Chris Christie’s latest budget gimmick
Chris Christie, the Republican governor of New Jersey, is a master at distorting facts and attacking his political opponents. Politicians do this everyday, of course, but Christie is especially confrontational, and his go-for-the-throat approach must leave Democrats in the state legislature feeling bullied and weary.
For all of Christie’s aggression, little real governing happens in his state. New Jersey still has a structurally unbalanced budget. The state still relies on short-term deficit financing and other tricks to get the budget balanced at the end of the fiscal year. Since Christie took office in November 2009, the state’s debt load reversed its downward march and returned to the high levels last seen in 2005 under former Governor Jon Corzine. Christie’s rant in the video above about Democrats’ profligacy betrays his own actions.
Since February, when Christie proposed his budget for fiscal year 2013 (beginning July 1, 2012), he has been very optimistic about the state’s revenues and has been fixated on cutting the state income tax. Moody’s and others warned at the time that the tax cut was imprudent because New Jersey’s budget was based on fanciful assumptions. Here’s what I wrote in February:
I’ll translate the rating agency jargon: The state revenue projections are fantasy. If New Jersey gets lucky and revenues don’t fall short again as they did this year, then the state will end up with a cushion of $300 million to buffer a $32 billion budget. But if economic conditions slow at all (remember, many New Jerseyans work on Wall Street), then take out the midyear budget ax and start chopping. Basically the state is and will be running on fumes.
But Christie’s attack on Buffett obscures all that and shows him as forceful and in charge. In contrast Standard & Poor’s paints Christie as a fiscal illusionist. I just see him as another politician who promises the moon and prays he can juggle the books to cover his promises — or that he can get out of office before payment comes due.
Unsurprisingly, state tax revenues slowed in April, leaving a projected shortfall of approximately $500 million for 2012, and that is if economic conditions remain steady. Christie’s latest patch for the budget is yet another gimmick:
Christie wants to cut taxes while the cashbox is empty
New Jersey Governor Chris Christie got a lot of media attention this week when he announced that Warren Buffett “should just write [the government] a check and shut up,” on CNN’s Piers Morgan Tonight. His great one-liner obscured the more profound question he was being asked, which was: Shouldn’t the wealthy pay a higher proportion of taxes? Beliefs about progressive taxation vary widely, but income taxes at every level of government are structured so that the wealthy pay a higher proportion of taxes.
If I had been asking the governor questions, I would have focused on his fetish for cutting income taxes when his state’s cashbox is nearly empty. Or as the rating agency Standard & Poor’s defined the problem:
New Jersey Gov. Chris Christie released his proposed $32.15 billion budget for fiscal 2013 on Feb. 21. The budget remains structurally unbalanced, is built on what Standard & Poor’s Ratings Services regards as optimistic economic projections to close the budget gap, and increases New Jersey’s (AA-/Stable) reliance on nonrecurring revenues.
[...]
Assuming no further reductions to fund balance are needed to cover revenue shortfalls in fiscal 2012, reserves would fall to $300 million or less than 1% of expenditures at fiscal year-end 2013 if the legislature adopts the proposed budget. At this level, New Jersey’s fund balance would provide a limited financial cushion with which to offset revenue shortfalls should current revenue growth assumptions turn out to be optimistic.
I’ll translate the rating agency jargon: The state revenue projections are fantasy. If New Jersey gets lucky and revenues don’t fall short again as they did this year, then the state will end up with a cushion of $300 million to buffer a $32 billion budget. But if economic conditions slow at all (remember, many New Jerseyans work on Wall Street), then take out the midyear budget ax and start chopping. Basically the state is and will be running on fumes.
But Christie’s attack on Buffett obscures all that and shows him as forceful and in charge. In contrast Standard & Poor’s paints Christie as a fiscal illusionist. I just see him as another politician who promises the moon and prays he can juggle the books to cover his promises — or that he can get out of office before payment comes due.
