New Jersey's New Governor About To Get Mugged By Reality

At this blog, when not commenting on events in my home town of New York, I've tended to look more toward Connecticut than New Jersey.  But New Jersey has just elected a new Governor, by the name of Phil Murphy, in the off-year 2017 election; and he took office on Tuesday.  Here is a link to his inaugural address.  So perhaps it's time for a brief look to the West.  

In terms of major aspects of public policy, New Jersey's recent history bears a great resemblance to that of Connecticut.  When I first moved to New York in 1975, New York had top combined State and New York City income tax rates approaching 19%, while New Jersey had no income tax.  New Jersey was booming.  It seemed that on a weekly basis some securities firm was announcing its move to the Jersey City waterfront, right across the river.  But New Jersey had a budget shortfall, and in 1977 then (Democrat) Governor Brendan Byrne proposed a "temporary" 2% income tax to close the gap and avoid increases in already-high property taxes.  Forty years later, the property taxes are still just as high or higher, and New Jersey still has the income tax, with the top rate all the way up to 9%.  Meanwhile, New York's top rate, including the New York City tax, has been reduced to a little under 13%, but only on income over $1 million; for income between $500,000 and $1 million, New Jersey now has less than a 2% income tax advantage over New York.  I can't remember the last time I read about a business picking up and moving to New Jersey to save on taxes.

Also during the same period, a string of mostly Democratic governors and legislatures entered into a string of wildly overgenerous pension promises to the state workforce.  (Republican Governor Christine Todd Whitman, 1994 - 2000, bears a small portion of the responsibility.)  When the budget was tight, they "solved" the problem by just skipping the pension contributions.  Today New Jersey competes with the likes of California, Illinois and Connecticut for having the most irresponsible and worst-funded public pensions.  A report out in December from the American Legislative Exchange Council put the funding level of New Jersey's public pensions (at a risk-free interest rate) at 25.6%, 46th worst among the states.  This is way, way beyond the level where miraculous increases in the stock market or hedge funds can ever bail you out, and is deep into a death spiral.

And yes, like any decent blue state, New Jersey has a seemingly perpetual budget "crisis."  As not the least part of it, it has been underpaying its required pension contributions by up to about $3 billion per year -- this on a budget of about $36 billion per year.  And New Jersey's bond rating has been cut 11 times in the past 8 years, most recently to A3 by Moody's.  Hey, it's better than Illinois's rating!

Enter new Governor Murphy.  He is a Democrat.  And what credentials!  Harvard College!  Wharton Business School!  Goldman Sachs!  This guy is really, really smart!  And he may actually be "smart" in some sense.  I'll bet he had great SATs.  However, on the record of his campaign promises, you could be forgiven for inferring that he would have difficulty adding two plus two.

I should mention that Murphy is a complete standard-issue progressive, in the mold of an Obama or a Hillary.  Perhaps not quite as far off the scale as a Sanders or a Warren.  He is facing a nearly hopeless budget situation, with an immediate need for about $3 billion per year (almost 10% of the budget) to pay for past pension promises -- payments that will deliver absolutely nothing in the way of new or better services for the people.  What to do?  So far, his answer has been a collection of totally pie-in-the-sky promises of new and additional spending that can have no possible relation to reality.  Here is a list of just some of the items from his campaign web site:

• More money for the black hole of New Jersey Transit ("Rebuilding our cities through critical investments in transportation infrastructure")
• More money for the black hole of the New Jersey state university system ("Re-investing in our institutions of higher education and community colleges to make them affordable")
• More money for the black hole of K-12 education (Easing the property tax burden by funding our schools, restoring rebates for seniors and low-income residents. . . .").  (K-12 school spending in New Jersey for 2015 -- most recent year I can find -- was over $18,000, nearly double the national average.)
• New money for student loan relief ("Providing student loan relief for STEM employees")
• Additional payments to low income people carefully structured to be sure that no one is actually removed from poverty ("Expand the EITC to 40 percent of federal level, so that working families can lift themselves out of poverty.")  (Is this guy really so dumb that he doesn't know that EITC payments are not counted in the measure of "poverty"?  Or is he just being intentionally deceptive with this one?)
• More money to achieve universal healthcare "coverage" and lower premiums ("Access to health care is a basic right")

And so forth.  And then, how about my perennial favorite -- infinite oodles of fresh cash to "Combat Climate Change & Make New Jersey A National Leader in Clean Energy"?  Yes, Murphy is pledging to wipe out all use of fossil fuels by 2050 -- not just the paltry 80% reductions promised by his confrères across the river and in California:

Murphy committed, within his first 100 days in office, to starting the process of creating a new State Energy Master Plan to set New Jersey on a path to 100 percent clean energy by 2050.  

