Gov. Christie Issues Budget Recommendations

New Jersey Governor Chris Christie has issued his budget recommendations for the upcoming fiscal year, and he's increased spending by nearly $2 billion dollars to $32.1 billion. The full text of his speech is here, but I think we're heading for a repeat of problems.

There's a little bit of something for every group, including increased spending for education and the first portion of his proposed tax cuts:

The budget put forward by Christie projects total state revenues growing by more than $2 billion during the next budget year, which begins on July 1 and runs through June 30, 2013.

"In one word, it's all about growth," state Treasurer Andrew Sidamon-Eristoff said in an earlier briefing with reporters. “The trend line is clearly positive.”

The projected revenue growth will cover a $121 million increase in formula aid to schools and a more than $1 billion payment into the grossly underfunded state pension system.

The increased revenue would also provide enough money to offset $530 million in planned tax cuts, including $183 million in revenue lost to the first phase of Christie’s proposed three-year income tax cut.

Despite the planned growth, the governor’s spending plan does not increase Homestead property tax relief even after property tax grew on average in 2011 to a record-high statewide average of $7,759.

The budget also provides flat funding to hospitals, cuts overall aid to towns and leaves the state with a razor thin surplus fund of $300 million.

Christie, however, does increase spending in other areas and pays for his tax cuts by banking on that increased revenue.

“Because we have made the tough choices in these last two years, we can make the right ones now,” he said.

Tough choices had to be made, but now we're about to abandon the tough choices by increasing spending beyond what we should rightfully expect in terms of tax revenues. The budget should probably fall into the $31 billion range, not the $32 billion range - the expected revenues for the upcoming year can't support the levels Christie proposes. That would hurt his chances to get tax cuts, so he's figuring on a 7% increase in revenues even as revenues for the current year are lagging estimates.

I would much rather see the state spend more on infrastructure to make a down payment towards getting critical infrastructure rebuilt, replaced, or built, as well as vastly increased pension contributions to make up for the historical shortfalls to help bring the pension funds into balance. They aren't sexy programs, but they are critical to the state's future obligation.

Even as property taxes continue to rise, they are doing so at a lower rate than in past years as a result of reforms instituted during Christie's term. Additional state aid would further reduce property tax hikes - the primary reason that property taxes are what they are. However, let's not forget that the personal income tax was imposed as a way to reduce property tax burdens, the sales tax was increased to pay for property tax relief (that was then scaled back while keeping the rate at the same level), and now New Jersey has one of the highest overall tax burdens in the nation.

Another LIRR Pension Scandal Brewing

It's been a few years since the last pension scandal at the LIRR, but it seems that whatever procedures were put in place to prevent abuse of the pension system were insufficient. 10 people were arrested in connection with the latest pension scam. This investigation grew out of the original 2008 scandal, as federal investigators dug deep to find out what was going on.

The United States attorney in Manhattan, Preet Bharara, and the head of the New York F.B.I. office, Janice K. Fedarcyk, were expected to announce the charges at a news conference with two inspectors general, Barry L. Kluger of the Metropolitan Transportation Authority, and Martin J. Dickman from the Retirement Board. The investigation was conducted by the F.B.I. and federal prosecutors in Manhattan, along with the inspectors general of the federal Railroad Retirement Board and the Metropolitan Transportation Authority, the Long Island Rail Road’s parent agency, the people said.

The Times articles reported that virtually every career employee of the railroad was applying for and receiving disability payments, giving the Long Island Rail Road a disability rate of three to four times that of the average railroad. The Times found that retired railroad employees who had successfully claimed disability were regularly playing golf at a state-owned course without charge — another perquisite of their disability.

Indeed, the railroad’s retirement rate was particularly striking when compared with the number of disability pensions at Metro-North, another transportation authority subsidiary that serves commuters north of New York City and has a work force of similar size and composition.

The articles revealed that a web of doctors and facilitators were helping the workers file papers claiming they were disabled.

The authorities estimate that the cost to the Railroad Retirement Board of disability claims by Long Island Rail Road retirees was $1 billion, the people briefed on the case said.

Turns out that this was a billion dollar scandal.

Think about what a billion dollars could do for the LIRR. That's a one followed by nine zeroes. 1,000,000,000.

It could buy a solvent pension system that does what it was intended to do by servicing all eligible employees in a fair and just manner.

It could buy hundreds of railcars.

It could upgrade signal and rail systems.

It could renovate stations throughout the system to bring them up to modern standards.

Instead, it's a billion dollars that was siphoned silently from the system and commuters and taxpayers paid for it.

Now, investigators have to attempt to claw back the ill-gotten gains and take criminal actions against all those involved. It means that the agency will likely get back only a fraction of that amount, but it's still better than nothing. LIRR commuters deserve as much; they deserve a chance to recoup these costs from these defendants.

New Jersey Has a Budget; Christie Vetoed Unconstitutional Spending Added By Legislature

There will be no budget shutdown in New Jersey as is the situation developing in Minnesota. Gov. Chris Christie signed the budget presented to him by the Democratic-controlled Legislature, but not without slashing spending by $900 million. The new $29.7 billion budget is $100 million more than the budget he originally presented to the Legislature, but the Democrats will spin mightily to complain that Christie slashed spending and made harsh cuts.