If you’re looking for true fiscal conservatism, you’d do well to study Utah. Although Utah is rated AAA, the state is trying to figure out how to lower its municipal bond indebtedness in case of any emergency that might require it to issue bonds. The state also continues to top off its rainy-day fund, which is about 4.6 percent of general operating revenue. From Utah Policy:
Profligate Republicans and prudent Democrats
If you need more evidence that Republicans are no longer the party of fiscal prudence and that the Democrats are no longer out-of-control spendthrifts, take a look at two recent tax plans from the governors of New Jersey and Maryland. In an overture that primarily benefits the richest residents of New Jersey, Republican Governor Chris Christie has proposed cutting his state’s income taxes by 10 percent across the board, even though his state desperately needs revenue. At the other end of the spectrum, Maryland’s Democratic governor, Martin O’Malley, has proposed fading out deductions and exemptions for the richest taxpayers in his state, effectively raising their tax rates.
Maryland’s credit rating is a sterling AAA. In contrast, New Jersey is rated in the bottom tier of states for credit quality. Christie is further destabilizing New Jersey’s fiscal condition by reducing the amount of revenue without corresponding reductions in expenses. A profligate Republican state and a prudent Democratic one — isn’t it supposed to be the other way around?
In some of the best local political journalism that I’ve seen (watch the fantastic video), New Jersey’s Star-Ledger reported that Governor Christie’s proposed 10 percent income tax reduction has practically no chance of passage. The Star-Ledger editorial page editor, Tom Moran, speculated that Christie’s action was either a legislative bargaining chip or an act of pandering to the national press. Democrat Loretta Weinberg, the New Jersey senate majority leader, pointed out that a millionaire would get about $7,200 in relief under Christie’s plan, while a family earning $50,000 a year would get about $80. Meanwhile, the tax cut would cost the state about $1 billion.
New Jersey’s fiscal house is a mess. In particular the state’s public pension plan is significantly underfunded, and New Jersey paid only 14 percent of its required pension contribution this year. Maryland, which is a AAA credit, made 84 percent of its required pension contributions this year, according to Pew Center on the States.
We’ve known for a while now that broad caricatures of party philosophies have been spun contrary to the facts. For example, Republican President George W. Bush raised federal spending as a percentage of U.S. GDP from 18.2 percent in 2001 to 24.7 percent of 2009. This massive government expansion came alongside a reduction in taxes. Now the federal government is starved for revenues, and our national debt grows bigger and bigger. New Jersey seems to be on a similar path.
Maybe it’s time to examine the actions of Maryland’s Democratic governor a little more closely. Raising taxes on the rich and being fiscally prudent seem like a conservative combination.
Thanks for your comment RJM365.
Actually I wanted to highlight the relative “prudence” of each governor’s approach. Every state has a myriad of taxes. This is about the overall approach of using realistic data and not pushing liabilities out into the future while cutting current taxes. States get AAA credit ratings by running prudent operations. In contrast credit raters have not judged Governor Christie’s efforts kindly.
Muniland’s most active states
In the municipal bond market, one of the most insightful ways to examine a state is to look at how actively its bonds trade. Broker-dealers make money by trading, so naturally they go where the action is and commit market-making resources to those states. It’s generally true that the most populous states are the ones with the most traded bonds, but if we map the wealth of a state’s citizens to how often that state’s bonds trade, we get some interesting results. For example, New Jersey, which has only 2.8 percent of the national population but a high proportion of its wealthy citizens, might have the highest number of municipal bond owners as a percentage of state population.
The municipal bond market does not trade on an exchange but rather on “alternative trading systems” (ATS). These are systems where dealers post inventories of bonds to be aggregated. The largest of the retail ATS is Bonddesk, which does some excellent data analysis for both the municipal and corporate bond markets.
From Bonddesk’s December Transparency Report I pulled the data for these charts showing the seven most actively traded states’ bonds. Bonddesk uses “investor buys” data, which represents trades that end up in a retail investor’s account. In the bond markets there are often many trades between broker-dealers before the securities land in an investor’s account, so Bonddesk scrubs the data to show the real level of investor demand.
California is the largest state by wealth, population and municipal bond issuance. Although it represents about 12 percent of the U.S. population, it dominates with 30 percent of muniland trades. Even with its substantial demand, the state still has somewhat higher yields, as seen below. All seven states are rated AA, but Illinois and California trade with higher yields given their weaker fiscal position.
Let Europe kill municipal CDS
The solution to Greece’s debt crisis that Europe’s leaders announced on Thursday has market participants and commentators howling. It includes a provision that changes long-established rules for credit-default swaps mid-game. Mike Dolan, Reuters’ Investment Strategy Editor in Europe, said this:
For all the ifs and buts about the latest euro rescue agreement, one of its most profound market legacies may be to sound the death knell for sovereign credit default swaps — at least those covering richer developed economies.
