Sunday, February 24, 2008

Watching State Budgets

You’ve heard the old saying that the best way to quit eating sausage is to see it being made, and that can also apply to state budgets, of which this one in New Jersey is a sad example.

Toll and Spend
February 23, 2008; Page A8

The slow economy is hurting state tax revenues around the country. But look on the bright side: You could live in New Jersey, where decades of tax and spend politics is reaching its logical conclusion.

"We have a serious structural financial problem," the state's liberal Democratic Governor Jon Corzine told us on a recent visit. "You better address these problems or you will put yourself in a 1970s-style New York City situation, where you get a control board telling you what to do." Mr. Corzine is promoting his own solution, but he's also tacitly admitting that the state's politicians have been sucking the place dry for decades. If you want to know where a state dominated by public-employee unions ends up, Trenton is it.

Mr. Corzine spent 25 years at Goldman Sachs and is fluent with numbers, most of them harrowing if you're a New Jersey taxpayer. In 1990 the state was $3 billion in debt. Borrowing has since grown at a compound annual rate of about 13%, and now the state is $32 billion in the red. Throw in unfunded pensions and health benefits for retirees, and that number swells to $113 billion, or $3,400 for every man, woman and child in the state. That's three times per capita higher than the national average, making New Jersey the nation's fourth-most indebted state.

Public workers and teachers can retire at age 55 after 25 years with a pension of 60% of salary -- indexed to inflation. Police and firefighters can retire at 65% of salary at any age after 25 years of service and 70% after 30 years. With such generous benefits, you might think funding pensions would be a priority. Ah, no. Last summer the state disclosed it had used accounting tricks to skip more than $7 billion in pension payments over 15 years. That money went to current spending to buy votes.

Mr. Corzine is like a new homeowner who finds rotting floorboards once he moves in. And he deserves credit for acknowledging the problem. He's raised the retirement age to 60 for new state hires, instituted defined-contribution plans for elected officials, and insisted that state employees contribute at least something for health insurance. He's also pushing a spending freeze, but that would only stop the accumulation of new debt.

To pay off the old debt, he's literally proposing to mortgage the state's best cash-producing assets -- its roads. Under his plan, the state would create a new quasi-independent agency that would borrow about $38 billion. The bonds would be financed through steep, inflation-adjusted toll road increases -- 50% each in 2010, 2014, 2018and 2022, followed by an increase every four years based on the consumer price index.