This is the seventh in a series of articles exploring the critical policy challenges that the next governor and Legislature will face, as well as their positions on these issues.
Four years ago, Gov. Chris Christie inherited a state with a massive built-in budget deficit, a millionaire’s tax about to expire, and $2 billion in federal stimulus funding about to go away. Property taxes were rising, as was state debt. The state’s long-term unfunded liability for pension and retiree healthcare costs for teachers, police, and state and local government employees was a staggering $100 billion. The Unemployment Insurance Trust Fund was broke, and a new $8 billion plan would soon be needed to pay for highway, bridge, and mass transit capital projects.
The policy choices that Christie made to address those fiscal crises, the tax and budget votes that his Democratic challenger, Sen. Barbara Buono (D-Middlesex), cast in her 18 years in the Legislature, and the sharply divergent approaches they would take to the state’s future funding challenges are the most critical differences they have laid out in their year-long campaigns:
“The question is not only whether Chris Christie made the right policy choices, but what would have happened if a Democratic governor and Legislature were reelected together in 2009,” said Joseph Seneca, university professor at Rutgers University’s Edward J. Bloustein School of Planning and Public Policy. “Would the state have made the structural changes needed?”
Seneca and David Rousseau, Corzine’s former state treasurer who is currently serving as budget analyst for the liberal New Jersey Policy Perspective think tank, both warned that the governor and Legislature elected November 5 will face at least four more years of tight budgets as the state completes a seven-year phase-in to full funding of the its pension obligation, which will increase by an estimated $600 million each year through the Fiscal Year 2018 budget.
Nevertheless, if Christie and a Democratic legislative majority are reelected, as the polls indicate, it will be hard for Democratic legislators to avoid voting for a 10 percent property tax credit on the state income tax that was originally proposed by Senate President Stephen Sweeney (D-Gloucester) and is being pushed by Christie — not after so many Democrats have been running campaign ads saying they would work with Christie to enact it.
Paying for a property tax credit program that would rise in cost from about $250 million in the first year if implemented as a part of next year’s budget to $1.4 billion by FY2018 would severely strap a state budget whose pension bill is projected to go up from $1.7 billion this year to at least $4 billion by FY2018 and whose cost for retiree health benefits is projected to rise another $600 million to $1.7 billion by that summer budget year.
To put that challenge in perspective, the only way Christie kept the state budgets in balance during his first term was by raiding more than $2 billion in clean energy and other dedicated funds, delaying a scheduled $395 million property tax payment until the following budget year, and shifting more than $600 million in New Jersey Turnpike toll revenue into the general budget. In fact, Sweeney predicted in June that future budget battles will be relatively tame because “there will be no money to fight over.”
The governor and Legislature will still have to agree on a new five-year plan to refinance the Transportation Trust Fund again in late 2015 or early 2016, and the bond-rating agencies won’t let the state get away with another plan that ends up relying almost entirely on borrowing. But it isn’t just transportation.
Neither Christie nor Buono has laid out a plan to address the total $133 billion in unmet capital needs in transportation, energy, and wastewater infrastructure that the nonpartisan State Budget Crisis Task Force forecast that New Jersey would need in the years ahead. Nor did either candidate lay out a plan to fund the increased investment in higher education R&D that business leaders and policy experts regard as critical to the state’s future competitiveness in biotech, pharmaceuticals, and other cutting-edge economic sectors.
Finally, neither candidate has laid out a comprehensive plan to make a deep cut in property taxes, which are higher in New Jersey than in any other state — an issue not only of tax equity, but also economic competitiveness.
“The 800-pound gorilla in the room is property taxes, and nothing has happened that’s substantial to cut property taxes,” said Michael Egenton, legislative director for the New Jersey Chamber of Commerce. “When businesses look at taxes, they look across the board.”
Evaluating Christie’s fiscal record — and Buono’s critique of his handling of New Jersey’s finances — requires a review of the choices Christie made in several categories: the choices he made in balancing four budgets, the taxes he chose to cut, and how the decisions he made on pension funding and other issues have affected the state’s long-term fiscal stability.
The Big Budget Cuts
Christie and Buono have sparred repeatedly over the budget-cutting decisions he made in his first months in office to fill a midyear gap in what he calls the FY2010 “Corzine-Buono budget” he inherited and to create a budget for FY2011.
Buono, who was serving as Senate Budget Committee chair when the Great Recession sent state revenues plummeting in 2009, has asserted repeatedly that she managed to cut $4 billion from the state budget without cutting school aid, and has criticized Christie for making deep cuts in the property tax rebate program.