The problem for Democrats is that they propped up their spending with nothing more than wishful thinking. The state was already being forced to use a borrowing plan to tide the state over until it can present a bond measure in a couple of weeks because it lacked revenues on hand to do so. Democrats added hundreds of millions more in spending than they could ever hope to expect from their millionaires tax that they further added. Christie vetoed the millionaires tax and the spending. Besides, the millionaires tax had to be law before the budget was enacted in order to claim that the revenues were available and present - and it wasn't:

Little mattered until Thursday — Democrats could pass what bills they wished on Wednesday, but if they did not survive the Christie cut, the bills were almost certainly dead. The budget as sent to Christie was doomed. The only question was whether it would be cut in a way that would allow the state to not shut down or force legislators into a marathon session over the holiday weekend.

Christie's one gift to Democrats was that he chose the former. There will be no missed barbecues this July 4. The Democrats' budget was unconstitutional; it was not balanced as required by law. It may have included some dandy stuff, but there were insufficient funds. To borrow an oft-quoted phrase: Democrats were writing checks the state could not cash.

The first problem was that the budget only could be balanced if there were a millionaire's tax. And there wasn't. And there wasn't going to be one. But even if Christie had supported such a tax, it needed to be law before the Democrats' budget went to the governor.

It is not an easy time for legislators or the governor. They are all political creatures with agendas. Democratic legislators sold out to non-elected Democratic power brokers and agreed to transform public employees' lives, changing formulas for pensions and workers' contributions toward health care benefits. In the wake of that big sellout, there was a new kind of fire sale in which everything that could be salvaged from those ashes was put up for a vote.

I have not absorbed all the Christie cuts. Most of the increased school funding toward the so-called non-Abbott school districts has been cut. So has the Earned Income Tax Credit increase. And the millionaire's tax was axed like a tree in the Koch brothers' forest. None of this is particularly surprising. Nor will it be surprising to see Democrats try to override some of these vetoes next week.

To date, Christie has been brilliant at holding together the Republican caucus. I doubt few, if any, will defect. And the bottom line is that the budget has to be balanced by law. There is only so much revenue. The debate should be about priorities, and it has never been about that. Democrats added on without taking other things out. The only way to win with Christie is to force him to transfer one item for another. Instead, he was able to say the budget increased spending beyond certified revenues. It did.

Democrats in the Legislature have screwed the state for so long that their song and dance about how budget increases being cuts are getting stale (well, it's a common song and dance - especially in New York). A budget that spends more on education than the prior year is considered a cut because the spending is less than what the Democrats demanded even though there's no revenues to back up the plan.

New Jersey's Constitution requires a balanced budget, and that means that spending must require sufficient revenues. When those revenues aren't expected or can't be reasonably expected to materialize, something has to give. The Democrats' spending spree had to be cut.

The new budget will also provide $468 million in pension obligation payments, which is something that the state had not done in recent years and is part of the deal to overhaul the pension system in the state. There's also a slightly expanded homestead property tax rebate/credit. In all, the state is spending $30 million more than last year on education spending, including $450 million as required by the State Supreme Court following its misguided decision about those districts not getting a thorough and efficient education.

A Long Overdue Admission On Unsustainable Pensions In New Jersey

New Jersey Senate President Stephen M. Sweeney, a Democrat, has admitted what many have assumed for quite some time - pensions and health benefits were simply unsustainable at the levels promised by union officials and legislators who signed off on deal after deal. It comes as he's working on a deal with Gov. Chris Christie, a Republican to change union benefits and require workers to contribute a greater percentage towards their health and pension benefits:

To his mind, he’s exposed a family secret in Trenton: The pensions and health care plans are unsustainable, and union leaders have known it for years and said nothing.

“They lied to their members,” Mr. Sweeney said. “When I say lied, I mean it. They lied.”

That is only a slight overstatement. The labor movement has many laments and many wounds, more than a few self-inflicted. Some pension provisions were undoubtedly piled too high. And union leaders wheedled special deals and remained silent as governors, Republican and Democrat, declined to pay into the pension system.

Labor leaders and politicians, no less than arbitragers and Goldman Sachs partners, relied on magic bubbles to keep it all afloat. The line between illusion and lie grew indistinct.

But Monday offered a through-the-looking-glass moment of a sort, seen across the nation, as middle-class union members became improbable symbols of a recessionary era brought on by Wall Street financiers.

It's also quite troubling when no one who will actually be voting on these measures has any idea of what the costs are to the union members, or the taxpayers who have been bearing the ever higher costs.

The dealing on the pensions and benefits has revealed the shady side of politics in Trenton - it has kicked over a hornet's nest of conflicting interests within both parties, but particularly the Democrats who are closer to unions than the Republicans.

In the end, taxpayers - including these same union members who will be required to make higher contributions - will begin to see tax relief. For far too long, legislators in Trenton have made promises they couldn't afford, hoping that financial alchemy would solve the solvency issue. That all came crashing down when the economy faltered and the assumptions about growth simply didn't materialize.

Unions Kvetch Over Gov. Cuomo's Proposals To Change NYS Pension System

Once again, the state unions in New York are up in arms over Gov. Andrew Cuomo's proposals to revise the state pension system, including increasing the retirement age, increasing the percentage that workers must contribute to their future pensions and medical benefits, and eliminate the way that overtime is calculated as part of pension benefits:

The changes would affect newly hired workers in a pension system that covers 175,000 state employees and hundreds of thousands of employees of local government and teachers, as well as 300,000 New York City employees.

Labor officials immediately expressed strong opposition.

“Congratulations to Governor Cuomo for another grandstand play for the attention of his millionaire friends at the expense of the real working people of New York,” Danny Donohue, president of the largest union of state workers, the Civil Service Employees Association, said in a statement.

“Governor Cuomo’s proposal can only be viewed as an attack on working people to score some cheap political points.”

The president of the New York State Public Employees Federation, Kenneth Brynien, attacked the proposal as “draconian pension cuts that would inflict permanent damage on middle-class workers such as nurses, parole officers, bridge inspectors and cancer researchers for what is a transient problem.”

