Magazine | March 23, 2015, Issue

The Christie Hiatus

(AP Photo/Mel Evans)
New Jersey’s governor has not won lasting reforms

Chris Christie grabbed the attention of political observers when he defeated New Jersey incumbent governor Jon Corzine in 2009, vowing to fix a state that had been beset by almost continuous economic and fiscal woes for a decade. Christie’s tough talk about reining in public-sector unions and his efforts to reduce huge deficits without raising taxes won him a certain celebrity in Republican circles. And in his home state, he gained popularity by engineering some overdue, bipartisan reforms such as a cap on annual property taxes. Christie’s early successes sparked speculation that he might run for president in 2012, and though he declined, he has been exploring a run in 2016.

But lately, especially since winning reelection easily in 2013, Christie has watched his reputation tumble both in New Jersey and nationwide. This is partly the result of the political fallout from the so-called Bridgegate scandal, in which members of Christie’s staff ordered lane closures on the approaches to the George Washington Bridge to create traffic jams, and headaches for a political opponent who was the mayor of a town that suffered the congestion. But, in addition, the governor’s efforts at cleaning up the state’s multitude of fiscal messes and recharging its economy have stalled, prompting criticisms that he isn’t doing enough to revive New Jersey.

It’s worth considering what Christie was up against when he took office, what he’s accomplished, and where he’s fallen short. A good starting point is to look at the massive debt in the state’s pension system. The way New Jersey has mismanaged that system over 25 years — with a succession of administrations and legislatures engaging in accounting tricks, backroom deals, and outright deception about how much money was in the pension funds — is indicative of how Trenton has mishandled its other fiscal affairs.

The tale begins when Trenton politicians discovered that they could alleviate short-term budget woes by manipulating the financial statements of the pension system. In 1992, Governor Jim Florio signed into law the innocuous-sounding Pension Revaluation Act, which raised the projected return on the state pension system’s long-term investments. Politicians have no business dabbling in such projections, but the maneuver made the system seem better funded than before, allowing Trenton to reduce the money it contributed to the fund by some $750 million in a tight budget year. Two years later, the legislature passed a bill, signed into law by Governor Christie Whitman, that changed the pension system’s actuarial methods. This produced a short-term paper gain that saved the state more than $1 billion in pension payments over two years. But Trenton was just getting warmed up. In 1997, the Whitman administration decided to float $2.7 billion in bonds for the pension system as part of the ironically named Pension Security Plan. Borrowing to fund pensions is rarely a good idea, but Trenton made it even worse than usual. To get the public-employee unions to go along, the administration agreed to lower the retirement age for workers and reduce their required contributions to the system. And to minimize the short-term impact of the borrowing on its budget, New Jersey designed the bonds to pay no interest for ten years — making them more expensive to repay over the long term. Then legislators cited the borrowed money to argue that the system was well funded and that therefore the state could afford to skip some annual pension contributions and simultaneously increase benefits to workers. Between 1999 and 2003, Republican and Democratic administrations approved 13 bills boosting benefits, at a cost of an additional $6.8 billion in total liability.

To make these maneuvers look justifiable, Trenton misled voters. Even as the stock market declined in 2000 and throughout 2001, the state kept valuing the pension system as it had in 1999, when the system was flush with borrowed money. The legislature also kept referring in budget documents to a plan to shore up the pension system by putting more money into it, even though that plan had been abandoned. State documents in 2005, for instance, variously suggested that New Jersey contributed $551 million or $56 million to the pension system that year. The real number, the New York Times reported two years later, was zero. Politicians often mislead their constituents in such ways, but when New Jersey extended its obfuscations to bond-offering documents, the Securities and Exchange Commission cited the state for defrauding investors, making New Jersey the first state ever charged with violating federal securities laws. “The State of New Jersey didn’t give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation,” the SEC complaint said.

In 2005, a governor’s commission estimated the pension system’s unfunded liabilities at $12 billion and urged action. Corzine ran for governor that year promising to make reform a priority, but once in office he failed to propose any meaningful cost savings and continued shortchanging the system. By the time he left office in early 2010, the state’s pension debt had soared to $48 billion, and the opportunity to fix the problem at a price the state could afford had passed.

The economist Alicia Munnell, head of the Center for Retirement Research at Boston College, has said that the one common characteristic of states with severely underfunded pensions is that they are fiscally irresponsible in other areas, too. New Jersey certainly fits that pattern. Not content to spend merely the money it should have pumped into pensions, Trenton has foraged for even more cash. Between 1992 and 2006, the state swept $4.6 billion from its unemployment trust fund — meant to pay jobless benefits to workers — into other spending. When the recession hit in 2008, New Jersey had to borrow $2 billion from the federal government to pay benefits to unemployed workers — money that it has had to pay back under the Christie administration. Former governor Jim McGreevey was perhaps the king of borrowing. Even while he was shortchanging the pension system, McGreevey floated nearly $2 billion in bonds to finance a 17 percent increase in 2005 state spending — a move that violated the state constitution’s ban on borrowing to finance day-to-day operations. New Jersey’s supreme court reprimanded McGreevey but let the borrowing stand.