I’d suggest that death knell just rang for U.S. municipal credit-default swaps (CDS), too. They’ve recently been on their last legs amid collapsing volumes, but actions in Europe just might have delivered the deathblow.
Credit-default swaps play an arcane role in financial markets. Firms allegedly buy them for protection against the default of bonds they hold in their portfolios. For example, if XYZ Investment Group owned $10 million worth of Greek government bonds that matured in 10 years (GGGB10YR:IND) and the Greek government couldn’t pay their obligations, then the seller of the CDS would step in and pay the CDS owner. Think of the CDS seller as a guarantor or insurance provider of sorts.
CDS are marketed as protection against the risk of default of the cash bond that they reference. Contrary to standing convention though, when the announcement was made that Greek bondholders would be asked to take a 50 percent haircut (or markdown) on the value of their bonds, the CDS governing group announced they would not be triggered. Their rationale was that the bond swap would not be compulsory and that CDS sellers would not need to make payouts to make up losses. Here is how a twitter user responded:
@amb5160 amb5160 the real story today is that CDS, a multi billion (trillion??) dollar asset class is GONE in one day! no more quotes on bberg. insanity
Why invest in insurance if the insurer says no payment is necessary because we have new conditions? It’s easy to understand the outrage.
I was under the impression that ISDA had not made a ruling yet on whether the haircut would be considered a default event triggering payment. If they do not it, I agree it will be a disaster for the cds market.
State taxes on fire
State tax collections are hot, hot, hot. The taxman rustled up 16 percent more in state income taxes for the second quarter of 2011 compared to the same period in 2010. Where is this phenomenal growth coming from?
Based on the most recent data collected by the Rockefeller Institute, states are raking in about $900 billion a year from their three major tax categories: the sales tax, personal income tax and corporate income taxes. Revenues from these three taxes total about 6.25% of U.S. GDP.
But it’s the personal income tax (PIT) that’s really driving the show. In the state of New York the PIT makes up about 60 percent of total tax revenues. In Oregon the PIT is an astonishing 72 percent of the state’s tax haul. Although the national employment level improved slowly the PIT was up on average 11.4 percent across the country year over year, according to Rockefeller. This contrasts sharply with the 4.6 percent national increase in state sales tax collections, especially given that 21 states cut their PIT tax rate while only 12 states cut their sales tax rates.
Robert Ward of the Rockefeller Institute tried to explain this counterintuitive phenomenon in a presentation earlier this month. He pointed out that some states have significant PIT revenues from capital gains. Unlike the federal tax code, twenty-one states treat capital gains as regular income. All the states in the chart above treat income earned from labor in the same way as income earned from capital. And in some states the amounts can be significant: In 2007, 13 percent of New York taxpayers’ annual gross income and 8 percent of New Jersey’s came from capital gains. That is a lot of bond and derivative trading on Wall Street.
Ward also pointed out that states are increasingly relying on personal income taxes. In 1978 PIT was about 25 percent of state tax revenues nationally versus 35 percent in 2008.
As financial markets gyrate, though, state revenues that depend on the PIT will gyrate too. Financial markets have been highly volatile over the last decade. It would be interesting to find any work that ties state PIT revenues and market performance together, and it would be especially interesting to see any work which explains this recent big jump in personal income tax collections.
11% PIT in Oregon (state tax)! Please turn out your lights when you leave!
New Jersey’s battering ram
Chris Christie rode to national prominence when he publicly excoriated a New Jersey teacher and other citizens over differences in opinion in town hall meetings. In contrast to the plain vanilla politispeak of most public officials, his blunt, confrontational style of governing was seen as a breath of fresh air. Christie either has a naturally combative governing style or believes that choosing a new target will get the national spotlight back on him. Or maybe he just wants to create a legacy as New Jersey’s most powerful battering ram.
Christie’s latest target is New Jersey state judges. Since no federal law other than IRS statutes has jurisdiction over public pensions, state judges are the chief interpreters of what is owed to public-sector retirees. A New Jersey judge recently overturned a pension reform that Christie spearheaded and that the state legislature passed in the spring. This new law would have required state judges to increase their pension payments from 3 percent of their salary to 12 percent over seven years and make a much bigger contribution to towards their health care costs.
