Tuesday, September 27, 2016

The Economy and Abbott: What the NJPP Missed in the NJ's Fiscal Disaster

The New Jersey Policy Perspective, a think-tank based in Trenton, has just put out a report "The Notorious Nine: How Key Decisions Sent New Jersey’s Financial Health Spiraling Down Over Two Decades," on the origins of NJ's fiscal disaster.

Written by Gordon MacInness, NJPP president,  and Sheila Reynertson, NJPP policy analyst, the report is a must-read.

According to the NJPP these are the nine decisions that have wrecked the state:
(the parenthetical statements are my clarifying additions)

  • 1. 1994-1996: Significant Income Tax Cuts Lead to Large Property Tax Increases  (ie, Whitman's 30% cut in income taxes)
  • 2. 1994 Pension Changes Shift Current Costs to Future Taxpayers  (ie Whitman's underfunding of pensions through actuarial gimmicks.)
  • 3. 1994 Retiree Health Benefits Fund Raid and Conversion Frees Up Cash for the Tax Cut But Puts Health Benefits on Shaky Foundation  (ie, more Whitman debt)
  • 4. Facing Growing Pension Hole in 1997, New Jersey Turns to Reckless Borrowing  (ie, Whitman's Pension Obligation Bonds)
  • 5. The New Jersey Supreme Court Opens the Floodgates to More Bad Borrowing  (NJ Supreme Court allows Contract Debt for Pension Obligations Bond)
  • 6. Pension Benefits are Increased Without the Means to Pay for Them  (ie, DiFrancesco's 9% increase in pensions and cuts in employee pension contributions)
  • 7. Long-Term Borrowing to Plug Short-Term Budget Holes Ramps Up  (ie, McGreevey's tobacco bonds)
  • 8. The New Jersey Supreme Court Keeps Blessing Dangerous Financial Practices – Until it is Too Late  (ie, NJ Supreme Court's deletion of the Debt Limitation Clause)
  • 9. Money for Long-Term Improvement of Key New Jersey Asset Grabbed to Cover Current Costs  (ie Christie's neglect of long-term infrastructure needs.)

Something I appreciated about the NJPP report is that it wasn't governor-centric, as so many other explanations of the pension crisis are (example 1, example 2, example 3) and recognized the that the legislature and NJ Supreme Court are also responsible for New Jersey's fiscal crisis.  The New Jersey Policy Perspective even offers some criticism of the 2001 increase in pension benefits/reduction in employee contributions, which is a bold thing for a labor-funded organization to do.

And yet, while it's an interesting, informative report, it is very conventional in claiming that NJ's economic crisis is the result of decisions at the government level.  It's biased in that it discusses the consequences for the pension-system of tax cuts, and ignores the consequences for the pension-system of spending increases in other areas of state government.

Yes, our policy makers have made some gigantic mistakes and done irresponsible things, but our fiscal crisis is also due to our economic stagnation and spending increases, not only tax cuts.

It's the Economy, Stupid!
(I am paraphrasing James Carville, not calling the NJPP stupid)

New Jersey's Economy Outperformed the National
Economy From 1950-2000 Because of the Suburban Boom,
first of residents, then of businesses.  In other words,
Philadelphia and
New York City's losses were NJ's Gains.
What histories of our fiscal crisis never acknowledge is that NJ's Economic Growth has Slowed Dramatically Since 2001.

Yes, the economies of the United States as a whole has also had relatively low growth since the turn of the millennium, as bad as this is on the national level, New Jersey's economic slowdown has been more dramatic.

Source: BLS:

Prior to 2000, NJ's economic growth equaled or exceeded the national average.  For decades, NJ thrived from the suburbanization of middle class residents and then corporations from the struggling cities of Philadelphia and New York City.  During the eight years of Kean Administration, New Jersey added 50,000 jobs a year!

For decades New Jersey thrived because it was cheaper, cleaner, and better governed than our neighbors.  New York City's and Philadelphia's losses were our gains.  

