spending limits, editors impose word limits. As a former governor of California said: “I’ll be back!”