Friday, April 30, 2010
Facing Fiscal Crisis Head On: Lessons from New Jersey
By Gretchen Hamel

Ohio has major financial problems. Unemployment is 11 percent.  The state expects a shortfall of nearly $300 million this year and has unfunded pension liabilities of $26 billion. The Governor, legislature, and city councils are struggling to close budget gaps.  What should they do?

There are no easy answers, but policymakers can look to other states for lessons.  In particular, Ohio should pay attention to New Jersey for lessons good and bad.  While Ohio has problems, they are mole hills compared to New Jersey's mountains.  For fiscal year 2011, New Jersey faces a budget deficit of $10.7 billion—that's 36 percent of the previous year's budget (Ohio's current shortfall is about one percent of its total budget).  New Jersey already has the highest tax burden of any state in the nation.  With a per-person state and local tax burden of $6,610, raising taxes simply isn't a realistic option.

How did New Jersey get into this mess?  New Jersey, like every other state, lost tax revenue due to the economic down turn.  Total revenue for 2011 is expected to be 15 percent less (just under $5 billion less) than it was in 2008.

But revenue decline isn't the primary cause of the fiscal crisis: runaway government spending is.  New Jersey state spending increased nearly 60 percent between 2001 and 2008.  And so, even during flush economic times, New Jersey's debt ballooned from $16 billion in 2001 to nearly $52 billion in 2009.  As a result, New Jersey must use $2.5 billion of its budget just to service debt.    

New Jersey's situation is even worse than these numbers suggested.  In addition to the current deficit and explicit debt, New Jersey faces unfunded pension liabilities of $46 billion.  The state's pension crisis is another example of lawmakers' irresponsible spending habits:  liabilities doubled between 1999 and 2008, while the assets grew by little more than a third, leaving a serious financial hole.

New Jersey's new Governor, Chris Christie, has been clear about how he plans to tackle New Jersey's financial problems:  he is cutting spending, and cutting it a lot.  The Governor plans to reduce state expenditures by $10.1 billion in 2011.  He will reduce the number of state jobs; eliminate, streamline, and privatize programs; and root out waste wherever possible.  He will cut education spending—a necessity given that education consumes more than one third of New Jersey's budget—by $820 million.

Not surprisingly, these proposed cuts have created controversy.  The Governor urged teachers to accept a wage freeze, but unions are loath to make these concessions.  Yet this sometimes-ugly political tug-of-war has served an important purpose in educating the public about the budget crisis.

Few voters understood just how generous state worker benefits were until Gov. Christie laid it out:  A retired teacher who, while working, paid a total of $62,000 toward her pension and nothing for full medical coverage will receive $1.4 million in pension benefits and another $215,000 in health care benefits. Is this system really fair to taxpayers who have to foot the bill?

These cuts are just a first step in getting the state's fiscal house in order.  Pension reform must come next.  Christie's budget forgoes more than $3 billion in contribution to the state pension retirement system.  This helps the immediate budget crisis, but exacerbates the long-term problem of unfunded pension liabilities.  

The Governor has already begun the difficult process of reforming the pension system.  Last month he signed laws that modestly scaled back benefits by increasing employee contributions to healthcare, limiting payouts for unused leave time, and eliminating recent benefit increases. More pension reforms are needed and, thankfully, being proposed. 

New Jersey and Ohio aren't alone in facing the uncomfortable task of having to reduce public pension liabilities.  The Manhattan Institute found nationwide all 59 pension funds dedicated to public school teachers face shortfalls, with total unfunded liabilities as high as $933 billion.  With liabilities so high, and taxpayers already stretched so thin, states are going to have to face these pension issues or face financial ruin.

It's too soon to tell what the outcome of this looming crisis will be.  But it’s good governors and state lawmakers are having these conversations.  Ohio voters should encourage straight talk and tough choices from their state officials because, ultimately, it's the citizens who pay the price of government's runaway spending.

Gretchen Hamel is the executive director of Public Notice, a new independent, bipartisan, non-profit organization dedicated to providing facts and insights on the effect public policy has on Americans’ financial well being. For more information please visit www.thepublicnotice.org
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