In 1997 the NYTimes compared New Jersey's economy to the early 1990s recession years and wryly observed:

New Jersey's economy has arrived at an uncertain, anxiety-producing place in the late 1990's: It's called prosperity.
The state has now recovered -- far in advance of New York and Connecticut -- almost all the jobs that were lost in the three-year-long recession of the late 1980's and early 1990's.
Its clout and image as a center of telecommunications research, one of the hottest areas of the national economy, has grown. The statewide unemployment rate has reached a seven-year-low.
At the turn of the millennium, Rutgers scholars James Hughes and Joseph Seneca agreed that New Jersey's economy was very strong, saying this of New Jersey's economy for the Encyclopedia of New Jersey:

...strong income and employment data indicate that New Jersey benefited significantly from the longest economic expansion in the nation's history-- a 120 month expansion that began in March 1991 and ended in March 2001. The subsequent 2001-2002 recession caused only minor downward shifts in several of these economic barometers. 
In retrospect, there were currents of decline already apparent the Encyclopedia of New Jersey neglected, but still, I do not blame Hughes and Seneca for failing to predict the stagnation and Great Recession of the next decade.

By 2006, it was apparent to all that NJ's "recovery" from the 2001-2002 recession was actually very weak.

By January 2006, soon after Jon Corzine's inauguration, the New York Times summarized the old conventional wisdom:
FOR years, New Jersey has had this understanding: We are rich. We have great jobs. We are the medicine cabinet and the telecommunications nerve center of the world. We have hatched ideas and industries since Edison was recording sound onto tin-foil cylinders in Menlo Park.
And then pivoted to the new, 2006 reality:
But just as a new governor steps up, with visions of a state growing its way out of fiscal distress, comes some disquieting news: We are not as rich as we used to be. The highest-paying industries are expanding in other states and countries, while in New Jersey some are actually shrinking. The state's fastest-growing sectors employ motel clerks and nursing home aides... 
New Jersey had 20 percent of the nation's jobs in the pharmaceutical industry in 1990, yet slipped to 14 percent in 2004. What's more, the state's share of jobs in Internet service and data processing was cut nearly in half. 
In all, in the five highest-paying sectors -- which include financial activities and federal government jobs, in addition to high-tech businesses -- New Jersey lost 44,000 jobs from 1990 to 2004.  [my emphasis]
Now, ten years later, things have have only gotten worse.
— New Jersey’s $504 billion economy, measured by the Gross Domestic Product and adjusted for inflation, was the nation’s eighth biggest last year. It is driven by high-paying industries — finance, real estate, science and technical services. But the state’s economy has grown a meager 0.8 percent a year since 2000, about half the rate of the U.S., according to the U.S. Bureau of Economic Analysis.

Since 2002, New Jersey’s economy has outperformed the nation just twice — in 2008 when it grew by 0.4 percent while the U.S. contracted by 0.5 percent, and in 2012, when it grew by 2.5 percent compared with the U.S. rate of 2.1 percent.

New Jersey’s economy the past two years slowed, growing 0.9 percent in 2013 and 0.4 percent in 2014, according to the U.S. Bureau of Economic Analysis. By comparison, the nation’s economy grew 1.9 percent in 2013 and 2.2 percent in 2014 to a pace that was nearly six times faster.
Source: Bureau of Labor Statistics:
Note, the trendline was done visually. It is not
statistically based
A 0.8% growth rate is pretty bad, but adjusted for inflation, it is only 0.3% per year.  

In the early 2000s James Hughes had looked at NJ's economy and seen strength, but by the present, James Hughes sees something very different, "Our once great 20th century suburban job creation machine has really faltered in the 21st century.”


  • In January 1980, New Jersey had 3,359,742 jobs.
  • In January 1990 New Jersey had 3,848,483 jobs, or a gain of nearly 500,000 over the previous decade, a 15% gain!
  • In January 2000 New Jersey had 4,128,988 jobs, or a gain of almost 300,000 jobs over the previous decade, a 7% gain.
  • But by January 2016, New Jersey only had 4,354,804 jobs, or a gain of 230,000 over the previous sixteen years, a 5% gain in a timeframe that is six years longer than the previous two comparison points.  
Had New Jersey's employment grown in the 21st century at the pace it grew in the previous 25 years, New Jersey would have an additional 800,000 jobs.  Had New Jersey's employment grown post-2001 at the rate it grew in the 1990s, we'd have at least 200,000 more jobs.

As for GDP itself, between 1997 and 2001, when DiFrancesco and the legislature increased pension benefits, our GDP increased from $408 billion to $454 billion, or $34 billion in 2009 dollars. Between 2001 and 2015 - fourteen years - our GDP increased by only $54 billion, to $508 billion.  

