Why New Jersey's Broke (Part 1)

As of this hour, New Jersey has no budget and its government remains shut down. That may change very soon. But how did the state ...
by | July 6, 2006

Newjersey As of this hour, New Jersey has no budget and its government remains shut down. That may change very soon. But how did the state arrive at this juncture in the first place, at a time when most states are enjoying bountiful revenues and toasting the cheeriest Happy New Fiscal Years since 2000?

It goes way back. New Jersey didn't invent any particularly egregious fiscal mismanagement practices, but they have indulged in almost all the worst ones. "It's almost like every financial practice you shouldn't follow in running a state, they did," says Jon Shure, of the think tank New Jersey Policy Perspective.

Republican Governor Tom Kean has taken on a saintly sheen through his work leading the 9/11 Commission, but he managed to take the nation's largest budget surplus (back in 1986) and turn it into a sizable deficit by the time he handed the reins to Democrat Jim Florio in 1990.

Florio saw through a big package of tax increases, which cost his party control of the legislature the next year. Florio himself got beaten at the first opportunity by Republican Christine Todd Whitman, who promised a 30 percent income tax cut.

Cut taxes she did, becoming a national star for her party in the process. To pay for the cuts, she took up the bad fiscal habits of prior governors (including Florio). For one thing, she emptied out a retirement health trust fund, taking some $300 million out of the kitty and turning it into a pay as you go program. She also eliminated the state's annual billion-dollar appropriation to pay for pensions.

During her second election year, in 1997, the pension fund needed money, but rather than reverting to the habit of making contributions from the state budget, Whitman sold some big pension bonds -- and also got legislation allowing surpluses from pension investments to be used to cover the state's ongoing obligations.

More tax cuts were in store, notably property tax cuts. All the cutting left the state without the funding necessary to comply with a state Supreme Court decision on school finance. New Jersey eventually floated a $12 billion school construction bond. As with the pension bonds, though, legislators and the governor failed to set aside enough cash even to make payments on the debt they incurred.

That meant that Jim McGreevey, the Democrat who opposed Whitman in 1997 and succeeded her in 2001, inherited a deficit of $6 billion. During that latter election year, the legislature gave a 9 percent pension increase to retired and current workers -- shades of a pension bonus Kean doled out on his way out of office.

McGreevey raised some taxes and made some spending cuts, but for the most part resorted to a variety of new gimmicks to fill the gap. For instance, he twice borrowed money against tobacco settlement dollars. The state was still neglecting its required payments to the pension system, so it continued its neat trick of taking money out of the system to make payments back into it. Eventually, the state Supreme Court ruled that the state had to stop borrowing money to pay for operating costs.

Which brings us to Jon Corzine, who inherited a structural deficit estimated at $4.5 billion. Both he and his Republican opponent in the 2005 election, Doug Forrester, said out on the campaign trail that the state had run out of easy fixes.

Corzine took a good faith approach to the problem, proposing a budget in March that would pay for recurring costs with recurring revenues. Among other things, he wanted to add another penny to the state sales tax. His fellow Democrats, who control the legislature, haven't cozied up to that idea. Hence the impasse.

For them, tax hikes are like the flaming sword that kept Adam and Eve from returning to Eden. They still remember their fall from power after the Florio tax hikes more than 15 years ago. As New Jersey Monthly summed things up last month: "Lessons for politicians: 1. Never raise taxes. 2. When in need, borrow. 3. In dire straits, cut taxes. 4. Never raise taxes. 5. Never."

As a result, says David Wyss, chief economist at Standard & Poor's, "They're having more problems than they ought to have. This is 90 percent politics, and 10 percent economics."

Even if it had passed intact, Corzine's budget still would have left the state with a recurring deficit of about $2 billion. Even so, it was too bitter a pill for legislators. Which makes Wyss pessimistic about the future.

The state will reopen, but its problems will persist. Wyss warns that, along with other states, New Jersey will have real troubles as its pension problems and need to declare retiree health care costs (think another $20 billion line in the longterm budget) become matters they can no longer take a pass on.

"That's what's kind of scary," Wyss says. "If they're having this trouble in good times, what are they going to do in bad?"