Friday, February 12, 2010

The Expected Response and How To Avoid The Mess In the First Place

The howls of anger and derision at Governor Chris Christie's budget address came just as I figured they would. After all, he's "cutting" two billion dollars from the budget and nearly $500 million in education spending is frozen. Critics will be busy calling that a cut, even though Christie pointedly noted that the money for the school year is all accounted for and no school district will be without their funds.

Those school districts will simply have to dip into their reserve accounts and other sundry accounts to finish out the year, instead of hoping for the state to pay.

So, why are state budgets a mess all over the nation? Christie identifies the problem in New Jersey, but it is just as applicable to New York, California, and pretty much every state government and the federal government:
New Jersey is in a state of financial crisis. Our state’s budget has been left in a shambles and requires immediate action to achieve balance. For the current fiscal year 2010, which has only four and one-half months left to go, the budget we have inherited has a two billion dollar gap. The budget passed less than eight months ago, in June of last year, contained all of the same worn out tricks of the trade that have become common place in Trenton, that have driven our citizens to anger and frustration and our wonderful state to the edge of bankruptcy.

What do I mean exactly? This year’s budget projected 5.1 % growth in sales tax revenue and flat growth in corporate business tax revenues. In June of 2009, was there anyone in New Jersey, other than in the department of treasury, who actually believed any revenues would grow in 2009-2010? With spiraling unemployment heading over 10%, with a financial system in crisis and with consumers petrified to spend, only Trenton treasury officials could certify that kind of growth. In fact, sales tax revenue is not up 5%, it is down 5.5 %; and corporate business tax revenue is not flat, it is down 8%. Any wonder why we are in such big trouble? Any question why the people don’t trust their government anymore and demanded change in November? Today, we must make a pact with each other to end this reckless conduct with the people’s government. Today, we come to terms with the fact that we cannot spend money on everything we want. Today, the days of Alice in Wonderland budgeting in Trenton end.

The facts are that revenues are coming in $1.2 billion below what was projected last year, and over $800 million in additional spending was done by the previous administration on their way out the door.
Sales tax revenues are actually off 10% from what was expected. Corporate taxes are off 8%. Those are not insignificant oversights. They are budget busters.

Rinse and repeat nationwide. Overly optimistic budget forecasts led politicians to adopt budgets that were wildly off in their revenue component while spending continued increasing. The only expected outcome under the circumstances is a deficit - and that's what we've got in spades.

Freezing spending is the only thing that can be done right now, and while I disagree with Christie's actions on not funding the pension obligations, it was the least bad decision he could have made under the circumstances (but one that every New Jersey governor has done for years to the point of institutionalizing the underpayment of those obligations saddling the state with a multi-billion dollar deficit in the pension fund that can't simply be overcome with a one-year budget fix).

New Jersey's fiscal problems are structural in nature, and until the very structure of the budget is addressed, we'll simply lurch along until the next crisis. Christie has to take on those entrenched interests and fix the structural problems with the budget process in New Jersey.

For starters - a far more realistic budget projection would have meant a far smaller deficit. A budget that curbed spending would have meant a far smaller budget deficit. State workers and the unions might not like the curbs in spending, but that's tough luck for them. They've been living high on the hog for far too long and the state simply can't afford them.

No comments: