Exiting New Jersey's Fiscal Nightmare

Can Chris Christie reform the Garden State?

"I'm gonna govern like a one-termer." That's the promise of New Jersey's Chris Christie, who became New Jersey's 55th governor this week. If true, it's a welcome development, because fixing New Jersey's fiscal mess isn't a matter of mere accounting. It will require tackling institutionalized corruption head on. The Garden State's budget has been crippled by spending schemes that largely benefit a well-paid and unionized public sector, itself a creation of New Jersey's entrenched political class.

The magnitude of the damage is daunting. Last year's $7 billion budgetary shortfall now stands at $8 billion and growing. The fiscal patches of 2009′"stimulus money, tax hikes, and program cuts'"spent their magic six months into FY 2010. With the nation's highest property taxes (an average of $7000 per capita), an eight-bracket, progressive income tax, a $45 billion debt load, and the net loss of more than half a million residents since 2000, New Jersey is suffering the painful fallout of its long-running policy of fleecing residents to benefit politically-connected special interests.

Christie's first challenge is to cut $8 billion. But, as many of his predecessors have discovered, fine-toothed scouring will not contain a budget that has been designed to expand. To get a sense of how intractable New Jersey's budget has proven to previous reformers, consider the largest category of spending. Forty-one percent of New Jersey's budget, $13 billion in FY 2009, is dedicated to the Property Tax Relief Fund (PTRF).

In 1976 the state Supreme Court ruled that New Jersey's reliance on property taxes to fund schools disadvantaged poor districts and ordered the state to find supplemental revenues. The legislature complied by creating a nearly-flat income tax and dedicating all of the revenue to providing "indirect property tax relief."

About 78 percent of the fund is spent on the state's 605 school districts, with nearly half concentrated on 31 court-designated low-income "Abbott districts." Another 6 percent of the fund supplements revenues in New Jersey's 566 municipal governments and 15 percent is sporadically awarded as homeowner rebates to help take the bite out of individual property tax bills.

The fund has failed on all counts. Property taxes have risen every year since 1978. Homeowner rebates, averaging less than $1000 when distributed, do little to dull property tax pain. And in the meantime, the court has continued to monitor the Abbott districts, often with disastrous results. For example, a decision requiring poor school districts to spend as much per pupil as the wealthiest school district has transformed New Jersey's income tax into an eight-bracket beast with a top rate of 10.75 percent on those earning over a million dollars a year.

In spite of this massive transfer of resources to poor districts, however, outcomes remain abysmal. Since 1998, Camden has received $2.8 billion for its schools and has spent close to $24,000 per pupil. Yet last year, just 18 percent of Camden's 8th graders scored proficient in math. By contrast, Woodbridge Township has received $169 million in school aid over the period, spending a little more than $10,000 per pupil. Nearly 75 percent of Woodbridge's middle school students met or exceeded proficiency in math.

The perverse outcomes of such decisions won't be easily undone. In essence, spending that should have been determined by the legislature has been decreed by the court, which claims it is upholding New Jersey's constitutional guarantee to provide children a "thorough and efficient" education. The biggest benefactor of Abbott's spending largesse is the New Jersey Education Association (NJEA), which is adamantly opposed to any attempt to rein in costs.

This is just one of the decades-in-the-making disasters confronting the state. Since 1990 local governments have added 45,500 new jobs. Nearly all of them are represented by one of a dozen unions, which have helped secure some of the plushest public sector jobs in the nation. It's easy to see how property taxes have grown at twice the rate of inflation over the past decade. A government worker in New Jersey earns an average of $58,963, a police officer averages $84,223 (the second highest in the nation), and six-figure public sector salaries are commonplace. Compare this to neighboring Philadelphia, where the average police salary is $49,000. According to one estimate, of the $23 billion New Jersey raised in property taxes in 2008, $18 billion was spent on police, municipal, and teacher salaries.

The tab for public workers doesn't end there. Factor in the state's pension plan, currently under-funded by $34 billion. The New Jersey Taxpayers' Association calculates pension payouts for the average teacher range from $1.6 million to $2.5 million, per retiree. For the average police officer, that range totals between $3.2 million and $6 million, per retiree.

As he takes office this week, Christie's real challenge is to stop this exploitation of the state's treasury by the public sector unions. Here are some easy ways to start. He can lead the charge in rooting out obvious public sector excess, such as massive cash payouts for unused leave, and paid time off for holiday shopping.

More difficult but still essential is changing the state's budget rules. Christie must pull the plug on the Property Tax Relief Fund and reject the state Supreme Court's Abbott funding requirements. He must return the state to a flatter income tax and put the revenues in the general fund. And finally, he must discontinue the fiction that this immense redistribution of revenues has anything to do with property tax relief.

Christie seems serious about his one-term pledge. He once told the unions he may declare a "fiscal state of emergency"'"a move the public sector unions call "dictatorial." That would allow him to void former Gov. Jon Corzine's agreement to double the rate of increase in union salaries in 2011. Christie also has strong words for the NJEA: "They need to get realistic that change is coming." He supports both charter schools and vouchers, noting that competition will force failing schools to "change or perish."  

He's also proposed cutting back on two wasteful programs, the "Extraordinary Aid" and "Special Aid" to municipalities, both of which simply subsidize municipal mismanagement. Another bold policy sign is Christie's nomination of former Jersey City mayor and outspoken school choice proponent Bret Schundler to serve as education commissioner.

These are good signs, but implementation is the hard part'"especially in a political climate where patronage and rent-seeking seem to be the explicit goal of most policy makers. Chris Christie has his work cut out for him.

Eileen Norcross is a senior research fellow at the Mercatus Center at George Mason University. She is the author of the recent study "Institutions Matter: Can New Jersey Reverse Course?"

Editor's Note: This article originally misstated the rate of increase in union salaries set by Gov. Jon Corzine.