After a year in office, New Jersey Gov. Chris Christie has persuaded lawmakers to pass several bold reforms to slow government spending and ease the state’s tax burden. But the work of turning around a state with some of the nation’s heaviest tax burdens and worst budget problems is far from complete.
Christie, a Republican, inherited a state in which property owners were paying the highest property taxes in the nation, and residents were leaving by the thousands. In the decade before Christie took office, property taxes grew 70 percent, driven by a 69 percent increase in local government spending. More residents left New Jersey than in all but four other states from 2000 to 2008, according to the nonpartisan Tax Foundation.
Christie presented his “toolkit” of reforms to the Legislature in May of 2010, 33 bills in all. The centerpiece was a new property tax cap, which passed in July. Previous caps were short-circuited by numerous exemptions for particular categories of spending. For example, the 4 percent cap enacted in 2007 had 16 exemptions.
In 2009, almost one-third of the municipalities in New Jersey raised taxes by more than 4 percent through these exempted costs, says Josh Barro, Walter B. Wriston Fellow at the Manhattan Institute.
“New Jersey got fake property tax reform,” says Barro of the 2007 tax cap.
Christie’s original tax cap proposal had only one exemption, which grew to four exemptions before passing. The additional exemptions include pension and health care costs, which are growing at double-digit rates.
Stressed Local Governments
Mason Neely, chief financial officer of East Brunswick, believes property taxes will grow by more than 2 percent.
“Local government is not the cause of the tax increase, but is driven by what happened under the golden dome,” said Neely. He cites pension and health insurance costs, which are run by the state but paid for locally, increasing 22 percent and 18 percent, respectively, in 2011.
Furthermore, the state collects taxes, such as those paid by public utilities, on behalf of local governments. The state is supposed to distribute them back, but has not done so, further stressing local budgets.
“Local governments lost $400 million in transfer payments to the state. It was diverted to the state to balance their budget,” says Bill Dressel, executive director of the New Jersey State League of Municipalities. This was done through the state dramatically raising its administrative charge for collecting these taxes.
The tax cap does not address any of the underlying costs that drive property taxes, he says. The cap’s success depends on further reforms being passed, including those addressing pension costs, health care costs, civil service reform, and government employee sick leave compensation, Dressel says.
Pressure for Reforms
Why enact a tax cap before containing the costs?
“It creates political pressure to enact other reforms,” says Barro.
New Jersey has mandatory binding arbitration for disputes between state and local government and employee unions. An arbitration reform that passed in December bars arbitrators from awarding wage increases beyond 2 percent.
“It sends a powerful message to arbitrators,” says Dressel.
Need for More
Notably missing from the list of reforms is any bill to address New Jersey’s poor accounting standards and transparency. Sheila Weinberg, CEO and founder of the Institute for Truth in Accounting, says these reforms are critical because “poor budgeting standards allow politicians to expand the government beyond what the people are willing to pay for.”
New Jersey has a constitutional requirement to balance the budget, but Weinberg questions its effectiveness when the government is allowed to skip pension fund payments.
“How can they claim a balanced budget when they don’t pay all their costs?” she says. “People don’t pay attention until a crisis because they assume budgets are balanced.”
Owes $42,700 per Taxpayer
Weinberg says New Jersey’s accounting ranks second worst in the nation, allowing the state to rack up $42,700 in unpaid liabilities per taxpayer, most of which is for pension and health care benefits.
Budgetary accounting is not the only area of concern. Pension accounting has come under fire as well because of unrealistic assumptions and questionable “smoothing” algorithms.
A recent study by professors Robert Novy-Marx and Joshua Rauh argues the discount rate used in pension accounting runs counter to well-established financial economics and is much higher than it should be. A high discount rate, along with a narrow actuarial method, can grossly misrepresent pension liabilities. Making these assumptions more accurately reflect reality could nearly quintuple reported pension liabilities in New Jersey.
Barro cites an example from 1999 when the state reset the value of its pension assets to the market high point in order to justify a 9 percent increase in benefits.
The smoothing methods can also misrepresent the assets on hand to pay for benefits. The Public Employees Retirement System (PERS) reported an actuarial value of assets $9 billion more than their market value in their most recent valuation. Overvaluation allows the state and local governments to contribute less to pension plans, further increasing the unpaid liability.
“Poor accounting has been very costly and leads to bad policy,” says Barro.
Roman Hardgrave ([email protected]) is a graduate student in economics at George Mason University. His current research focuses on the effect of public sector unionism on municipal budgets, to be published in a forthcoming Mercatus Center Working Paper.