This guy -- and remember, he went to Harvard and the Wharton Business School, and worked at Goldman Sachs for decades -- actually believes, or claims to believe, that spending oodles of government money to force a switch from less expensive to more expensive sources of energy somehow makes the people richer rather than poorer:

Murphy noted that moving to a clean-energy economy would encourage innovation and create jobs, as every $1 spent on early-stage clean energy research and development generates an additional $1.60 in output from other sectors of the economy. He said his plan would maximize this potential, in large part, supporting innovation and R&D in higher education.   

And don't forget the importance of "climate justice"!

Murphy said he also would ensure that the benefits of clean energy reach all communities as a matter of environmental and economic justice.  “Too often, conversations about climate change have ignored the disproportionate impact on lower-income and politically vulnerable communities, yet the environmental concerns in these communities are staggering,” said Murphy, noting that, in Newark, as many as one in four children have asthma. “We must ensure environmental justice as a core principle.”

Once you get into this groupthink, you're just not allowed to realize that tripling the cost of energy for the poor is the opposite of "climate justice."

All this (and lots more) with a budget already hopelessly under water.  Does he have any proposal to pay for it all?  Of course, there is the usual call for higher taxes on the top 1%.  ("In New Jersey, the wealthiest 1% continue to pay a far lower share of their income in state and local taxes than the lowest-income residents. Phil strongly believes that is unacceptable in 2017.")  Good luck with that.  Here's NJ Senate President Steve Sweeney on Fox Business today basically saying that the "millionaire's tax" is not going to work any more in the wake of the federal tax reform.  OK, the only other suggestion I can find in Murphy's stuff is the bright idea of getting the pensions out of investing in hedge funds in order to save on investment fees.  That might produce about 1% of the money Murphy is looking for.

New Jersey has come to the blue state dead end.  The new Governor, living in fantasyland, doesn't realize it yet.  Maybe he never will.  But he is about to get mugged by reality.  Meanwhile, his state will continue its long-term relative decline.  Maybe the voters will just keep voting for more and more of the free stuff while the decline continues and accelerates.

Tax Reform And The Blue State Model

It was not long before I started this blog in 2012 that Walter Russell Mead of the American Interest began writing about what he dubbed the "blue model" of government, and his prediction that that model was "on the way out."   When applied to the states, the term "blue model" referred to the combination of relatively high taxes, high state spending, and extensive regulation typical of Democrat-leaning states like California, Illinois, New York, New Jersey and Connecticut.  Mead's prediction was that the combination of the information revolution and competition from lower-tax and lower-regulation "red" states would put the blue model under increasing pressure and force reform.

Almost six years later, the "blue" states have only doubled down on their policy model.  None of those states have seen any significant cutbacks on state programs.  During this period California and Connecticut have actually raised their income tax rates on top earners.  In the competition against other states, California appears to be doing relatively well, although its population explosion has slowed substantially.  In New York, Connecticut and New Jersey the population has been almost completely flat in recent years.  Illinois has actually experienced a population decline since 2010, but only a slight one.   Meanwhile, the big "red" states, like Texas and Florida, have grown rapidly.  But the very slow and gradual relative decline of the big blue states so far has not created any significant motivation to do anything different. 

Could that be about to change?  As of January 1, the state and local income tax deduction will mostly be gone.  Suddenly there will be a significant shift in the competitiveness between the high-tax "blue states" and the lower-tax "red states."  Will this lead to any serious rethinking of the "blue state model"?

I'm betting against it.  The basic nature of the blue state model is to put in place various government handouts and favors to specified groups, who thereupon become dependent on the handouts and favors and will fight to the death to keep them as is.  Given the overall disinterest of most of the electorate, the recipients of the handouts and favors come to exercise effective control over the political process.  