“This is about politics and placating big-business special interests, plain and simple,” Mr. Brynien added.

Pensions for new workers would still be enviable by the standards of the private sector, and Mr. Cuomo is not going as far as he has talked about in the past, when he raised the idea of shifting from a traditional pension to a defined contribution plan, similar to the 401(k)’s that have proliferated in the private sector.

But Mr. Cuomo’s proposal would still cause significant changes to worker retirement plans.

New York taxpayers face one of the highest tax burdens in the nation, and it isn't just the rich who are paying for the state's massive annual budget.

63.2% of the state's tax collections come from the personal income tax in 2008. That amounts to $36.5 billion dollars (Table 1). Only 5.5% of taxpayers file returns with an AGI of $200,000 or more, but that comprises of 54% of the total tax liability (meaning that 5.5% of filers are paying 54% of the $36.5 billion in income tax collections- $19.71 billion). That leaves $16.79 billion to be picked up by all other income tax payers. That's 94.5% of taxpayers.

The pension problem in New York isn't going to be solved by increasing the taxes on the rich - and the downturn showed that when Wall Street was hammered hard, the receipts from the richest percentage dropped the furthest and increased the burden on other taxpayers. The problem must be solved by reworking the pension system to make it more sustainable and to eliminate profitable paydays resulting from banking overtime in the final year of w36ork to max out pensions that would be significantly lower otherwise. It also makes sense to bring the retirement age in line with the private sector considering that most people work past 65 - and most people can expect to live into their 80s.

The pension problem hits all taxpayers, including the 94.5% who aren't rich. Fixing the pension problem would help all taxpayers, especially the 80.7% who make less than $100,000 AGI.

Unions are doing what the unions always do - refuse to recognize the fiscal realities and instead hope to protect their already overexpansive benefits at the cost to all taxpayers.

New York and New Jersey Reveal Pension Reform Packages

New Jersey Governor Chris Christie, a Republican, has slammed the state pension system in the state since before he took office. The state unions have repeatedly taken umbrage with him, but it appears that he's worked out a deal with the State Senate (controlled by Democrats) to amend the pension system to require state workers to pay more into their pensions, to pay a greater percentage of their health care costs, and for the state to pay its pension obligations.

Under the deal, most public workers would immediately pay an additional 1 percent of their salaries for their pensions, while police and firefighters would pay an additional 1.5 percent. The state would pledge to increase its pension contributions to legally required levels.

The sources declined to speak openly in advance of an announcement, which could come Wednesday.

So far, it’s unclear if Assembly Speaker Sheila Oliver (D-Essex), who would need to post the bill for a vote in the Assembly, is on board.

Both legislative leaders are in meetings with Democratic lawmakers right now.

Workers would pay up to 30 percent of their health care premiums after a four year period. But, unlike Christie’s original proposal, the payments would be tiered based on income, so employees with lower salaries pay less.

CWA New Jersey Director Hetty Rosenstein declined to discuss the specifics of the proposal, but said she’s opposed to legislation that “undermines collective bargaining.”

“This proposal attacks collective bargaining. It’s absolutely unaffordable. And it does not one thing – there’s no indication that it does anything to address the high cost of health care.”

Several public sector labor union leaders are standing near the Assembly Democrats’ room, hoping the lower chamber will provide a bulwark against the health benefits part of the package.

Public unions want health benefits to be decided through collective bargaining, not legislation.

The high cost of health care is a crushing burden not only on the workers, but on the states that have subsumed the costs. That's something that the union ought to take up with the Obama Administration when additional aspects of the Affordable Health Care Act take effect over the next few years. Having workers pick up a greater percentage of their health care costs is something that should bring those workers in line with the private sector.

At the same time, New York Democrat Andrew Cuomo has revealed his own pension reform package, and it too involves significant changes:

The highlights:

• Raising the retirement age from 62 to 65
• Ending early retirement
• Requiring employees to contribute six percent of their salary for the duration of their career
• Providing a 1.67 percent annual pension multiplier
• Vesting after 12 years instead of 10 years
• Excluding overtime from final average salary
• Using a five year final average salary calculation with an 8 percent anti-spiking cap
• Excluding wages above the Governor’s salary of $179,000 from the final average salary calculation
• Eliminating lump sum payouts for unused vacation leave from the final average salary calculation
• Prohibiting the use of unused sick leave for additional service credit at retirement

The reform of the state pension system would impact new hires by the state and local governments, including school districts. The NYC pension reform plan would cover new employees of New York City, including the uniformed services.

In total, the Cuomo plan would save the state $93 billion over 30 years, not counting savings for New York City.

Both New York and New Jersey are facing massive problems with their benefits systems, and realigning those systems with private sector benefits will help make the system more affordable for the taxpayers who fund those systems. For far too long, legislators in both states doled out benefits that the state could ill afford, and repeatedly underfunded those benefits overtly by cutting pension obligation payments or reducing payments based on Wall Street return on investments that were out of touch with what a conservative estimate should have expected.

Expect significant pushback from the unions in both states, and we're already seeing that in New Jersey.

Gov. Cuomo Proposes Pension Reform; Unions In Uproar

New York Governor Andrew Cuomo is proposing significant pension reform for the state, including creating a new tier of workers that are entering the state workforce that would not be entitled to the kind of pension perks that prior employees had. The state simply can't afford the gold-plated pension system it has in place, and benefits are going to increasingly drag on the state budgets in coming years.