Now, New Jersey’s constitution prohibits the governor or the legislature from reducing the salaries of state judges. The framers included this provision to insulate the judiciary from the types of political attacks that Christie is making on them.
It’s important to note that there are sound legal disagreements about the judge’s ruling and the attorney general has filed an appeal to the state supreme court. That said, Christie’s response to the court ruling was confrontational and condescending:
The governor, instead, turned venomous. He attacked [the judge]’s integrity and accused her of “protecting her own pocketbook and those of her colleagues.” He called her the reason “why the public has grown to have such little faith in the objectivity of the judiciary.”
Later, after you’d think he had a chance to calm down, he went at her again: “Judge Feinberg made a decision that is, on its face, self-interested and outrageous,” Christie said. “This is a blatant attempt to exact for themselves special treatment because they have the power to do so.”
The head of the state bar association and many others in the legal profession in New Jersey have berated him for his attacks. From the Star Ledger Statehouse Bureau staff (emphasis mine):
Not only does the hypocrisy on the right never cease to amaze me, but it frightens me because I know what a destructive force it can be. A lot of folks on the right accuse Obama of being a tyrant of sorts. I’ve heard this again most recently with Obama’s issuing of executive orders on things he can’t get Congress to pass. I find it ironic and frustrating because if anything Obama doesn’t fight hard ENOUGH for his proposals.
So along comes Gov. Christie, a governor with true tyrannical tendencies, and the right see in him the future of their party. Oh, the irony. I think…correction, I KNOW that the combination of a major political party that has embraced a my-way-or-the-highway mentality as the Republicans have–as with their handling of the debt ceiling debate; their threat to end Bush’s tax cuts for ALL Americans rather than end them for the wealthy only; the voter suppression laws Republicans are passing around the country; or, simply their lock-stop refusal to support ANYTHING proposed by Obama or the Democrats–led by a governor like Christie, who embodies that same governing style, would be a disaster at a time when we have enough disaster on our plate. Yet, it is this battering-ram characteristic in Christie which may one day propel him to the top of the US political food chain. No wonder Americans are losing hope and feeling like they no longer have a say in their democracy. Tyranny seems to be what half the country wants and the other half feels powerless to do anything about. I feel this confluence of currents coming together and to say it will be bad for this country is a gross understatement.
The Christie discount
The Christie discount
The media is reporting that New Jersey Governor Chris Christie will announce that he is not running for the Republican presidential nomination this afternoon. That’s probably wise given that the credit markets’ opinion of New Jersey would undercut any claim candidate Christie could make to being a responsible budget manager.
If you look at the Markit municipal credit default swap chart above you can see that credit markets think that the financial condition of New Jersey is pretty bad. It ranks only behind California and Illinois as a poor credit risk. It would be very hard for Governor Christie to tell the story of his fiscal successes in his state given the data. To be a credible candidate for the presidency he needs to develop real improvement for his state and reverse the Christie discount.
Here is the real muniland story
From the blog Credit Writedowns:
US states and local governments cut their debt by 3.2% in Q2 and 4.2% in Q1. This year looks to be the first year since 1996 that local governments in the US reduced their indebtedness.
Christie’s big packaging
Our nation is overdue for an overweight leader. President William Howard Taft, seen at left, was a heavy man who had accomplished a lot when he completed his term in 1913. His successes laid the groundwork for exceptional economic growth for the century. Wikipedia says:
His domestic agenda emphasized trust-busting, civil service reform, strengthening the Interstate Commerce Commission, improving the performance of the postal service, and passage of the Sixteenth Amendment.
The 16th amendment allowed the federal government to assess an income tax without apportioning it among the states or basing it on Census results. The big man had impressive results in his term of office.
Now another big man — the Republican governor of New Jersey, Chris Christie — is flirting with a presidential run. Christie, who is being egged on by wealthy donors, seems eager to enter the primary fray after serving less than two years as governor. In contrast, Taft had a very distinguished career prior to the presidency that included positions as U.S. Solicitor General, a judge on the Sixth Circuit U.S. Court of Appeals, Governor-General of the Philippines and Secretary of War under Theodore Roosevelt.