Consider a couple of examples.  Generous pensions for state and local government workers are a hallmark of the blue state model.  Not that the red states are pure on this issue.  But if you look at lists of states ranked by amount of aggregate unfunded pension debt, or by amount of unfunded pension debt per capita, or by percentage of pension obligations that are unfunded, the big blue states consistently appear at or near the bottom of the list.  A December 2017 Report just out from the American Legislative Exchange Council contains rankings of the states on all of those measures.  In funding percentage at the risk-free rate, Connecticut ranks dead last among the states at 19.7%; Illinois 48th at 23.3%; and New Jersey 46th at 25.7%.  California and New York do better on that measure, but they are kingpins of aggregate unfunded pension debt:  50th place and $987 billion in the case of California (hey, it's less than a trillion!); and New York at 46th place and $345 billion.  (To its credit, New York has been relatively honest in funding the pension obligations it has taken on.  However, it has taken on ridiculously generous obligations, particularly as they concern early retirement ages for workers in many areas.  The result is that pension contributions constitute a high and ever-increasing percentage of government budgets at both state and local levels.)

Are the blue states going to do anything soon to right their pension ships?  New York and Illinois have provisions in their state constitutions that make revisions of pension accruals for existing employees difficult or impossible.  (See my discussion of that issue here.)  In California, there is no comparable constitutional provision, but the courts have imposed a rule of law that may amount to the same thing as a practical matter.  Former San Jose Mayor Chuck Reed has led an effort to enact a ballot initiative that would overrule the court-made restrictions; but after getting off to a slow start, that initiative was pulled in 2016, and its backers are talking about another try in 2018.  They will face major opposition from the public employee unions.

As a second example, consider obligations that blue states have taken on in union contracts.  Again, the red states are far from pure; but generosity to public employee unions is one of the hallmarks of the blue model.  Some insights into the nature of the problem can be found in a big New York Times spread today in the New York section, headline "What Would It Take To Fix New York Subway?"    The impetus for the article is that a recent series of things like derailments and fires has brought calls for an emergency program to "fix" the subways.  Mayor de Blasio, of course, has called for a new "millionaire's tax" to raise the funds.  (Funny how he seems to have the exact same idea for how to "fix" every problem we encounter.)  So, can we free up some money to "fix" things by bringing down the costs of operating the subway through automating the function of running the trains?  They are well on the way to doing that in London and Paris:

London is upgrading its fleet to become automated in the mid-2020s.  In Paris, driverless trains are in operation on two lines.

So how about in New York?

In New York, the L train [one of some 26 lines] is the only line where the new traffic control system has been fully implemented and where trains could, in theory, be automated.  But after a brief experiment using only one train operator in 2005, the M.T.A. had to bring back two-person crews to the L after losing a labor dispute.

Yes, we have at least some trains fully equipped for automated operation, but we use not one person, but two to run them.  The union insists!  Oh, and our costs of building new extensions of the subway system run five to ten times international norms.  So, sorry, no money is available for the emergency "fix."

Basically, what the "blue model" comes down to is spending far more money to get the same or worse results.  We spend far more than national norms on healthcare, for no better health outcomes; and far more (more than double) national norms per student on K-12 education for no better outcomes.  But the costs are all locked in place and nearly impossible to control or reduce.

So what will be the result of the tax reform?  My prediction:  the process of relative decline will be somewhat accelerated -- from very, very slow, to merely very slow.  Likely, new "millionaire's taxes," like the one de Blasio has been proposing, will go off the table.  But don't look for any immediate declines in the existing tax structure, unless there are a large number of departures of the wealthy suddenly announced.

UPDATE, December 27:  Turns out that the Daily Caller had a post yesterday on the amount of outmigration from the big blue states, headline "Nearly 450,000 People Fled These Three Deep Blue States In 2017."  The three states in question are California, Illinois and New York.  The post is sourced from Census data that came out on December 20.  Key quote:

Three Democratic-leaning states hemorrhaged hundreds of thousands of people in 2016 and 2017 as crime, high taxes and, in some cases, crummy weather had residents seeking greener pastures elsewhere.  The exodus of residents was most pronounced in New York, which saw about 190,000 people leave the state between July 1, 2016 and July 1, 2017, according to U.S. Census Bureau data released last week.