Cuomo's proposals would change benefits and require employee contributions as follows:

Double the employee contribution to 6 percent for new hires.
- Raise the minimum age of retirement to 65. Retirement age is now 62 for most employees and 57 for teachers. Early retirement, now allowed at age 55 with a 38 percent penalty, would end.
- Require workers to put in 12 years before they qualify for a pension. Employees are now "vested" after 10 years.
- End the practice of "padding" a pension by factoring in overtime pay late in service, unused vacation and certain types of sick leave.
- Cap pensions for the highest-paid state employees -- physicians at state teaching hospitals, CEOs of public authorities and utilities among them -- based on the governor's $179,000 salary. Many of those employees earn far more.
- Eliminate a "multiplier" that boosts a pension after 20 years and 25 years of service.

Needless to say, the unions aren't happy at all but some are cautious in what is being proposed. Moreover, this comes just as the governor is negotiating with unions over a new deal.

What would this actually do for the state's long term financial picture? According to Cuomo's team, it would save the state anywhere from $60 to $90 billion or more over 30 years, depending on whether the state shifts from a defined benefit to defined contribution plan setup. The problem begins with the fact that the state's benefits contributions are constitutionally required:

Currently, public employees are liable only for a fixed contribution to their plan, and the benefit is constitutionally guaranteed by the state of New York -- come hell, high water or a catastrophic market failure.

But under a defined contribution, the government's contribution would remain at a fixed level of the employee's salary. Employees of the State University at New York have the option to enroll in this type of plan as opposed to the defined benefit plan, and they, too, are at first required to contribute a portion of their income.

"Without the defined contribution option, it's like Tier V-a," said E.J. McMahon, a senior fellow at the conservative Empire Center think tank, of Cuomo's reported proposal. "The main benefit of a defined contribution model is that it caps and makes certain the employer share, which remains completely uncertain and subject to a great deal of volatility under the traditional model."

At a minimum the state needs to take a closer look at raising the retirement age to obtain pensions from 62 to 65, bringing it closer in line with the retirement age of workers in the private sector. Increasing the vesting period wont have nearly as much impact as raising the retirement age. Eliminating padding would be a good start, although possible compromise on this point could involve changing how the final pension calculation is done.

Bell California's Fiscal Problems May Get Boost From Just Discovered Pension Slush Fund

Bell, California is again in the news as investigators have uncovered a $4.5 million slush/pension fund for the indicted former leaders of the nearly bankrupted city. The former city leaders saw their city's residents as an unending piggy bank - illegally raising property taxes to line their pockets, both in exceedingly high salaries, and now with a slush/pension fund that investigators are hoping to use to compensate the city and its residents.

The discovery of the money could be a huge boost for the finances of Bell, whose entire operating budget is about $13 million and is faced with major budget cuts in the wake of a corruption scandal. City officials said Monday that they were looking into whether they could use the $4.5 million to reduce the city's budget deficit.

In 2008, Rizzo said he wanted the city to spend $14 million to fund this second retirement account. Lourdes Garcia, the city's director of administrative services, testified that Rizzo said the city needed to place $2 million a year into the account, even as Bell's finances were deteriorating.

"My reaction was 'That's a lot of money,' " Garcia testified. "The city doesn't have that kind of money…. He knew that money was getting tight."

According to the transcripts, even after Rizzo left office last summer following The Times' disclosure of his enormous salary, he called Garcia on her cellphone on a Saturday and told her to move money into the Wells Fargo account set up for his and Spaccia's retirement. Garcia balked, telling him he was on administrative leave.

"I'm still the CAO," Rizzo told her, according to the transcripts.

The revelations come six months after The Times reported that Rizzo had created the supplemental pensions, which allowed employees to circumvent retirement limits set by California. Employees who worked in Bell for 25 years and retired at the age of 55 could get 90% of their salary — far more than most public employees who retire at the age of 60.

But prosecutors allege that Rizzo and Spaccia secretly schemed to give themselves an even richer supplemental pension. Prosecutors allege that they went to great lengths to hide the value of their pensions.

"What's important is that … they didn't just write a plan in which everybody got the same thing," Deputy Dist. Atty. Max Huntsman told the grand jury last month. "They very carefully crafted a plan to benefit themselves.... He planned to receive a heck of a lot of money further down the road. That was always his plan."

Bell is an exceedingly poor community, and the indicted former city leaders saw their residents as a piggy bank and unjustly enriched themselves by securing high salaries for themselves and other excessive perks.

Hopefully, the state and new city managers can recover these funds and use them to help bail the city out of its dire fiscal situation.

Despite Pension Time Bomb, NYS Legislators Propose Dozens of Pension Sweetener Bills

The Citizens Budget Commission has reviewed the 2011 legislative agenda and found dozens of bills proposed by legislators that would not only undo pension reforms from past years, but would add to an already crippling level of spending that the state simply cannot afford:

pension bills

Most of these are one-house bills, which means that they stand little chance for passage, but it goes to show that support for expanding pensions is alive and well despite the problems with funding pensions at existing levels. Fiscal responsibility is anything but alive and well in the legislature when you've got legislators running around and hoping to overturn pension reforms and want to expand pension benefits (and therefore state obligations) beyond what the state has a capacity to pay with the current tax burden.

Mayor Bloomberg Sees the Light On Pension Reform

After doing considerable damage to the stability of the pension system over the past 8 years, Mayor Bloomberg has finally come to the realization that all of those sweeteners to the unions to seal contract deals have long-term implications that are increasingly eating into the city's budget. When Bloomberg took office, $1 out of every $28 went to pay for the pension funds.

It's now $1 out of every $8, and Bloomberg has finally come out calling for a major revision of the pension benefit system. It's sure to rankle the very unions and workers who benefited from the pension expansion, but taxpayers can no longer afford the sweetheart deals.

