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Monday, August 23, 2010

State budgeting shenanigans

Steve Malanga details one way that states have gotten into the mess that they're facing today. They neglected the admonition to save during the fat years to help them out during the lean years. Instead, when times were good they made extensive promises for state workers and then had to resort to creative gimmicks to try to fund those pensions when the expected earnings didn't pass out.
New Jersey is an object case in how such manipulations eventually backfire. The problems go back nearly 15 years, to when the then-relatively healthy state decided to borrow $2.8 billion and stick it in its pension funds in lieu of making contributions from tax revenues. To make the gambit seem reasonable, Trenton projected unrealistic annual investment returns—between 8% and 12% per year—on the borrowed money. The maneuver temporarily made the funds seem well-off.

In 2001, when legislators wanted to further enhance rich pension benefits, they valued the state's plan at its richest point: 1999, when the system was flush with borrowing and the tech bubble hadn't yet burst. The scheme proved disastrous, of course, because the stock market has since gone sideways, and New Jersey has achieved nowhere near the returns it needed on that borrowed money.

Meanwhile, New Jersey compounded its woes with other ploys. In 2004, the state broke the cardinal rule of municipal budgeting when it borrowed nearly $2 billion to close a budget deficit, which is like borrowing on your credit card to pay off your mortgage. (The state supreme court ruled this move unconstitutional but allowed it to go forward anyway because it didn't want to "disrupt" government operations.) Over time, New Jersey's combination of overspending in its budget and underfunding of its pensions resulted in a tidal wave of tax increases and spending cuts.

Now, even if Gov. Chris Christie can solve the state's long-term, structural budget problems, New Jersey will have to find some $3 billion a year in new revenues to begin contributing again to its pensions.
Brilliant, just brilliant. And the federal government rewards such irresponsibility by funneling money to the states to help them out of the hole that they had dug for themselves. What do they think is going to change next year?

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