But Corzine and Buono were able to offset those cuts with $1.1 billion in federal stimulus funding that was used for school aid, a one-year surcharge on the incomes of New Jerseyans earning more than $400,000, and a tax amnesty program that enabled Corzine to reinstate property tax rebates for non-seniors just before the budget was adopted in June 2009.
“Christie did what he had to do in his first year based on his priorities and policy decisions,” said Rousseau, who served as Corzine’s treasurer. “In the last Corzine budget, we used $3 billion in non-recurring revenues to balance the budget and protect vital programs such as school aid, municipal aid, and college aid. We made a decision to do the millionaire’s tax for just one year, and he made a decision during the ‘lame duck’ session before his inauguration not to extend it.”
“Once Christie decided he wasn’t going to do any revenue enhancements, he was really limited in what he could do. The loss of the federal aid led him to virtually eliminate the rebate program and to cut school aid by an amount equal to the lost federal stimulus money. When we used up all the federal stimulus money in one year in 2009, we really believed there would be another stimulus package in 2010, but with Obamacare and the rise of the Tea Party, it never happened.”
The Debate Over Property Taxes
The cuts in the rebate program are at the core of the debate between Christie and Buono over the governor’s record on property taxes.
During his first two years in office, Christie pushed through a series of initiatives in cooperation with the Democratic-controlled Legislature that imposed a 2 percent cap on county, municipal, and school district spending increases; limited arbitration awards to police and firefighters; and required public employees at all levels of government to pay more toward their pensions and health benefits. These initiatives limited actual property tax increases to just 2.4 percent in 2011 and 1.4 percent in 2012.
However, Christie’s cuts in the property tax rebate program reduced these average payments to $240 in 2011, $407 in 2012, and $440 last year for senior citizens earning up to $150,000 and other homeowners making up to $75,000. This was sharply lower than rebate payments under Corzine, which averaged $1,100 from 2007 to 2009; Christie also eliminated tenant rebate checks, which had averaged up to $850 for senior citizen renters under Corzine.
As a result, net property taxes for the average New Jersey homeowner rose 18.7 percent in Christie’s first three years in office when property tax increases and rebate cuts are added together, according to a NJ Spotlight analysis of state Department of Community Affairs statistics, compared to just 6 percent in the last three years of the Corzine administration. Under Christie, the $897 property tax deductions on the state income tax received by taxpayers making $500,000 or more were larger than the total of the rebate checks and income tax deductions received by middle- and lower-income families.
In January 2012, Christie announced that the “New Jersey Comeback has begun” called for a 10 percent across-the-board income tax cut to be phased in over four years; the tax cut would have gone primarily to the wealthiest 2 percent of taxpayers because New Jersey has one of the most highly graduated income taxes in the nation. Christie justified the plan — which would have provided an $8,970 tax cut to a millionaire and just $177.50 to a family earning $70,000 – by asserting that the plan was aimed at keeping “job creators” in New Jersey.
But Democrats, who had gone along with Christie the year before on a five-year business tax cut, balked, arguing that he should cut property taxes instead. Sweeney proposed a 10 percent property tax credit on state income taxes up to $1,000 that would benefit the middle class rather than the wealthy and cost the same amount as the Christie plan. Assembly Majority Leader Lou Greenwald (D-Camden) favored a 20 percent cut up to $2,000, with the additional cost to come out of reimposition of a millionaire’s tax.
Buono preferred Greenwald’s plan to Sweeney’s proposal, and has been charging for the past two years that Christie has been overinflating revenue projections to justify a tax cut — first in 2012 when he was a potential candidate for vice-president and this year to support his reelection and a potential presidential run in 2016.
During her gubernatorial campaign, Buono has called for reimposition of a millionaire’s tax to fund increased property tax rebates, but Democratic legislators, particularly in targeted districts, have been running ads proclaiming their eagerness to work with Christie to implement Sweeney’s 10 percent property tax credit – with no mention of a millionaire’s tax.
The question has never really been about whether the state can afford the $250 million projected first-year cost of the tax cut if a reelected Christie and Democratic legislative leaders decide to commit themselves to doing so as part of the FY2015 budget that has to be adopted by June 30, 2014. “Any treasurer or OMB (Office of Management and Budget) director worth his salt can find $250 million in a $33 billion budget,” noted Rousseau, the former state treasurer. “The question is what happens in the ‘out years’ when the cost rises to over $1.6 billion, and is a tax cut the best use of the money if it is available?”
