Manhattan Institute’s Steve Malanga presents August Briefing

Senior Fellow and Editor of the Manhattan Institute’s City Journal, presented “The Fall and Rise (We Hope) of New Jersey” on the morning of August 1, 2013 at the Park Avenue Club in Florham Park. Steve is the principal investigator on a privately commissioned upcoming CSI•NJ report entitled, Making Pension Reform a Reality in New Jersey. The Breakfast Briefing served as a preview for the report to be released in September at a press conference in Trenton.

In a “state of the state” overview, Steve discussed how the long term economic downturn and slow recovery specifically impacts blue states: costs are increasing while revenues are decreasing. Raising taxes leads to private sector exodus which only exacerbates the problem. Bankrupt cities like Detroit – which must cut services and raise taxes - are the harbingers to states like New Jersey. The culprit? Unfundable pension liabilities.

Steve laid out the history of New Jersey’s demise as an historically free market, limited government state that offered a pro-business environment that attracted commerce from New York City and Philadelphia. “Until the 1960s, New Jersey still had no sales or income tax while neighboring New York was taxing itself into oblivion” Steve noted. The radical changes came at the hands of a series of unconstitutional but unchallenged decisions made by activist judges on the New Jersey Supreme Court that instituted: income tax, redistribution for public school funding, the general welfare housing provision, and so on.

New Jersey’s income tax is now one of the highest in the country (along with sales tax). For decades, suburban tax payers have poured $50 billion into the Abbot Districts and other urban schools for the highest per pupil expenditures in the state - as well as mandated social programs - resulting in nothing. The Mt. Laurel decision has led to 140,000 lawsuits filed by low-income developers against municipalities.

While the Supreme Court rulings exponentially increased the corporate and individual tax burdens, the pension system continued to grow and so has the state’s debt. (Notoriously, between 1999 and 2003, New Jersey passed 13 laws increasing public benefits by 9 percent.) In 1991, New Jersey nullified the state’s debt restrictions and created something called “non-debt debt”. A year later during a fiscal downturn, the “Pension Reevaluation Act” was passed. “This essentially upgraded the value of the state pension fund from 7-8.7 percent enabling Governor Florio to cut contributions to the pension fund in order to balance the budget,” described Steve.

New Jersey, along with Detroit and Illinois, utilize “a volatile, expensive and hard to check” assessor of pension system value called the Personal Unit Cost. It has been cited as the cause of Detroit’s collapse. Basically it enables the funders to dump funds into the system in year one in order to claim a surplus in subsequent years and underfund during that period. Various fiscal manipulations have led to a $40-$50 billion pension liability and as Steve pointed out, “the bailout window is gone.”
In reference to the results and recommendations of the upcoming pension report, Steve made two specific exhortations to the assembled guests: “Change the make-up of the New Jersey Supreme Court. They have wasted tens of billions of dollars without answering to the tax payers”; and “demand no new spending!”

Stay tuned for more from Steve Malanga and CSI on New Jersey’s pension debate.