Magazine October 5, 2009, Issue

The Swamps of Jersey

How the Garden State fell into decline

Paramus, N.J. —

Addressing a crowded room at the local Elks Lodge, not far from one of North Jersey’s ubiquitous shopping malls, Republican gubernatorial candidate Chris Christie paints a bleak portrait of his home state. New Jersey is “careening towards bankruptcy,” says the former U.S. attorney. “People and jobs” are fleeing “in droves,” mainly because of stifling levels of taxation. The Garden State is “no longer competitive,” and “businesses are voting with their feet.”

Is Christie overstating things? After all, blessed with felicitous geography and a highly educated work force, New Jersey remains the most densely populated state in the Union, and also one of the wealthiest. Yet in a 2007 study, Rutgers University scholars James W. Hughes, Joseph J. Seneca, and Will Irving concluded that “population outflow is real, is approaching worrisome dimensions, and is exerting a small but increasingly negative impact on the New Jersey economy.” In 2006, 72,547 more people left the state than moved to it from elsewhere in the U.S., up from 23,759 in 2002. By this measure, from 1998 to 2007, only three states (Illinois, California, and New York) lost more residents.

Hughes, Seneca, and Irving estimated that, between 2000 and 2005, net domestic out-migration cost the state a total of $7.9 billion in adjusted gross income. “Although this loss is relatively small — 3.3 percent of total adjusted gross income in 2005 — it is a permanent loss that will persist (or increase) each year unless net out-migration is reduced or eliminated,” they wrote. 

While international migration, particularly Hispanic migration, has continued to fuel population growth — Latinos were 16.3 percent of New Jersey residents in 2008, compared with 9.6 percent in 1990 — that growth has declined sharply. Between 1990 and 2000, New Jersey’s population expanded by 8.9 percent; between 2000 and 2008, it increased by only 3.2 percent.

One need not be a demography expert to understand why New Jersey is hemorrhaging human capital. According to state rankings compiled by the Tax Foundation, it now has the highest state and local tax burden, the highest per capita property taxes, and the worst tax climate for business. The Pacific Research Institute’s latest U.S. Economic Freedom Index says that only two states (Rhode Island and New York) offer less economic freedom. The 2009 State Economic Outlook Index, co-authored by legendary economist Arthur Laffer and published by the American Legislative Exchange Council, ranks New Jersey 46th. Democratic governor Jon Corzine recently suspended property-tax rebates for most New Jerseyans and raised the state’s upper individual income-tax rates to help close a yawning budget gap. New Jersey’s uppermost rate (10.75 percent) is now higher than California’s (10.55 percent).

Christie has railed against the tax hikes and has proposed slashing income taxes and boosting property-tax relief. Yet as Newark Star-Ledger columnist Paul Mulshine notes, these proposals conflict with the state constitution, which requires that all personal-income-tax revenue be allocated to the Property Tax Relief Fund. A reduction in personal income taxes means a shortfall in money for property-tax relief.

Corzine’s decision to raise taxes in an election year indicates the rickety condition of New Jersey’s fiscal house. “Public spending in New Jersey doubled in real terms, as a percentage of GDP, between 1971 and 2008,” write Mercatus Center scholars Eileen Norcross and Frederic Sautet. Government spending represented over 7 percent of GDP in 2008, compared with 5.4 percent in 1997. Corzine has touted the spending cuts in his fiscal year 2010 budget, which took effect on July 1, but New Jersey’s nonpartisan Office of Legislative Services projects a structural budget deficit of around $8 billion for fiscal year 2011. As of June 2008, the state had an outstanding debt of roughly $31.8 billion (one of the highest burdens in the country). It also faces the daunting long-term challenge of shoring up public liabilities: As Norcross and Sautet point out, “New Jersey’s pension fund faces a potential $56 billion unfunded liability (up from $18 billion in 2006), which rises to $130 billion when post-retirement medical and prescription drug benefits and stock market losses are factored in.” In early August, Moody’s Investors Service bumped New Jersey’s credit outlook down to “negative.”

Crippling taxes, runaway spending, massive debt, significant out-migration: Tony Soprano’s home state is in bad shape. Speaking of HBO’s erstwhile leading man, one cannot separate New Jersey’s economic and fiscal woes from its endemic corruption. This past July, federal investigators arrested several prominent public officials, including the mayors of Hoboken and Secaucus, after a lengthy probe of corruption and money laundering. The lurid details of the scams reflect a political culture far swampier than the Meadowlands. During Tom Kean’s governorship in the 1980s, the slogan “New Jersey and you: perfect together” was coined to attract tourists. Today, that phrase could just as easily describe the state’s appeal to crooked politicos and real-life criminal organizations.