The mayor wants to require most new municipal workers to work at least 10 years, or double the current amount, to qualify for a pension, and bar them from receiving pension checks until age 65. Now most nonuniformed workers, including teachers, can get pension checks at age 57, and some police officers and firefighters can receive full pension checks after working 20 years, no matter their age.

New employees would also need to contribute more of their own money to their retirement accounts, according to the plan.

And Mr. Bloomberg would forbid all new employees to benefit from a time-honored practice: adding hundreds of hours of overtime at the end of their careers to balloon their final year’s pay and their pensions.

The mayor did not spare current retirees, vowing to eliminate a $12,000 annual stipend that retired police officers and firefighters get on top of their regular pension benefits.

“This reflects the dire fiscal circumstances the city faces, the devastating impact of increasing pension costs and the desperate need for aggressive reforms,” said Marc La Vorgna, a mayoral spokesman.

The mayor’s pension proposal — coming one day after a shrunken state budget from the new governor, Andrew M. Cuomo, with similar tough talk — represents a clear bid to capitalize on growing concerns about pension costs and rising anti-union sentiments, even among traditional labor allies.

Public pensions are being tightened in other states across the country where government employees, as in New York, receive far more generous retirement benefits than most private employees; many companies are eliminating pensions altogether.

But Mr. Bloomberg’s proposal also represents a departure from his own past practices. His administration has been responsible for a significant portion of the growth in city pension costs, offering generous pension sweeteners during contract negotiations and repeatedly missing opportunities to rein in spending.

Indeed, pension costs are now projected to eat up one of every eight city dollars next year, in contrast to 1 in 28 when he took office in 2002.

Mr. Bloomberg’s package could help the city save at least $200 million a year immediately, and billions of dollars more in the future. But his proposal faces a potentially major obstacle because any changes in the city’s pension system must be approved by the Legislature and the governor.

The mayor has potential allies in Mr. Cuomo and the new Senate majority leader, Dean G. Skelos, a Republican. But Sheldon Silver, the Assembly speaker, will most likely be the wild card.

One of the ways that an individual can boost their pension is to work massive amounts of overtime in their final year (or final three years, depending on which contract deal we're talking about), to result in a far higher final salary on which the pension is calculated. Eliminating the overtime from the pension calculation would result in a significant savings to the taxpayers.

That's going to run into a huge amount of opposition from firefighter, police, and sanitation unions whose members are beneficiaries of that policy. What will most likely happen is that the formula used to calculate the pension will be adjusted.

Instead of the final year salary (or final three years) including overtime, the formula would be expanded to be the final 5 or 7 years - reducing the overall compensation and resulting in a cost savings to the city, but not nearly as much as Bloomberg wants, but one that still preserves part of the benefits package promised to existing workers.

It's further interesting to note that had Bloomberg maintained pension benefits at the 2002 levels, the city would not be in nearly the financial straits it is facing. The city would be on far more solid financial footing and would have been able to weather the recession with far greater ease. Simply put, the city needs to live within its means, and increasing union benefits to win elections is a short-sighted political ploy that damages the financial stability of the municipalities.

New Jersey Begins Serious Discussion on Pension Reform

New Jersey has one of the worst state worker pension time-bombs in the nation. It's underfunded obligations total more than $54 billion, which is nearly 1.5 times the size of the annual budget.

It's an unsustainable situation and Democrats and Republicans in Trenton are finally recognizing the seriousness of the situation.

Legislative Democrats have floated a series of proposals ahead of Republican Gov. Chris Christie's state of the state address, and if both State Senate President Stephen Sweeney and Gov. Christie can focus on the issue and work out a comprehensive plan, the state can begin the arduous task of correcting the longstanding structural deficits that have plagued the state for years on end.

The major changes the Democrats proposed:

• Replace the current oversight boards with joint labor/management boards for each of the pension systems. The boards would be made up of an equal number of union and state officials, who would decide who would manage the fund’s investments and determine the rate employees and employers pay into the fund.

• Employees and employers would have to pay more into the pension system if its fiscal health declines. Sweeney, a general organizer for the International Association of Ironworkers, said his union members agreed to pay $2 more per hour to keep their pension system going.

• Workers would either forgo a 9 percent pension boost they got 10 years ago, or keep it but pay more into the system.

"To put it simply, if public workers want a higher pension, then they'll have to pay more for it," said Oliver.

• Those with less than five years of service at the time of the new law’s enactment would no longer get cost of living adjustments. Workers with more than five years would be eligible, but would have to pay a higher rate to get them.

Sweeney said the governor and Legislature should not be trusted to determine the specifics about what benefits should be. He noted the 9 percent pension bump workers got in 2001.

"When Acting Gov. (Donald) DiFrancesco did this enhancement, it was with an eye towards being elected governor. Let’s get everyone out of it and make pensions be managed the way they’re supposed to be," he said.

It will be an uphill battle to take the politics out of the pension system, but ensuring that those workers who are already in the system are fairly treated while protecting taxpayers from future price shocks is critical. That means requiring additional worker contributions at the same time that the state pays its pension obligations.

However, it also means that the discussion has to focus on new state workers and their benefits packages - and shifting from defined benefit plans (pensions) to defined contributions (401k) that dominate the private sector workforce.

New York Budget Situation Remains A Disaster

New York continues to be disgraced by its legislators, who once again kicked the issue of massive deficits into the future when it refused to deal with the latest deficit situation. New estimates figure that the deficit has grown by another $315 million, which is on top of the $9 billion deficit that incoming Governor Andrew Cuomo will have to deal with in short order.

