Sunday, August 22, 2010

States' Fiscal Problems Run Deep and Long

New Jersey's problems may be worse than many states, but they are typical. Short term "solutions" to solve politicians' campaign promises result in mortgaging the future and causing even bigger problems down the road. The legacy of bad deals has created a fiscal time bomb that is only now beginning to be addressed.

The decision to leverage cigarette tax revenue through the cigarette bond issue in 2004 was made by Democratic Gov. Jim McGreevey. To balance the state budget, McGreevey borrowed $1.4 billion from investors upfront against the $600 million the tax was generating at the time — a move similar to the borrowing for pension benefits that Republican Gov. Christie Whitman approved to free up cash for her budgets.

Moody’s Investor Services downgraded the rating for the 2004 bond issue last week because fewer people are buying cigarettes in New Jersey and the cigarette tax is bringing in less revenue — roughly 6 percent annually — than was originally projected.

While that may be good for the state’s overall health, it may also mean the state could eventually have to come up with other funds to pay back the bonds that aren’t set to mature until 2034.

"It’s just another fiscal issue that has been dropped into the lap of this administration, and we are going to have to deal with it," Christie said.
Even worse than New Jersey's mess is that many states took their Master Settlement Agreement funds and spent it in one shot. The Master Settlement Agreement split up $206 billion among the states, but was meant to fund programs over a period of 25 years.

Some states, instead of taking the money as it came, reduced the value to present day value and took a lump sum payment - and spent it in a single year. Not only did this undermine the very reason for the settlement (to fund anti-smoking programs) but created deficits in future years because those very anti-smoking programs continued to need funding.

Throw in reduced numbers of people smoking and the tax hikes on tobacco couldn't cover the difference. Revenues couldn't match spending.

Politicians will often do what is necessary to be reelected, rather than what's right and fiscally prudent. Take the pension mess that Republican Don DiFrancisco did for New Jersey when, assuming the governorship on Gov. Christie Whitman went to the EPA in the Bush Administration, he passed a pension sweetener that added to the state's obligations.
He approved a bill in 2001 — when every legislative seat was up for grabs — that increased the pension benefits of both current and retired public employees by 9 percent.

A fiscal estimate conducted at the time, based on rosy stock market conditions that have since changed, predicted a surplus in the pension fund. A later estimate pegged the actual cost of the increase at $5.2 billion. Now, Christie is talking about rolling back the 9 percent benefits increase this fall.
Gov. Christie is having to clean up the mess of bad decisions by a host of governors in New Jersey. Many other states continue ignoring the fiscal disasters - especially New York. New York continues increasing the state budget despite revenues that cannot support it.

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