As the state’s fiscal woes multiplied, Trenton could not muster the will to enact any meaningful reforms. By 2008, New Jersey had emptied its transportation trust fund. All the money from gas taxes and tolls had gone toward paying back its debt. Still, the state managed to waste transportation money at astonishing rates. A 2010 study by the Reason Foundation found that New Jersey spent $1.14 million per mile on its roads, compared with a national average of just $145,127 per mile. It expended an astonishing $123,844 per mile just on transportation maintenance at a time when the national average was $22,937. No other state spent more. Those huge numbers represented expensive practices such as the imposition of prevailing-wage laws, which essentially require state contractors to pay union wages on all jobs, and the maintenance of a complex and needlessly large transportation bureaucracy.

What is perhaps most astounding is that the state racked up these debts even as McGreevey and Corzine enacted more than $5 billion in tax hikes. By the time Corzine left office, New Jersey was collecting more state and local taxes per capita than any other state, yet it was deeply in debt and its projected revenues and spending showed no signs of matching up anytime in the foreseeable future.

When Christie took office in January 2010, he inherited a $2 billion midyear financial hole from Corzine (New Jersey’s fiscal year, like that of most states, begins on July 1) and a whopping $11 billion projected deficit for the next budget, on estimated revenues of only $30 billion. The state’s budget woes were exacerbated by the ending of a nearly $1 billion temporary income-tax surcharge on wealthy residents that Corzine and the Democratic legislature had designed to expire at the close of 2009, knowing that any potential Republican candidates would be forced during the gubernatorial campaign to declare whether they planned to extend the tax, and, if not, what programs they would cut.

Christie refused to renew the tax and proceeded to slash some 300 items in the Corzine budget, including more than $400 million in school-district aid. He then vetoed tax increases sent to him by the Democratic legislature and crafted a budget for the new year with still more budget reductions, including cuts to politically popular programs such as a property-tax rebate for senior citizens. When Democrats argued that Christie’s budget would force municipalities to boost their own spending, the governor traveled around the state urging residents to vote against any efforts to keep local budgets growing. The spring of his first year in office, voters shocked the political establishment by rejecting 60 percent of school-district budgets in a state where they had routinely passed.

Christie took office arguing that New Jersey needed to reduce taxes to make itself more competitive with other states. He has sent the legislature a series of broad, across-the-board tax cuts that the Democratic-controlled senate and assembly have refused to enact. But in 2011, the governor and the legislature did get together to pass modest business-tax cuts that eliminated some of the most onerous characteristics of the state’s commercial-tax code. When fully phased in next year, the cuts will be worth about $700 million annually to firms.

Christie and the Democrats have also enacted reforms for the benefit of overburdened municipal taxpayers. In Christie’s first year in office, the state passed a 2 percent cap on annual property-tax increases (though the law has some loopholes that allow for greater increases under certain circumstances). That same year, Christie responded to complaints by municipal officials — who had long argued that state mandates made it difficult to manage their own budgets — by dumping New Jersey’s expensive binding-arbitration law, which had put the ultimate fate of negotiations between public unions and local governments in the hands of an unelected arbitrator.

In his second year in office, Christie tackled the state’s thorniest problem: the severely underfunded pension system. Working with a handful of Democratic legislators who were willing to cross the aisle, Christie and the legislature modestly increased payments that workers must make toward their own pensions, suspended annual cost-of-living adjustments for retirees, and raised the retirement age for state-government workers from 62 to 65. The reforms also made government workers, who had previously been required to make no contributions to their own health-insurance costs, start paying a small portion of their premiums. And the legislation  required the state to make its annual contributions to the pension system, too, although it gave the state seven years to gradually increase its payments until they reached full funding in 2018.

Compared with reforms passed up to that point in most other states, the changes that Christie engineered were considerable. The problem, however, was that New Jersey’s pension debt was so large that the cost savings needed to be even greater. Independent pension analysts almost universally argued in the press that the legislation Christie was about to sign would not be enough to fix the broken system. George Mason University fiscal analyst Eileen Norcross told the Philadelphia Inquirer, “I don’t think it’s going to be enough to save the system from the size of the liability they are looking at.” Christie, however, disregarded these warnings and accepted the optimistic assumptions of legislative Democrats and of his own team’s economic projections.

It was clear that New Jersey faced a long, arduous road back to fiscal responsibility. The reform legislation gave Trenton seven years to start making full contributions to its pension system. In the meantime, the system’s debt would continue growing. The law also put most of the onus for paying off the system’s debts on taxpayers. While the state asked workers to contribute an additional $250–300 million a year to the cost of their benefits, taxpayers were handed a bill that independent analysts estimated would grow to $5 billion annually by 2018.