The outmigration from California was 138,000, and from Illinois 115,000.  In the case of California and New York, they were able to replace the departures with immigrants from abroad.     

A Ray Of Hope On The State/Local Pension Front?

The good people at Maggie's Farm today post a link to an article from California's East Bay Times reporting on the latest court decision concerning legislative attempts to address the state and local pension crisis.  The court decision in question issued from the California Court of Appeals on August 17.  It concerns a California statute effective in 2013, and the efforts of the pension board of Marin County to implement that statute.

It's been a while since I posted on the issue of the state and local pension crisis.  This post from January 2014 has a good background.  But this crisis is so slow-moving that the word "crisis" itself is rather ill-fitting, and it's hard to maintain any sense of urgency about the subject.  Still, this is a gigantic problem.  The California Court of Appeals decision cites various sources that put the overall size of the problem (all states) in the range of $3 to 4 trillion -- and it could be even substantially higher if you use lower interest rates to measure the future obligations.  But it's unlikely that any state or local pension plans will actually run out of money and start bouncing checks until well into the 2020s.  Nevertheless, plenty of these plans are already so deep in the hole that there is no clear way out short of fundamental restructuring of the pension obligations -- and then, many state constitutions (not to mention the federal constitution's Contracts Clause) have provisions that many courts have interpreted to prohibit or severely constrain the fundamental restructuring of obligations.  So the problem just slowly worsens and worsens, and generations of politicians take the opportunity to punt and leave the situation to their successors. 

Two of the states in deepest trouble are Illinois and California.  In recent years Illinois passed two statutes to deal separately with the situations of the Illinois State and the Chicago pension plans.    In both instances, the Illinois legislature made the bold step of cutting already-accrued benefits of the workers, taking the position that it could do so under its emergency police powers given the direness of the situation.  In two opinions of the Illinois Supreme Court, one from May 2015 and the other from March of this year, that Court rather angrily struck down the legislature's efforts as contrary to the Illinois Constitution.  The Illinois Court took note of the fact that the legislative changes would modify not just future accruals, but also already-accrued benefits.  But its decisions did not turn on that distinction, and appear to stand for the proposition that an employee who joins the system and works for even one day has a constitutional entitlement (under the Illinois State Constitution) to have no reductions in his pension accruals of any kind throughout an entire 40 year working career.

So, into this breach now leaps the California Court of Appeals in its case of Marin Association of Public Employees v. Marin County Employees' Retirement Association, et al.  A major case from California is particularly noteworthy because, at least up until this time, California has been known for what has sometimes been referred to as the "California rule" of state pension obligations, which is that, even in the absence of any state constitutional protection, any government employee who works for even one day as part of a pension plan can never have his ongoing pension accruals cut in any respect, no matter how trivial.  I'm not sure that that is an accurate statement of the pre-existing California case law, but certainly many advocates have taken the position that that is what the California cases have stood for.  

This new case arises in the context of a statute designed to address issues arising from what was perceived as abusive employee pension "spiking."  It seems that the pensions in question were calculated based on so-called "final average pay," and the employees would maneuver to get various things, otherwise not normally a part of pay, paid to them in cash in their final years in order to get those things included in the pension calculation and drive up the pension amount.  Examples mentioned in the opinion included unused sick days, unused vacation days, and payments for waiving health insurance.  The statute passed by the California legislature allowed pension boards to modify the definition of a term called "compensation earnable" in the pension formula to do away with these perceived abuses, in the process lowering the "final average pay," and thereby lowering the pensions that would be payable to employees who were planning to take advantage of the spiking games.  

So, is this OK or no?  It would not pass the test of the "California rule" as I articulated it above.  But this court parses the pre-existing California law at great length, and comes to a very different result.  The court expresses its holding through quotes from prior California Supreme Court cases, most notably this one:

[A] public pension system is subject to the implied qualification that the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.

On that basis it upholds the actions of the Marin pension board.  Note that the modification to the definition was not prospective-only, so this opinion would give the legislature flexibility -- within very vaguely-defined boundaries -- to make changes even to already-accrued benefits.