The legislature claims that they didn't have sufficient time to study the issue, even though they were four months late in passing this mess of a budget and it was out of whack from the moment it was passed.

Mind you that the state passed a bloated budget four months late that was billions more than the previous budget, which itself was a vastly bloated disaster requiring tax hikes that didn't result in additional revenues as anticipated.

New York has been well outside its means for years on end and endless tax and fee hikes have not generated the anticipated revenues, which means that the budget deficits swell.

It is past time to rein in the spending and to make far more conservative estimates of revenues particularly at a time when consumer confidence is shot and people are looking to keep their own costs down. The state government must do the same - and must budget accordingly.

Deep and sometimes painful cuts will be necessary and that includes sharply cutting the size of the state bureaucracies and dealing with unfunded pension obligations - both by making sure that existing obligations are funded and limiting the number of people who will be put into the pension system. It means fighting the very unions that help elect the legislators and governor who fight health care and pension reform every step of the way since it means that the compensation packages are decreased. Simply put, the state can no longer afford the compensation packages it doles out and taxpayers simply aren't able to sustain the revenues necessary to carry state obligations.

It is a system that is collapsing on itself because no one in the legislature was willing or capable of standing up and demanding fiscal responsibility to keep the spending flat during a recession. The state instead spent wildly above and beyond what its taxpayers were able to afford, driving up deficits further.

This is an unsustainable situation and Gov. Cuomo will have to pick up the pieces and put both the legislature and state workforce on notice that serious changes will be forthcoming.

Protests and Riots Continue As French Protest Pension Changes; UPDATE: Senate Approves Pension Reform

Protests continue across France as a result of ongoing protests and riots against the French government's plans to adjust the retirement age for pensioners. It's caused widespread fuel shortages as protesters have blocked fuel shipments from refineries around the country. Efforts to stop the blockades have been mixed as problems continue in some parts of the country. The country has even been forced to import electricity from neighboring countries as workers at nuclear power plants have been hit with a rolling strike cutting production.

France was forced to import electricity as unions announced that strikes against an increase to the retirement age would spread over the next two weeks.

The unions said production had been cut at four nuclear power plants because of a 10-day rolling strike, while at least 12 of France's 58 reactors are closed for maintenance. Work has stopped at two of three liquefied natural gas terminals.
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With all of France's oil refineries out of action and a quarter of its petrol stations without fuel, police took action yesterday.

They took control of the entrance to the Grandpuits oil refinery, scuffling with pickets and dealing with a barricade of burning tyres.

The officers advanced without batons or tear-gas, clearing an 80-strong ''citizens' cordon'' of strikers and local supporters cordon with bare hands, although there were scuffles as the officers cleared the entrance.

France's Environment and Transport Minister, Jean-Louis Borloo, said in a radio interview the police operation had not been designed to restart refining at Grandpuits, but to gain access to fuel already stocked there.

The retirement age is to be raised to 62 from 60. This has sparked protests and riots, despite the need to keep the pension fund solvent.

UPDATE:
Despite the protests, riots, and fuel and energy distribution disruptions, the French Senate has passed the pension reform bill, which will now head to a conference reconcile the versions passed by the National Assembly and the Senate before it can be signed by President Sarkozy into law.

On Monday, a joint committee of senators and members of the National Assembly will work to reconcile the two versions of the measure, and the final package could be ready for President Nicolas Sarkozy to sign later in the week.

Protesters have scuffled with police and blockaded oil refineries and terminals for days as tensions flared over the proposal to raise the retirement age from 60 to 62 -- a measure that the government says is necessary to save money.

French Finance Minister Christine Lagarde has said the country cannot continue to pay its debts -- to retirees and others -- by borrowing at current levels. The government's announced goal is to cut the deficit from 8 percent to 6 percent of gross domestic product by next year, an ambitious goal.

France Shuts Down Over Pension Reform Plan

The French lifestyle is under assault and pensioners aren't sitting back and letting the Sarkozy government impose the austerity measures that are designed to prop up the existing system. They're protesting in the streets, and the protests are getting increasingly violent. Indeed, it looks like the carbeque is making its return.

Among the changes are an increase in the retirement age from 60 to 62. Yet, riots have broken out around the country in nationwide strikes that have all but shut down the country. The strikes include major oil refineries, which has put a crimp on the transportation sector, including rail and air travel. Airlines have been told to reduce flights into the country because of scarcity of jet fuel.

Train operator SNCF said it expected 60% of trains to run on Tuesday, the Le Monde newspaper reported, with Metro and local trains around Paris also expected to keep some services running.

Despite the disruption, one opinion poll on Monday suggested that 71% of those surveyed supported the strikers, despite the increasing effect on people's lives.

There was more opposition among those travelling as the strikes began.

"We shouldn't think it's still acceptable to stop working at 60 years old - we should work until 65. Like other European countries we have to work longer than 60 years," insurance worker Frederic Deraed told the BBC's Matthew Price in Lille.

"It's completely useless," said housewife Nadine Gestas.

"We can't pay the pensions and we can't avoid increasing the age of retirement. Every country in Europe is raising the age of retirement."

But Olivier Sekai of the General Confederation of Labour (CGT) said he saw support increasing for the protests.

"The government is acting as if we didn't have a rich country, as if we didn't have the money. The thing is we do have the money," he told the BBC.
Crisis cabinet

The week-long fuel crisis has added a new dimension to France's public discontent.

Former Obama Car Czar Gets Slapped With $5 Million Fine For Pension Kickbacks

Steven Rattner, who was picked by President Obama to be car czar to oversee the impending bankruptcies and reorganizations of General Motors and Chrysler, has been fined $5 million and banned from most aspects of the financial services industry for being involved in pension kickbacks in New York State.

