New Jersey: Some Modest Proposals

By Vincent J. Truglia

I usually write about national or international topics.  This time, I hope you will indulge me while I write about something local.  I live in New Jersey, along the famous Jersey Shore.  My home office looks out at the ocean where I am writing this today.

Superstorm Sandy did not damage my immediate area, because as one of America’s oldest resorts, since hurricane prediction didn’t exist in the past, the town was built on a bluff overlooking the ocean.  As a result, despite the havoc to the north and south, most of my community survived the storm pretty much unscathed.

Background

As background, I must confess that my brother and I were both born in Newark, although we actually grew up in New York City.  The Newark area was where my mother’s family lived, and her uncle was a doctor in that once great city.  Needless to say, I have seen New Jersey transform over the decades.  For years, we visited my mother’s family almost every Sunday.  I remember when right next to my grandmother’s house in Nutley, there was a large farm; hard to believe today.  When we would drive home across the George Washington Bridge, the New Jersey side always seemed pitch dark when juxtaposed against the bright lights of New York – except in the summer, when Palisades Amusement Park, of 1950s music fame, was lit just south of the bridge.  Today that entire area is full of high-rise apartments and office buildings.

The Sopranos

For those familiar with the now famous TV drama, the Sopranos, the creator of the show, David Chase, is a second cousin (obviously a name change took place along the way).  Many of the names and personality types used during the first season were borrowed from family members, although to the best of my knowledge, not their occupations.

You get the picture, I know more than a little about New Jersey.  That’s why I feel the need to try to get the state back on track economically.  Since I also know a bit about public finance, I put together four simple recommendations on how to address New Jersey’s immediate problems.

Four Point Plan

1) To make the state more competitive, state income taxes should be coordinated with NY State income taxes.  When I first started working in New York City in the 1970s, NJ income tax was about 2%, against NY’s top rate of 15%.  Today, at the upper end, NJ’s rates are actually higher than NY, which over the years have nearly been cut in half.  In the past, it was advantageous for high earners to live in NJ.  Today, there is no benefit. Rather, it is more costly compared to New York.

2) The NJ real estate tax deduction is limited to $10,000. Again, to remain competitive with NY, it should mimic NY’s income tax policy. You don’t want to discourage successful people from living in the Garden State.

3) NJ has a high estate tax.  It should mimic the US standard.  This would allow wealthy seniors to remain residents.  Today, it is far more advantageous for them to move elsewhere in their final years.

4) NJ’s long-term fundamental fiscal problem is the high cost of pensions and healthcare for the state’s civil servants.  This is one of the main reasons why both income taxes and real estate taxes are so high.  These benefits represent massive costs to the education system, police departments, fire departments, etc.

A Minefield

The first three proposals are relatively easy to accomplish. The fourth proposal is a minefield, however one that needs to be addressed, not just for the sake of all New Jersey residents, but also to maintain reasonable benefits for public sector employees over time.

At present, the public sector pension plan is only about 57% funded.  NJ plans to reach funding of 80% over the next 7 years.  That is still bad governance.

Bi-Partisan Problem

The pension problem has bi-partisan roots.  Republican and Democratic governors both allowed this to happen.  However, if public sector retirees or civil servants hoping to retire and still get benefits, then they should recognize they have a vested interest in getting the pension problem fixed.  Why?  All they need do is to follow recent developments in Illinois.  The Democratic Illinois legislature is being forced to make significant benefit cuts for existing retirees, as well as future retirees.  Illinois waited until the problem became critical, threatening the state’s ability to finance itself.

Avoid Intensive Care

As with a medical condition, if you wait too long, the illness may require major surgery, which is what is happening today with Illinois public employee pensions and health benefits.  Maintaining the medical analogy, if major surgery is not done, there may be even worse consequences.

I would argue that NJ is not yet at the critical stage Illinois is.  However, unless NJ can preemptively solve the problem by sitting down with all public sector unions and discussing how to change the system today to make it sound, NJ will eventually reach an Illinois-style crisis. That would entail draconian cuts to be made, even for existing retirees.

Higher Taxes Will Make Things Worse

The public sector pension and healthcare benefit programs need to be fixed without raising taxes. Higher taxes will make the NJ economy worse off, making the state even less competitive than it already is.  That would make it even harder for the state to meet existing claims.  It is in the best interest of civil servants, past and present, to make the system solid if they want to see the overall level of pension and healthcare benefits maintained.  In the end, however, existing plans will need to be scaled back.

One of the biggest mistakes made, not only in New Jersey, but also in other states and cities across America regarding pensions and healthcare for public sector employees, is that they have often used Social Security and Medicare as models.  However, the difference between states and cities, and the federal government, is that the federal government can print money, and with the stroke of a pen, revamp benefit programs at will.  State and local governments, on the other hand, are subject to contract law.  They are not sovereign.  Therefore, making promises that cannot be kept are actually far riskier for states and local governments and for those who depend on them to provide benefits. If the state can’t raise adequate revenues, then courts will have to make the final determination.  That would not bode well for public sector employees, past and present.

Collapse Under Its Own Weight?

Will public sector employee unions sit down and revamp the system before it collapses under its own weight?  I have many family members who are, or have been, dedicated public sector employees who have worked in the state’s schools and the courts. I hope an Illinois-style crisis can be avoided.  However, that can only happen if more proactive action is taken.  Aiming to reach 80% funding through significantly higher state funding is counterproductive and increases the risk the benefits system will fail in the future.

As always, Clear and Candid.