The last two years of Christie’s first term seemed to provide him with the surging economy he needed to pay off the state’s big bills. The number of private-sector jobs grew by approximately 1.4 percent in both 2012 and 2013. New Jersey had gone a whole decade before Christie took office, including eight consecutive years under two Democratic administrations, without ever surpassing annual employment growth of 1 percent. But the Democratic legislature didn’t take advantage of New Jersey’s economic good fortune. In November 2013 it imposed a significant boost in the state’s minimum wage over Christie’s veto. And last year, job growth skidded nearly to a halt. Christie scrambled to balance his budget and decided to cut a $2.5 billion pension payment back to just $700 million. A judge allowed him to do so even though the reform legislation did not permit it, on the grounds that the state faced a fiscal emergency.

The outlook is even worse when you consider the way the state’s bills will grow. The pension-payback plan forces New Jersey to increase its contributions by about $500 million every year until 2018. It’s difficult to see how a state that has only about $34 billion in revenues and has never put more than $1.5 billion into its pension system in any given year will find more than three times that amount in just a few years. Christie has now begun arguing that the only alternative is to go back and look for even bigger savings. In late February he proposed a new plan that involves freezing the current, expensive pension system and instituting a new, 401(k)-style plan for government workers, similar to what many workers in the private sector now have. Under this plan, known as a cash-balance system, the state would make annual contributions to worker retirement accounts, and workers would receive a lump-sum payment at retirement rather than a monthly pension check based on some percentage of their final salary, which is what the current system provides. But the state’s taxpayers would not be responsible for making up any shortfalls that resulted from declines in the stock market. Christie has also proposed requiring workers to contribute more toward their health benefits and using the resulting cost savings to help pay off the current pension system’s debts. These proposals represent the kind of reforms he should have argued for back in 2011. The political obstacle is that, because Christie declared victory on pensions several years ago, he now owns the state’s pension problems. Democrats have put him on the defensive and proposed $1.6 billion in new taxes.

As Christie has scrambled to pay off the state’s debts and balance its books, he has employed questionable budget tactics himself, including sweeping monies dedicated to specific purposes — such as funds from a national mortgage-fraud settlement and road tolls that should be used for highway maintenance — into the general budget. He has also “reduced” spending in some cases simply by pushing expenditures from one fiscal year into the next, which is not a true long-term reduction. He employed these gimmicks in the early years of his tenure, after years of state spending far in excess of actual revenue, because it would have been impossible for anyone to quickly solve the enormous structural imbalances in New Jersey’s budget. “You can’t deal with it all at once,” respected Rutgers economics professor Joseph Seneca told the New York Times. “It’s going to take some time to get back, but I think the important first steps have occurred very effectively.” But rather than giving up the gimmicks he employed at first, Christie has persisted in his budget manipulations.

For a governor who preaches restraint on spending, Christie has also made some questionable decisions. He’s shown a fondness for expensive big-business tax subsidies that smack of corporate cronyism, and he’s chosen to bail out a few white elephants from previous administrations, including a twice-bankrupt, $1.9 billion mall-and-entertainment complex in the New Jersey Meadowlands. He’s one of nine Republican governors who agreed to expand their states’ Medicaid programs under Obamacare, though he vetoed state legislation that would have made the policy permanent and promises to rescind it if Washington doesn’t meet its promises to fund most of the additional coverage.

Christie has also seen some political failures that have made his job tougher. A major source of New Jersey’s fiscal problems is its supreme court, one of the most activist in the country. It has ruled that Trenton needs to subsidize urban schools so that they spend as much, per pupil, as schools in the state’s richest suburban districts, with the state covering the difference. As a result, schools in places such as Newark, Camden, and Paterson spend more per pupil — $25,000 and up — than urban schools just about anywhere else. I estimate that New Jersey has been forced to spend an additional $40 billion on education over the last 20 years as a result of the supreme-court ruling. Christie took office pledging to rein in the court, but he’s stumbled in his nominations, putting forward inexperienced jurists whom the Democratic-controlled state senate has balked at approving.

Despite his failings, Christie has remained very popular with one constituency that’s crucial for a New Jersey rebound: the state’s battered business community. In a January 2015 poll by the New Jersey Business and Industry Association, 57 percent of executives said that Christie is doing a good or excellent job — the best rating of any governor since the poll began in 1991. That same poll found a significant decrease in the pessimism that hung over the business community: During Corzine’s last year in office, 52 percent of New Jersey executives rated their state as a bad place to do business; it’s down to 28 percent now.

If his overall popularity doesn’t rebound, Christie’s biggest failing may be that he has paved the way for a Democrat to succeed him. Given the stranglehold that Democrats already have on the legislature, that would almost certainly lead to new rounds of expensive and destructive tax increases. Under that scenario, Christie’s tenure would have been, at best, an eight-year hiatus from the barrage of new levies, spending boondoggles, and regulatory excesses that New Jersey experienced under Democratic governance.

Christie’s administration could have achieved so much more. It might have demonstrated to the state’s cynical and beleaguered voters that it is possible to change the culture of Trenton, to overturn the greedy, profligate, dysfunctional politics that has so consistently earned New Jersey a reputation as one of the worst-managed states, and to set state government on a path toward financial stability and regulatory sanity. But Christie still has time to demonstrate just how destructive years of tax-borrow-and-spend policies have been, and this would be a real achievement.

– Mr. Malanga is a senior editor of City Journal and a senior fellow at the Manhattan Institute.

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