The fact that there are economic causes to New Jersey's fiscal crisis doesn't make our leaders any less foolish and irresponsible, but if NJ's economy were still growing like it used to, we'd be in fiscal stress, not fiscal crisis.

Don't get me wrong, our leaders, especially Whitman and DiFrancesco, were idiots, but not complete idiots since they based their decisions on forecasts that were based on growth that had been the pace up until that point.  

Since what creates a fiscal crisis is the debt to GDP ratio and not the
Post 2000, Public Sector Job Growth
Has Been Disproportionate to
Private Sector Job Growth
raw amount of debt nor debt per person, the stagnation of our economy must be discussed in any honest, thorough history of the Fiscal Crisis.

The New Jersey Policy Perspective is quite aware of NJ's economic stagnation, but, unfortunately, it never connects our economic stagnation to the Debt Crisis.  Nor does anyone else.


(Abbott) Decisions, Decisions, Decisions: 

The NJPP's report is on decisions and undergoing economic stagnation is not a decision like cutting taxes and expanding benefits would be.

I suppose someone could counter-criticize my NJPP criticism for ignoring the strict conception of what the NJPP's report purports to be, so let me clearly describe an issue that directly has led to our debt disaster that unambiguously is a decision: ABBOTT.

The Abbott cases are a series of NJ Supreme Court decisions that

  1. Ordered the state to fund K-12 education in 31 "urban poor" districts above the level of the richest suburbs.
  2. Ordered 100% state construction funding for those urban poor districts. 
  3. Ordered the state to pay for two years of "free" PreK for every child living in an urban, poor district.

During the Abbott spending rampup, New Jersey budget watchers were aware the school funding was causing the state to decrease pension contributions.

The New York Times wrote simply in 1992:

The protests [from middle income districts over lost aid to give more to the Abbotts] quickly dissipated when education officials announced plans for the extra infusion of $341 million, which would be made possible by reducing the state's contribution to public employee pension funds.
The reduction of state contributions was made legal by the Pension Reevaluation Act of 1992. The Pension Reevaluation Act changed the actuarial valuation of NJ's pension assets and increased the expected rate of return from 7.0% to 8.75%. Overnight, the valuation of NJ’s pension funds rose from $24 billion to $29 billion. Due to the Pension Reevaluation Act, New Jersey could legally reduce pension and post-retirement medical contributions by $770 million in FY 1993 and $570 million less thereafter, much of which could go to schools.

The NJPP does not acknowledge the strain the Abbott decision has been on state finances, but the spending increase for operating aid alone has been double the rate of inflation.

Most of the aid increase went to the Abbotts:

The New Jersey Policy Perspective would have the public believe that the sole reason pension contributions fell in the 1990s was because of Whitman's tax cuts, but there were spending increases that Whitman made too and education spending, including Abbott spending, was among the biggest.

The New Jersey Policy Perspective only discusses Abbott in the context of state-financed construction debt.

Specifically, the NJPP criticizes the Supreme Court's greenlighting of billions in "Contract Debt," ie, issue debt without voter approval in defiance of the Debt Limitation Clause of the NJ Constitution.

8. The New Jersey Supreme Court Keeps Blessing Dangerous Financial Practices – Until it is Too Late
The state Supreme Court wasn’t done unwinding the force of conservative constitutional financial mandates [ie, the Debt Limitation Clause] with its failure to take up the pension obligation bond. Twice before the case on Gov. McGreevey’s borrowings was heard, the Court was given clear chances to reaffirm the strict boundaries of the clause and twice it passed.

Faced with a 2002 case challenging the issuance of “appropriation” and “contract” bonds, which relied entirely on the good faith that future legislatures would appropriate whatever funds were required for repayment, the Court set aside the question with the exception of bonds to build schools in the 31 Abbott districts (that the Court had ordered in 1995 to receive 100 percent funding for facilities) and to cover up to 40 percent of non-Abbott district capital projects. Effectively, the Court ruled that the Debt Limitation Clause was trumped by the requirement that all children are entitled to a “thorough and efficient” education that includes adequate facilities.[40]