Under a deal with the Securities and Exchange Commission that could be announced as early as Thursday, Mr. Rattner will pay a fine of more than $5 million along with accepting the ban, according to the people briefed on the talks. Mr. Rattner may still be able to perform some roles in finance, even with that ban.

A spokesman for Mr. Rattner declined to comment.

Mr. Rattner, 58, while at the private equity firm he co-founded, the Quadrangle Group, was accused by federal regulators of paying off a political adviser to secure investment business from the state’s pension fund.

He is the most prominent financier to pay a settlement in the pension kickback investigation, which raised questions across the country about the ways investment firms seek money from public pension funds. Private equity executives like Mr. Rattner often hire outside advisers called placement agents to help them pitch their services to public pension officials, a practice that has come to be called pay to play. New York State, and the city, have since banned their pensions from working with placement advisers, though the practice continues in many parts of the country.

The investigation led all the way to the top of New York’s $125 billion fund. Alan G. Hevesi, the state’s former comptroller, pleaded guilty last week to a felony for steering pension fund investments to a money manager who had contributed to his campaign and steered business to one of Mr. Hevesi’s friends. The state’s former chief investment officer also pleaded guilty to securities fraud in March for his role.

The investigation in New York was led by the S.E.C. and the office of the New York attorney general, Andrew M. Cuomo, the Democratic candidate for governor. Mr. Cuomo’s office was still negotiating with Mr. Rattner on Wednesday night, said the people close to the case.

Rattner's involvement in the auto industry was curious given that he had no experience in the auto industry and that he was already under investigation by NYS Attorney General Andrew Cuomo for the pension problems (which ultimately resulted in arrests and convictions for controller Alan Hevesi, Hank Morris, and several others).

Rattner resigned in July 2009 over the widening scandal. Cuomo has been working for more than a year on wrangling a deal from Rattner.

After Delaying Inevitable Budget Woes, Municipality Woes Come Crashing Down

Cities and states around the country are again facing massive budget deficits. Cities are looking to cash-strapped states for bailouts. It's a recipe for fiscal disaster but it isn't one that couldn't have been predicted.

The stimulus package of 2009 - the ARRA of 2009 - including hundreds of billions of dollars in transfer payments to prop up cities and states. It was meant to keep them afloat, but instead of using the money to close budget deficits and curb spending to rectify awful fiscal positions, some cities and states increased spending precipitously.

That includes New York State, where the budget continued to bloat by billions that the state simply didn't have.

Now, many of the same cities and states are begging for a bailout because they can't close their budget deficits.

The increasingly common pleas for state assistance — after two relatively quiet decades — reflect the yawning local budget deficits that have appeared in the last two years.

As tax revenue has fallen, the cost of providing labor-intensive government services, like teaching and policing, has proved hard to reduce.

The programs, which vary by state, generally allow troubled communities to tap emergency credit lines while restructuring their finances with some form of state oversight.

Many places may indeed bridge shortfalls and make necessary changes in services.

But some public finance experts worry that the states, mired in their own financial problems, will not force communities to attack their problems head-on and solve them. If states let towns keep borrowing, without acknowledging the magnitude of the towns’ existing debts — like the pensions they owe retired public workers — they might never solve their problems and just keep drawing on the states. They could end up like miniature versions of Fannie Mae and Freddie Mac, stuck in conservatorships under government oversight with no clear way out.

Better off in bankruptcy court?
“It’s like throwing you a life preserver but never pulling you into the boat,” said Daniel Miller, a certified public accountant and the city controller in Harrisburg. He says he believes that the city might be better off in federal bankruptcy court.

Worse yet, the municipal requests for state assistance could spell problems for already beleaguered state finances. One head of a municipal bond trading desk at a major Wall Street firm said he worried more about problems bubbling up from the local level than he did about the possibility of a sudden state collapse.

If the downturn is prolonged and deep, and local governments fail to act aggressively, he said, dozens of small communities could be pushed into the arms of a state, weighing it down so much that it, too, would need a bailout. Something like that happened in Arkansas during the Great Depression, causing the only default by a state on general-obligation bonds in United States history.

Restructuring only works when the cities and states can make major changes to contractual relationships with various unions that represent teachers, law enforcement, fire and other municipal workers. The benefits bubble that has led to driving up pension obligations is untenable and something has to give.

Allowing municipalities to restructure by taking on still more debt isn't a workable solution either. Many cities are simply incapable of taking the steps necessary to cut the structural deficits and attacking the problems that cause out-of-control spending.

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.

New York's Fiscal Disaster Keeps Getting Worse

There is no good news to be found when it comes to the New York state budget. It's a disaster. Out of control spending combined with ever higher taxes have resulted in a disastrous budget situation.

Legislators cannot find the courage to cut spending. Heck, they can't even be bothered to keep spending flat. Instead, they increased spending more than $3 billion this year, all while calling for an increase in taxes of more than $1 billion.

The result? A budget that will be in deficit next year by nearly $8.2 billion that will only grow by billions in future years.

This is a structural deficit caused by prodigious spending and a refusal to deal with the situation. Taxpayers are soaked in New York and have the highest tax burden in the nation.

And as bad as that situation is, it gets worse once you factor in the overly rosy forecasts for pension obligations.

The budget news came with release of the final 2010-11 budget, which totals just under $135.5 billion.

While that spending plan is finally balanced, future gaps have grown larger than earlier predicted.

Next year, the gap stands at $8.2 billion, and grows to $13.5 billion in 2012-13 and almost $15.6 billion in 2013-14.