Chris Christie has a very slim record. He also appears to inflate his accomplishments often. It’s been widely reported that he regularly exceeded travel guidelines while serving as U.S. Attorney. The AP reported in 2009 on his habit of staying at hotels that were much more expensive than what Justice Department policy allowed:
The Republican candidate for New Jersey governor, who has campaigned on a platform of ethical integrity and cutting government waste, regularly spent beyond federal guidelines on business travel while U.S. attorney, records show.
The newly released travel records show that Chris Christie occasionally billed taxpayers more than $400 a night for stays in luxury hotels and exceeded the government’s hotel allowance on 14 of 16 business trips he took in 2008.
“I’m sure he knew better, and he chose to ignore the rules,” said Melanie Sloan, executive director of Citizens for Responsibility and Ethics in Washington. “There is never a situation where the only available hotel in Washington is the Four Seasons. If you stay there, you’ve chosen luxury and you’ve chosen to ignore the rules.”
There is a certain mean hubris in repeated disregard of the rules while prosecuting others for violations of the law. It’s really important that leaders follow the rules in a democratic society as an example for the people to follow the rules too.
Chris Christie’s Presidential Baggage
http://2012.talkingpointsmemo.com/2011/1 0/chris-christies-presidential-baggage.p hp?ref=fpa
As Chris Christie considers presidential run, past contests provide clues into governor’s thinking
http://www.nj.com/news/index.ssf/2011/10 /as_chris_christie_considers_pr.html
Chris Christie Caves, Jersey Will Repay Federal Tunnel Funds
Muniland Absurdity of the Year Award
The small town of Collingswood, New Jersey is facing some rough sledding in the next 90 days as it attempts to raise cash to pay off loan guarantees it made on behalf of a local condo and commercial development.
The private project, The Lumberyards, originated in 2006 with funding from TICIC, a consortium of New Jersey banks that provided $18,000,000 in construction loans to Lumberyard Condominiums. After completing about one third of the project the developers encountered weak demand when the housing market and economy softened following the 2008 financial crisis. The developers are now broke and have turned to the town of Collingswood, their municipal guarantor, to repay the loan to TICIC.
Moody’s downgraded the town six notches due to its weak financial position and the difficulty it will face in repaying the loan to TICIC. Moody’s picks up the tale:
The current loan amount outstanding is approximately $8.5 million with a maturity date of October 7, 2011. Lumberyard Redevelopment LLC and borough officials have asked the lender to extend the term of the loan by one year to October 7, 2012, as allowed in the most recent modified loan agreement. Collingswood officials have stated that the lender is requiring the loan to be paid down to $4 million before an extension is granted.
The developer seems to have returned a good portion of the loan monies to TICIC since most of the project was never built, leaving the loan balance at $8.5 million. But the lenders want half of the remaining loan amount paid immediately. Collingswood has very little cash so they plan on issuing $4.5 million in bond-anticipation notes to buy up vacant condos and rent them out for revenue to pay off the loan.
The reason I’ve been following this story is that last week I happened to read a report by a Gannet reporter, Jane Roh, about the financial troubles of the community. She has done an excellent job covering the story, especially considering she is not a financial reporter, but she got a key fact wrong: the Lumberyard loan guarantee is not part of the $27.8 million, but rather an addition to that municipal debt.
When I saw her report I wrote initially about Collingswood and said:
In fact, the $650,000 is not the bridge loan but is authorized by borough ordinance 1480 (in 2010), which can seen on the town’s website. This money, purposed for completion of Buildings 3 & 4 at the Lumberyard, yet was never even washed through Lumberyard Redevelopment, LLC. The Purchase Order and Invoice for this expenditure indicate that the vendor is the Borough of Collingswood General Current Account.
The bridge loan, authorized by Resolution 2009-10, went to Lumberyard Redevelopment, LLC, which gave the money back in December of the same year so that the Borough could square its books. The invoices for these four purchase orders, totaling $1.3 million, read “Additional Funds per the Subordinate Mortgage Modification Agreement” and similar wording. There’s no evidence of materials purchased or work or services performed. The money never went back out from the borough to the project.
Another of the later bond ordinances for this project, Ordinance 1486, has invoices that detail construction loan interest and property tax payments. Definitely not the kind of stuff you want a municipality to borrow money for. That’s probably why Moody’s made such a harsh downgrade.
When the slick marketing is peeled away and the facts are evident, the borough position becomes much less tenable.
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Resident Muniland expert
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