Needless to say, the case is on the way to the California Supreme Court.  That court can of course do what it wants with this subject, and is certainly not bound by the decision of the Court of Appeals, let alone by its own prior decisions.  

Meanwhile, back in New York, nobody has had the guts to take on these issues yet.  As I pointed out in this post from January 2014, we have two old cases from our Court of Appeals, one from 1958 and the other from 1972, that would appear to hold that any changes to pension accruals that are adverse to a public employee, even one who has only worked for one day, violate a provision of our state constitution.  The 1972 opinion actually specifically addresses an attempt to change the way unused vacation days are counted in final average pay.  Sooner or later these issues will have to be addressed, but meanwhile we have the benefit -- or maybe it's the curse -- of having funded our pension plans much more honestly than places like California and Illinois (and New Jersey and Connecticut).  That just means that the crisis will hit later, not that we can avoid it forever.    

How Do You Tell The Corrupt Politicians From The Honest Ones?

Across the big river from me, New Jersey State Senate President Stephen Sweeney has just created a big stir by calling on New Jersey's Attorney General and U.S. Attorney to investigate the New Jersey Education Association (teachers union) and Fraternal Order of Police for what he calls a "clear case of extortion."  NJ.com has the story here.  

This is not a small deal.  Sweeney is of course a Democrat, often referred to as the most powerful Democrat in the state (the current Governor -- Chris Christie -- being a Republican).  But more than that, Sweeney's background is as a unionized construction worker.  Before going into politics, he started in the Ironworkers union in 1977, and held several positions in that union, including serving as an organizer.  So it's quite something for Sweeney to take on the most powerful public employee unions in this way. 

And what have the teachers and police unions done to be on the receiving end of a charge of "extortion"?  It seems that the unions want a particular piece of legislation passed (setting up a referendum they think they will win on a constitutional amendment to get increased pension funding), and they orchestrated a series of calls to legislators threatening to withhold campaign contributions from anyone who did not support the legislation.  From nj.com:

Representatives from the powerful teachers' union contacted Democratic party leaders Monday and said unless and until there is a vote on a proposed constitutional amendment guaranteeing billions of dollars to the government worker pension fund, they would not make campaign contributions this year.  Sweeney also told reporters his legislative office had received a direct threat from Bob Fox, president of the Fraternal Order of Police. Fox said no state senator would receive a contribution from the union until the resolution to put the referendum on the ballot is passed, according to an internal email describing the phone message.

OK, here's your quiz for today:  Crime, or not crime?  How do you tell?

As a clue, I will give you the quote from the expert on the subject chosen by nj.com. He is Jeffrey Brindle, executive director of New Jersey's Election Law Enforcement Commission.  If anyone is in a position to know whether this is OK or not, he would be the guy -- right?  Well, he doesn't know:

"It doesn't look good," said Jeffrey Brindle, . . .  "[But] political scientists have had to wrestle with this for some time: What is quid pro quo? A contribution in exchange for supporting certain policies and legislation? I think it's pretty close."

And he's right.  The law is a complete mess.  For more on the totally muddled legal situation, see my posts here and here.  The short statement of the law is, a "quid pro quo" payment to a politician in return for some "official act" is a crime.  So, is a legislator who takes a campaign contribution from someone who hopes he will vote a particular way on some piece of legislation guilty of a crime?  Unfortunately, it is inevitable that every single legislator will at some point vote on some piece of legislation in a way favorable to some campaign contributor.  Are they all criminals?  How do you tell which are which?

As readers here know, my position is, government is inherently corrupt.  There is no way around it.  That's just one of the reasons (although perhaps the most important one) why we are complete fools to entrust to the government more and more power to redistribute the wealth of society, supposedly to create more fairness and justice in the world.  What this process actually creates is more corruption.  And does this process create more fairness?  If it did, why does Manhattan -- the jurisdiction with the highest taxes and the most extensive suite of progressive welfare and redistributive government programs in the whole country -- have the highest income inequality?  

Meanwhile, kudos to Mr. Sweeney for calling out these corrupt union thugs.  The fact that their conduct may not be criminal does not make it any less disgusting.  People, this is how the government operates out of your sight.  Once in a while you get a little peak at the inner processes.