To understand how corruption, taxes, and public spending in New Jersey spiraled out of control, we must appreciate at least four factors: the diffuse nature of local politics, the influence of unelected state and local “authorities,” the bitter struggle over education funding, and the severe decay of New Jersey’s big cities.

At the local level, political power is extremely fragmented. In The Soprano State, their alternately funny and frightening dissection of “New Jersey’s culture of corruption,” veteran journalists Bob Ingle and Sandy McClure note that the state has 566 municipalities and more than 19,000 elected officeholders serving in local government. Until recently, New Jersey allowed politicians to hold multiple paid offices. This is why former Newark mayor Sharpe James, who is now serving jail time for fraud, was able to be a mayor and a state senator simultaneously. When New Jersey finally banned the practice in 2007, recognizing that it encouraged and exacerbated corruption, it allowed current dual officeholders to maintain their existing arrangements. 

Municipal and county governments in New Jersey “have more power than they do in other states,” says Brigid Harrison, a political scientist at Montclair State University, and these governments often operate like “partisan fiefdoms, or even personal fiefdoms.” All told, write Ingle and McClure, New Jersey has nearly 2,000 separate taxing entities — and that’s “when counting the state, with its taxing arms, as only one.” It has more than 600 individual school districts, “some of which don’t have students but collect millions of dollars in local taxes and state aid and do have paid administrations.”

New Jersey’s constitution stipulates that the issuance of bonded debt by the governor and the legislature must be approved by the voters. But as Ingle and McClure explain, crafty politicians were long able to sidestep this rule through a reliance on more than 300 state and local authorities run by unelected bureaucrats. (Prominent state authorities include the Economic Development Authority, the Transportation Trust Fund Authority, the Casino Reinvestment Development Authority, the Schools Development Authority, and the Sports and Exposition Authority.) These independent governmental bodies long had the power to issue bonds without consulting taxpayers. Not surprisingly, they became cauldrons of patronage, waste, and corruption, and they saddled New Jersey with a mountain of debt. (As of June 2008, 86 percent of all outstanding state debt had accumulated this way.) Last November, however, New Jerseyans endorsed a constitutional amendment requiring that the issuance of bonds by independent state authorities receive voter approval.

Over the past decade, billions’ worth of independent-authority bonds have been issued to improve school facilities. That brings us to the New Jersey supreme court, which has earned its reputation as one of the most liberal and activist in the country. During the 1970s, a string of decisions in the case of Robinson v. Cahill forced the state legislature to revamp its school-funding formula and establish an income tax in order to achieve a more equitable distribution of education resources among communities. In the 1980s, a successor to the Robinson case, Abbott v. Burke, triggered a new cycle of legal battles. In 1990, the supreme court ruled that “students in the poorer urban districts” were entitled to “at least the same amount of money as their competitors.”

Since then, the court has handed down a series of rulings aimed at shaping New Jersey’s school-funding framework. The debates have typically pitted the suburbs against the cities, with predictable racial overtones. What the supreme court has advocated, and lawmakers have devised, is essentially a large-scale wealth-redistribution program. Many suburbanites resent the fact that their tax dollars are used to subsidize dysfunctional schools in cities such as Newark, Paterson, Trenton, Camden, and East Orange. In 2007, the New York Times reported that the so-called Abbott districts — the chronically underperforming urban school systems that have been showered with state funds — “are now among the highest-spending school districts in the country.” As Harrison puts it, “an extraordinary amount” of New Jersey tax revenue goes to education — not only because of the Robinson and Abbott rulings, but also because of the powerful New Jersey Education Association (NJEA).

The school-funding wars highlight a broader city–suburb divide. New Jersey is still among the richest U.S. states: In 2007, only Maryland had a higher median household income; New Jersey’s ($67,035) was 32 percent greater than the national average ($50,740). Three New Jersey counties (Somerset, Morris, and Hunterdon) ranked among America’s wealthiest. On the other hand, the cities of Newark, Passaic, and Camden were among America’s poorest. Only four states (New Hampshire, Connecticut, Hawaii, and Maryland) had a lower poverty rate than New Jersey. But the poverty rates in Newark and Camden were 23.9 percent and 38.2 percent, respectively. (Remember: This was before the financial crisis and recession.) According to Forbes, New Jersey now boasts two of America’s ten most expensive ZIP codes (in Brookside and Alpine, the latter of which tops the list). But cities such as Newark and Camden are virtually synonymous with urban blight.