Next year's predicted gap stood at $5.4 billion earlier this year, before the budget was completed.

Those deficits would arise if current trends continue and nothing is done to close the gap, either through reduced spending, higher revenues or a combination. By law, the state budget has to be balanced.

Meanwhile, localities likely will feel a pinch for the next few years on their public employee pension costs as Comptroller Tom DiNapoli is poised to announce a lowered expected return on the state's $132.5 billion pension fund.

The fund currently generates 8 percent, but the Comptroller's panel of actuarial experts is expected in coming weeks to recommend that the "assumed" rate be lowered to 7.5 percent or 7.7 percent, said DiNapoli spokesman Robert Whalen.

"There's been a lot of public discussion of whether (8 percent) is realistic or not," Whalen said.

The sluggish stock market and with record-low interest rates, which decrease the return from bonds, is helping push down the amount of money the fund spins off each year.

With less money generated by the fund, the state as well as municipalities and other local government entities would have to increase their share of pension payments for retirees. Unless they can cut costs in other areas, localities might have to raise taxes in coming years to make up the difference.

The more conservative estimate, the more money must be directed into the pension funds to fund the state's obligations to workers. The problem is that the state needs higher returns to justify lower funding - and the current economy means that there is no honest way to justify the higher rate of return.

That's why the state must start trimming spending. It cannot justify higher spending on programs when it lacks the revenues to fund these programs and obligations. Higher taxes aren't driving higher revenues either - they've fallen off even harder. When Wall Street falters, the revenues at the highest brackets falls the greatest.

2% Property Tax Cap In New Jersey's Future

That the New Jersey legislature and Gov. Chris Christie could come to an agreement on a property tax cap wasn't all that surprising given the all too apparent need to deal with locality spending and its effect on property taxes. The size and scope is. I had expected that Gov. Christie would accept a statutory cap with a severely limited set of exemptions that was in the range of the Democrats' proposal of 2.9% versus the 2.5% constitutional cap that Christie proposed.

Instead, the agreement was for a 2% cap with four exceptions, down from the 14 proposed by the legislature. The exceptions are pretty significant, but marks a significant departure from the way localities prepared their budgets (and imposed tax hikes).

The agreement represents a series of compromises from both parties. It would limit property tax increases to 2 percent a year, lower than the current 4 percent cap and lower than previous proposals from Christie and Senate President Stephen Sweeney, D-Gloucester.

It would also decrease the number of expenses exempted from the cap, from 14 to four. Those four exemptions are pension benefits, health benefits, capital expenditures and certain emergencies. An exemption for spikes in school enrollment will remain in place.

A key feature of the proposal is allowing local residents to vote on whether to increase taxes higher than the cap allows. Currently this is handled by a local finance board, but if the proposal is adopted, the only way the cap could be exceeded would be with the approval by a majority of local residents.

"This reaches all the core principles everyone has been talking about," Christie said.

Standing with Christie at Saturday's press conference in the governor's outer office were Lt. Gov. Kim Guadagno, Senate Minority Leader Thomas Kean, R-Union, Assembly Minority Leader Alex DeCroce, R-Morris, and Sweeney.

"They said it couldn't be done," Sweeney said. "Well, we proved them wrong, Governor."

Notably absent was Assembly Speaker Sheila Oliver, D-Essex, whose support remains in doubt.

"The speaker has not been part of any closed-door deal," spokesman Tom Hester said in a statement. "As the speaker has said repeatedly, we will thoroughly vet any proposal."

Still, Christie remained confident about the plan's prospects in the Legislature.

Delaying and Denying A Necessary Reality Check

It looks like Illinois wants to get in the game for having one of the worst budget situations in the nation. Illinois' fiscal situation rivals that of New York or California, and no one in the state wants to do a damned thing about it.

Like those other states, Illinois spent billions more than it could afford and there are no federal bailouts awaiting it this year.

For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps — cuts and tax increases — to close a deficit of at least $12 billion, equal to nearly half the state’s budget.

Then there is the spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up.

States cannot go bankrupt, technically, but signs of fiscal crackup are easy to see. Legislators left the capital this month without deciding how to pay 26 percent of the state budget. The governor proposes to borrow $3.5 billion to cover a year’s worth of pension payments, a step that would cost about $1 billion in interest. And every major rating agency has downgraded the state; Illinois now pays millions of dollars more to insure its debt than any other state in the nation.

“Their pension is the most underfunded in the nation,” said Karen S. Krop, a senior director at Fitch Ratings. “They have not made significant cuts or raised revenues. There’s no state out there like this. They can’t grow their way out of this.”

As the recession has swept over states and cities, it has laid bare economic weakness and shoddy fiscal practices. Only an infusion of federal stimulus money allowed many states to avert deep layoffs last year.

States face a choice. Make those layoffs, reduce benefits to state workers, or raise taxes.

Raising taxes isn't an option because taxpayers are sick of funding state workers' benefits that exceed those of the private sector. Reducing benefits isn't an option because the unions generally refuse to give up hard earned benefits and they also stand in the way of layoffs. Layoffs aren't always an option either because the politicians get flack from the unions, who form a major constituency to be satisfied in elections.

So, the states go from bad to worse in their fiscal situation.

The politicians make awful decisions to leverage future state fiscal responsibility to fund current obligations - borrowing heavily, which increases the debt load. Ignoring the pension obligations or worse - borrowing to make payments has made the Illinois situation a particularly perilous one.

And while the NY Times wants to blame the failure to raise taxes on the state GOP, Democrats have been the ones to pass budgets that are in deficit year after year - ignoring the balanced budget requirements. Corruption and graft have left the state devoid of any leadership.