Posted on 09/18/2010 8:28:48 PM PDT by Lorianne
In April, the New York State Comptroller, Thomas DiNapoli, issued a damning report on the Empire State’s financial practices. Albany’s budgets, he observed, increasingly employ “fiscal manipulations” to present a “distorted view of the State’s finances.” Money shuffled among accounts to hide deficits, loans made by the state to itself, and other maneuvers Mr. DiNapoli called a “fiscal shell game” are meant to “mask the true magnitude of the State’s structural budget deficit.”
The comptroller’s report produced yawns. Last week, however, the Securities and Exchange Commission (SEC) filed fraud charges against New Jersey for misrepresenting its financial obligations, particularly its pension obligations, and misleading investors in its bonds. New York—and many other states—had better sit up and take notice.
The Citizens Budget Commission of New York recently measured states’ obligations against their economic resources. New Jersey was rated in the worst fiscal shape, but it judged other states that employ questionable budget practices, including New York, California, Illinois and Rhode Island, to be only marginally better. Closer SEC scrutiny of these states’ muni offerings should be welcomed by investors, and also by taxpayers from whom legislators often try to hide the true depth of fiscal problems until they grow unmanageable.
New Jersey is an object case in how such manipulations eventually backfire. The problems go back nearly 15 years, to when the then-relatively healthy state decided to borrow $2.8 billion and stick it in its pension funds in lieu of making contributions from tax revenues. To make the gambit seem reasonable, Trenton projected unrealistic annual investment returns—between 8% and 12% per year—on the borrowed money. The maneuver temporarily made the funds seem well-off.
In 2001, when legislators wanted to further enhance rich pension benefits, they valued the state’s plan at its richest point: 1999, when the system was flush with borrowing and the tech bubble hadn’t yet burst. The scheme proved disastrous, of course, because the stock market has since gone sideways, and New Jersey has achieved nowhere near the returns it needed on that borrowed money.
Meanwhile, New Jersey compounded its woes with other ploys. In 2004, the state broke the cardinal rule of municipal budgeting when it borrowed nearly $2 billion to close a budget deficit, which is like borrowing on your credit card to pay off your mortgage. (The state supreme court ruled this move unconstitutional but allowed it to go forward anyway because it didn’t want to “disrupt” government operations.) Over time, New Jersey’s combination of overspending in its budget and underfunding of its pensions resulted in a tidal wave of tax increases and spending cuts.
Now, even if Gov. Chris Christie can solve the state’s long-term, structural budget problems, New Jersey will have to find some $3 billion a year in new revenues to begin contributing again to its pensions.
Municipal bondholders seem complacent in the face of such problems. They like to assert that they have first dibs on any tax revenues. But New Jersey has written so many “guarantees” into its constitution—whether regarding pensions or citizens’ right to a “quality” education—that sorting out the competing interests in a fiscal crisis could keep the courts busy for years.
As alarming is how Jersey-style fiscal practices have proliferated in other states.
The manipulations date back to the late 1970s, when taxpayer revolts produced spending caps and constitutional limits on tax increases in states. Rather than hew to these restrictions, politicians found increasingly inventive ways around them.
State officials have acknowledged such practices are growing common. During the 2002 recession, a report by the National Association of State Budget Officers admitted that states were employing “creative, innovative . . . adjustments” to budgets. They include financing current operations with debt, moving money from trust funds dedicated to specific tasks (like highway maintenance) into general funds, and pushing payments to vendors into future fiscal years.
“The long-running use of gimmicks is part of the reason most state budgets are in crisis today,” noted Eileen Norcross of the Mercatus Center at George Mason University in a recent study.
The federal government has served as enabler. Although the special tax-free status it bestows on municipal bonds amounts to a subsidy, Washington does little to enforce responsible budgeting. In its fiscal stimulus packages of 2009 and 2010, for instance, the federal government funneled hundreds of billions of dollars to the states without regard for their fiscal practices, treating irresponsibility in New Jersey and New York the same as prudence in, say, Texas and Indiana.
California granted its workers big pension and benefit enhancements in 1999. As in New Jersey, those benefits were based on unrealistic projections of stock-market returns over the long term. Now the costs of those pension enhancements—which have added some $4 billion annually to the state budget and hundreds of millions more to municipal costs—have deepened Sacramento’s fiscal woes, which it is solving with more ploys, like pushing tax refunds and payments to vendors into future years.
These maneuvers often don’t make it into bond presentations. Like New Jersey, Illinois used extensive borrowing—including a whopping $10 billion offering in 2003—to make its pensions appear well-funded. The state then skipped contributions into the system for several years, creating additional funding problems. A recent study by Joshua Rauh of Northwestern University projects that Illinois’s pension system is among a handful that, like New Jersey’s, could run out of money in the next decade.
Yet a presentation made by Illinois officials to potential investors in June mentioned the pension borrowings only briefly, then painted a rosy picture of the state’s fiscal practices. “Does the state have the Will To Govern needed to address its challenges?” the presentation asked. “YES” it answered in big, bold letters. The presentation then touted modest pension reforms that the state had enacted, even though legislators are doing little to ensure the system’s long-term viability.
The citizens of the “failed States” (NY, CA, NJ, MI,) need to be told the American taxpayer isn’t going to pay their bills anymore. They need to be told “get your finances in order” or SINK.
California is the worst offender. California is the most wasteful and the most irresponsible State. It’s debt (20 Billion and rising) is the largest. Nancy sure would like to write them a check, wouldn’t she? (at our expense!)
When businesses do that it's a crime.
Very nicely written. Great post. Good find.
Right.
Meanwhile, New Jersey compounded its woes with other ploys. In 2004, the state broke the cardinal rule of municipal budgeting when it borrowed nearly $2 billion to close a budget deficit, which is like borrowing on your credit card to pay off your mortgage. (The state supreme court ruled this move unconstitutional but allowed it to go forward anyway because it didn’t want to “disrupt” government operations.)
This should tell anybody all they need to know.
Yes, and very worrisome indeed if we all are going to be on the hook for these ‘hidden’ shenanigans. Well, we won’t but our grandkids will be.
I’m advising my daughter to start thinking about emmigrating ... to NZ or someplace. Why should she or her children have to pay for all this?
A direct attack by the Obama administration on Christie for the crime of being effective.
While I agree with you that States should have their fiscal houses in order, most of the States you listed have long been paying MORE revenue to the Feds than they receive, particularly NJ, NY, and CA. It is States like Montana and the Dakotas, States whose resource industries have been destroyed by Federal regulations, that subsist off Federal transfer payments.
“While I agree with you that States should have their fiscal houses in order, most of the States you listed have long been paying MORE revenue to the Feds than they receive”
First of all, I am so sick of that statistic, that I could care less. If a state like California has all of the defense plants, and the government needs a bunch of fighters, then I would HOPE that the government buys from them.
But regardless - given the amount of money that the feds are borrowing today and then handing to the states, I doubt that ANY state receives less than it pays to the feds. Hopefully this will change, but I really doubt any state is losing money on the deal today (i.e., only my kids lose, but who cares about them).
It sounds like a question Obama&Co. are asking.
How do you mean?
They aren't built here. No, the reason is that California, New Jersey, et al. are high income States. They pay more taxes than they receive in revenue. Meanwhile, States such as Montana, the Dakotas, and such consume vast amounts of ag price supports, welfare for the unemployed miners and forestry people, etc. It's a fact. The same is true to some degree within California, where government is the largest employer in rural areas once active in resource industry.
BUMP!
After th BP shake down I wonder just how much he’s dipping his paw in the till?.
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