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.

Let’s stack the deck

Deficits at state-pension funds are the real monsters threatening municipal stability. Estimates of shortfalls at these funds range from $1 trillion from the Pew Center on the States to $3 trillion from Orin Kramer, the former chairman of New Jersey’s State Investment Council.

There are numerous strategies that individual pension-plan sponsors are using to stabilize their funds, including:

    Reducing benefits Increasing employee contributions Making additional public contributions to “top up” the fund Trying to increase returns for the fundby increasing investment risk Changing to a defined contribution plans

The excellent graphic above, provided by the Pew Center on the States, shows how many states are adopting the first and second strategies listed above. The upside of these methods is they stabilize fund assets immediately.

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