The Court’s decision to protect funding for school facilities was built on a foundation of sand. First, it asserted that school construction bonds were not an obligation of the state, but of the Economic Development Authority, and that bond buyers and credit agencies therefore would not expect the same security as a voter-approved general obligation bond. Second, it assumed that the meager assets of the Fund for the Support of Free Public Schools – which stood at about $100 million – would be sufficient to guarantee repayment of the $2.6 billion in bonds to cover the non-Abbott districts.
Since the NJPP is a liberal group, I was very pleased to see this acknowledgement that Abbott has had any costs (the Education Law Center acts as if Abbott money is pennies from heaven), but the fiscal problem wasn't so much that the NJ Supreme Court accepted Contract Bonding, it was that the NJ Supreme Court effectively ordered it.

This is the text of the Abbott V decision where the Supreme Court (written by Justice Alan Handler) ordered contract bonding (as the Whitman DOE had earlier proposed):

EFA [the Education Facilities Authority] then would issue its bonds in a public offering using the district bonds to secure the debt. EFA does not require statewide voter approval to issue bonds because they are not considered general obligation bonds of the State. Although the State is not obligated legally to provide debt service for bonds issued by the EFA, it essentially is obligated financially and morally because the State's credit rating would suffer severely if EFA defaulted on its obligations.

The NJ Supreme Court had originally estimated that Abbott construction would cost $1.8-$2.4 billion for K-12 space and $260 million for PreK space (see page 46-47), but as Abbott renovation and replacement costs were tabulated and ambitions swelled, the estimated cost for Abbott construction reached $6 billion by 2000.

The NJ Supreme Court only ordered construction money for the Abbotts, ie, "Special Needs Districts."  There was no order of relief for non-Abbotts.  The decisions to give $2.6 billion to non-Abbotts in 2000 was the legislature's mercy on non-Abbotts, not part of the NJ Supreme Court's "remedy."

However, even that amount was insufficient due to waste, and in 2008 the legislature approved another $2.9 billion in bonding for the Abbotts (and $1 billion for non-Abbotts).

The New Jersey Policy Perspective rightly condemns the "Pension Obligation Bonds" that Christie Whitman sold to fill in the unfunded liability that had mostly accumulated during her own governorship, but says something erroneous here:

The pension obligation bond is three times larger than the next largest borrowing in New Jersey’s history. It also has the most expensive payback, because it carries a permanent interest rate of 7.65 percent and, unlike all other bonds issued by the state, cannot be refinanced to take advantage of lower interest rates.
The relative costs claim - "three times larger" - is not accurate according to the 2015 Debt Report.  The debt service costs of the Pension Obligation Bonds are now about $350 million a year and will grow to $500 million by 2020 before being retired in 2029. However, school facilities debt service costs are now around $1 billion per year.  That amount will stay high for many years and will not be completely retired until 2040.  As the state continually borrows more for Abbott construction money, NJ's school construction debt may never be retired.

From the Department of Treasury's FY2015 Debt Report:

Contrary to the NJPP's statement, Abbott construction debt is much larger than any non-pension, tax-supported debt obligation New Jersey has.

According to the Debt Report, of the $35 billion in "Aggregate Obligations Supported by General and Dedicated State Revenues," outstanding school facilities debt is $9,528,414,000.  (see page 12; the $35 billion is not all tax-supported.)

If you factor out state debt that is carried by revenue-generating agencies (eg, transportation) and only look at tax-supported debt, New Jersey taxpayers only owe $16 billion ($15,796,623,000 to be exact), so school construction debt is more than half of what New Jersey owes.(see page 11)

Many people would morally differentiate the Pension Obligation Bond debt from school construction debt because they believe that it was necessary (and overdue) for New Jersey taxpayers to pay for school construction in poor, urban districts.  Ok, point taken, but did the state have to fund 100% of construction?  Did the Abbott facilities have to be so lavish?  Could the state have setup better safeguards to protect taxpayer money?  Could the money from construction have come out of K-12 operating aid?

Many, Many Causes

What I've written here isn't a comprehensive look at the origins of the Pension Crisis, but it is a plea for people to recognize that our economic stagnation is a major cause of the crisis and there were spending-side causes as well as tax-cut causes.


See Also
This Wall Street Journal piece, "Why the Economy Doesn't Roar Anymore" is a good profile of secular stagnation, although it refers to "secular stagnation" as "ordinary growth." 

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