As journalist Brad R. Tuttle writes in How Newark Became Newark, the state’s largest city saw its population decline by almost one-third (more than 125,000 people) in the three decades after 1960. Newark never recovered from its bloody 1967 riots, which destroyed the Central Ward and accelerated white flight. During the 1970s, when the city “hit rock bottom,” its violent-crime rates soared by 91 percent. Newsweek described it as “a classic example of urban disaster.” A 1975 Harper’s article called it “The Worst American City.”

Today, Newark has a young, reformist mayor (Cory Booker), a glitzy new hockey arena (home to the New Jersey Devils), and an attractive performing-arts center. Jersey City, meanwhile, now boasts the state’s tallest skyscraper, the 42-story Goldman Sachs Tower, which has become the centerpiece of a revitalizing waterfront. But sports arenas and waterfront office buildings do nothing to fix violent and woefully mismanaged public schools. Ingrid Reed, director of the New Jersey Project at Rutgers University’s Eagleton Institute of Politics, says the Abbott districts are not sufficiently accountable for how they spend their aid money. Of course, strengthening oversight mechanisms means taking on the education lobby, which wields enormous political clout.

The sad reality is that, as long as New Jersey’s redistributionist school-funding formula remains in place and its major cities remain economic drains, it will be very difficult to reduce substantially the state’s tax burden. And as long as the tax climate remains fiercely hostile to business, New Jersey will find it hard to generate significant private-sector employment growth. In March 2008, Governor Corzine met with several of New Jersey’s top real-estate executives. According to the Star-Ledger, one of those executives, Zygmunt “Zygi” Wilf, principal owner of the Minnesota Vikings, told Corzine that of the 38 states in which he develops real estate, New Jersey “is the worst.” The Star-Ledger reported that Wilf’s comments “reflect what many real estate executives are saying privately: New Jersey is losing out on scores of real estate projects, and thousands of jobs that go with them, to neighboring states aggressively courting new business.”

As for Corzine’s reelection hopes, the mega-millionaire (who previously chaired Goldman Sachs and served in the U.S. Senate from 2001 to 2006) has been trailing in the polls by a wide margin. Besides being a heavily Democratic state, New Jersey is also a late decider, so the race will surely tighten. One wild card is the independent candidacy of former state environmental commissioner Chris Daggett, whom the Sierra Club has endorsed. A Monmouth University/Gannett New Jersey poll released on September 13 showed Christie leading Corzine by 8 percentage points among likely voters, with Daggett garnering only 5 percent support. A month earlier, the same poll had found Christie up by 14 points. When sampling registered voters, however, the September survey revealed a dead heat, with Corzine at 41 percent and Christie at 40 percent. In August, Christie had led among registered voters by 4 points.

Patrick Murray, director of the Monmouth University Polling Institute, acknowledged that pools of likely voters tend to be more Republican than pools of registered voters. But he added that “we rarely see more than a few points’ difference. . . . The fact that such a notable discrepancy has shown up in two consecutive polls indicates that there is a decided lack of enthusiasm for the incumbent among the Garden State electorate. While we acknowledge that most of these ‘unlikely’ voters will never cast a ballot in this race, if the Corzine team can bump up turnout on Election Day by just a few percentage points, their chances of victory greatly increase.”

In the September poll, Corzine’s job approval among registered voters stood at only 37 percent. It has been dragged down partly by the state’s unemployment rate, which reached 9.6 percent in July. Still, New Jersey has become a Democratic stronghold — indeed, it is effectively a one-party state, which has worsened the corruption problem. No Republican has prevailed in a statewide race since Christine Todd Whitman won reelection as governor in 1997. Barack Obama carried New Jersey by 15 points in 2008. The last two GOP governors, Whitman (1994–2001) and Kean (1982–1990), were both pro-choice moderates. Christie is a pro-lifer who tacked rightward during the Republican primary; he is short on charisma; and Corzine’s sustained attacks may drive up his unfavorable ratings. Mulshine, the conservative Star-Ledger columnist and longtime Garden State political observer, believes Christie “is running the worst campaign in New Jersey history.”

A Christie triumph would be devastating for President Obama. A Corzine victory would be devastating for the state GOP. It’s not clear that either would do much to turn New Jersey around.

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