The question of whether New Jersey can afford to pay the $1.4 billion cost of the Sweeney property tax plan in FY2018 is inextricably linked not only with Christie’s handling of the state budget during his first four years in office, but also with the landmark pension and health benefits bill that both Christie and Sweeney point to as their greatest bipartisan triumph.
The Politics of Pension Reform
The 2011 pension and health benefits legislation not only split both the Democratic Party and the labor movement, but also shaped the politics of the 2013 gubernatorial race.
When Christie became governor and Sweeney the Senate president in January 2010, New Jersey was facing a $40 billion long-term deficit in the pension funds that covered teachers, police, and state, county, and municipal employees, plus a $60 billion unfunded liability in retiree health care costs.
Retiree healthcare has been funded on a pay-as-you-go basis for 20 years, but the pension problem was caused by the failure of past governors and legislators to make the state’s annual contribution while at the same time voting to increase pensions and lower the retirement age.
Sweeney, an Ironworkers Union leader who had aroused the ire of the public employee unions in 2005 when he first suggested that government workers needed to pay more, pushed through legislation that not only required public employees to pay more toward their pensions, but also mandated large increases in healthcare payments that had always been collectively bargained in the past. The bill imposed a four-year ban on collective bargaining on public employee healthcare issues at the same time that Wisconsin public employees were occupying the state capitol to protest Republican Gov. Scott Walker’s clampdown on collective bargaining rights.
Buono and most Democratic legislators refused to go along because of the collective bargaining suspension, but Christie and Sweeney cobbled together a majority made up of Republicans and a cadre of Democrats aligned with South Jersey power broker George Norcross, Essex County Executive Joseph DiVincenzo, and Sen. Brian Stack, the Union City mayor. Buono was stripped of her post as Senate majority leader by Sweeney for her defiance, but could now count on the public employee unions to back her run for governor.
“For most public employees, the increases they would pay for their pensions and health benefits and the new 2 percent cap meant that they would effectively be taking a pay cut over the next four years,” noted Raphael Caprio, director of Rutgers University’s Local Government Research Institute.
Just as important for the future of the retirement system, the new law required the state to ramp up to full funding of its required contribution to the state’s pension plans within seven years — a requirement that would eat up about $600 million a year of the normal increase in state revenues through FY2018 and create severe budget challenges for Christie.
Robbing Peter to Pay Paul
With pension reform in hand, Christie undoubtedly thought his budget problems were over in early 2012. Treasury officials forecast a surge in revenue growth that would enable Christie to cover the second $600 million pension payment, increase spending for services for the developmentally disabled and drug treatment for inmates, and still pay for the first year of the income tax cut he wanted to take to the Republican National Convention that summer.
But revenues fell short of Treasury’s expectations that spring and most of the following year, forcing Christie to amp up his reliance on dedicated fund raids and other “one-shot” nonrecurring revenues to cover annual pension payments and keep his budget in balance.
In the past four years, Christie has diverted $1 billion in Clean Energy funds to the state budget, and his attempted diversion of $164 million in funds earmarked for the construction of affordable housing ended up in the state Supreme Court.
The governor also had to use more than $500 million from the state surplus to balance the last two budgets, leaving a $300 million surplus that represents less than 1 percent of the FY2014 state budget and is regarded as dangerously low by the rating agencies.
When revenues came up short last spring, Christie was forced to push off payment of $395 million in property tax rebates scheduled for May until August — a maneuver that created a one-shot budget savings by pushing the payment into the following fiscal year.
Finally, Christie was forced to abandon his promise to provide significant pay-as-you-go funding for the Transportation Trust Fund when he had to divert more than $550 million in New Jersey Turnpike toll revenue earmarked for TTF to fill gaps in his last two budgets. As a result, Christie has relied more heavily on borrowing to pay for transportation construction projects than any previous governor, adding to a per capita state debt that is the third-highest in the country, according to the most recent State Budget Crisis Task Force report.
To fiscal experts, Christie’s need to rely so heavily on such maneuvers to balance his last two budgets raises real questions about the ability of the state to cover the cost of the 10 percent property tax credit on income taxes that the governor has been pushing, particularly with the state facing a June 30, 2016, deadline to come up with an $8 billion plan to renew the Transportation Trust Fund, the state’s universities needing billions in capital investment to compete with other states, and the State Budget Crisis Task Force identifying more than $100 billion in unmet infrastructure needs.