New Jersey's Budget Crisis: Causes, Solutions, and Political Responsibility

Introduction: The Roots of New Jersey's Financial Crisis

Currently, many states throughout the country are struggling to make ends meet. Matt Bai identifies three reasons for New Jersey's current financial woes. First, the state sends 40 percent of its annual budget to municipalities and school districts in order to compensate for the shortfall in revenue from local property taxes. Second, the state does not have the resources to cover its pension obligations to teachers and other state workers. Finally, the cost of healthcare for public employees is close to $3 billion annually and rising fast. These problems are not exclusive to New Jersey.

Both Matt Bai and David Leonhardt concur that the rising cost of state government and the lack of fiscal restraint on the part of local and state government leaders has led us to this crisis.

Chris Christie, governor of New Jersey, believes that the only way to get control of local taxes and state spending is to go after the pension and healthcare benefits of government employees. To address this issue, the governor put forward 33 measures for reform, including a proposal that would allow localities to opt out of the civil-service system altogether, giving them more control over hiring and firing local officials; limit the cash payouts that retiring workers can take for their unused sick days; mandate that most union members contribute more to their pension plans than they have up to now; and have them retire later while receiving lower benefit payments.

In order to facilitate this, Christie supported legislation, which passed the legislature in July, to put a strict cap on local property taxes, allowing them to raise no more than 2 percent every year. Combined with a reduction in state aid, this means that New Jersey's townships and cities will have to hold the line when negotiating municipal labor contracts if they want to remain solvent, because they cannot rely on either their residents or the state for more money.

The heads of the police and firefighters' unions predict that these actions will have dire consequences for public safety. Towns and cities will have to cut hundreds of positions in order to meet their payrolls. The teachers' union asserts that changes to their pension plan will "penalize educators for the irresponsibility of politicians."

Understanding the Problem: Compensation and Cost Growth

Leonhardt believes that the current fiscal problems many states are facing are the result of poor political leadership. Leonhardt contends that union salaries are not exorbitant and that politicians have no incentive to be tough negotiators on issues other than money. Additionally, since government agencies are a monopoly and face no competition, they can defer the costs of their decisions to a later date, allowing future office holders to deal with the consequences of their actions.

Both Bai and Leonhardt allude to the fact that poor government performance—particularly wasteful spending and the preferential treatment of special interest groups (read: significant campaign contributors)—have harmed the American taxpayer as well as the thousands of public workers who do their jobs well. Both recognize that state and local governments have made "a mountain of promises they cannot keep."

It has been said that today's problems are the result of yesterday's solutions. This observation is most applicable when discussing the current financial situation in New Jersey. The current economic downturn has rendered state and local governments unable to meet current financial obligations, and unfortunately there are no easy answers. Rather than trying to fix blame, let us look at some ways to fix the problem.

Leonhardt points out that "academic papers spanning more than 30 years have found that government workers receive compensation that is similar—with somewhat lower salaries and somewhat better benefits on average—to that of private sector workers with similar qualifications." Furthermore, government pay is "skewed too heavily toward pensions and health insurance."

Toward Solutions: Restructuring Employee Benefits

The problem with this equilibrium is that while the cost of salaries is easily controlled and negotiated by the employing agency, the cost of healthcare cannot. These costs continue to soar, and because of binding contracts, government agencies have little choice but to pay them.

Let us examine a government employee's total compensation package—salary plus benefits. For example, if John Doe makes $60,000 a year in salary and his benefits cost $15,000 for a premium plan as negotiated by the union, the total cost for John Doe is $75,000. In the following year, John's cost in salary rises 2 percent to $61,200, but the cost of benefits rises 14 percent to $17,100. That is a $1,200 increase in salary and a $2,100 increase in benefits. John's total compensation package is now $78,300. This is the crux of the problem.

One way to mitigate these costs would be to arrange John's compensation so that the costs fall more heavily on the salary side of his reimbursement and less on the benefits side. One way to accomplish this is not to reduce John's benefit package, but to offer him choices. For example, let us say benefit plan A, John's current plan, costs $15,000, while plan B costs $10,000 and plan C costs $7,500. Without reducing the total package of $75,000, he can choose to take plan B at $10,000 and receive a salary of $65,000, thus still preserving his $75,000 total figure. Using the same formula, his salary for the following year would be $66,300, while the benefits would cost $11,400 for a total compensation package of $77,700. John would have $5,100 more dollars in his pocket, and the employing agency would save $600. If John chose plan C, his salary would be $67,500, while his benefits would be $7,500—still $75,000. The following year, his salary would be $68,840, while his benefits would cost $8,550, for a total of $77,390. This saves the employing agency $910, while John takes home an extra $7,640.

When you multiply these savings over hundreds or even thousands of employees, the figures become significant. To be sure, this is not a complete solution to the problem; however, it is one method to start to gain control over spending.

Solutions to this problem are not simple, easy, or painless. Ultimately, the American public must come to understand that there are only two paths to solve this problem. First, we must reduce spending. Americans need to demand that their local and state governments become more efficient and learn to live within their means.

The second path is to increase revenues. Unfortunately, there is a long history in American politics of politicians foolishly frittering away public funds on projects that only benefit their constituency, and many Americans are not willing to vote for candidates who endorse this path.

The Broader Challenge: Voter Expectations and Political Will

There are no easy ways to unravel this mess. It is no longer wise or prudent for state governments to hide deficits or embrace economic assumptions based on best-case scenarios. With the end of stimulus spending from Washington, it is time for all of us to pull together and make the sacrifices it will take to achieve economic recovery.

It is often said that people get the government they deserve in order to explain why they feel our government is generally quite poor. The inference is that if people were more careful about whom they voted for, and if more people took the trouble to vote in the first place, we would not have such mediocre people in government, and indeed politicians would have to clean up their act and work a lot harder.

I tend to agree with Leonhardt's conclusion that "the cause is Americans' collective desire for low taxes and generous government benefits. We want our politicians to promise us tax cuts, strong military, safe streets, good schools, and unchanged Medicare and social security. And promise it all they do."

Conclusion: Moving Beyond Blame

Blaming unions for our current fiscal situation reminds me of the story of the teenage boy who brought his girlfriend to his room in his parents' home for the night. When his mother unexpectedly walked into his room in the morning, the boy jumped out of bed, pointed to the girl, and proclaimed, "She started it!"