I will protect your pensions. Nothing about your pension is going to change when I am governor. - Chris Christie, "An Open Letter to the Teachers of NJ" October, 2009

Sunday, May 25, 2014

Hey, Buddy: Can You Spare $2.5 Billion?

Now that Chris Christie's utterly fraudulent budgeting has been laid bare, we're left with a problem: how will New Jersey make up for its two decade-old pension holiday?

It's nice to talk about bi-partisan commissions and proclaim that "everyone must make sacrifices," but that's really just a way for pundits to avoid giving a straight answer. So let's, for once, not waste a lot of time talking about the politics, but instead talk about the policies. How is New Jersey going to solve its current pension mess?

One idea that's floated around a lot is to change the benefits of new workers: move them out of pensions into 401Ks. But that really doesn't solve the problem; arguably, it makes it worse, because the system will no longer be shored up by new employee contributions.

And while the labor market is undoubtedly soft, it's not so bad that the state won't have to make up at least some of the loss in compensation. Is it really a good idea to pay employees more up front in exchange for having them give up their pensions?

I don't see it. Pensions allow the state to utilize the markets to offset the costs of compensation: if an employee is willing to defer compensation, the interest earned on a pension is money the taxpayer doesn't have to pony up to pay the public worker.

Of course, for many folks pushing "defined contribution" plans, cutting the salaries of public employees is really the end game. Very rarely do they actually come out and say it, but the implication I read quite often is that we have to go after current employees' pensions: take more in worker contributions, pay out less in benefits, and do so immediately.

Aside from being morally reprehensible, this would almost certainly be illegal. There's just no way that the state can claim they can't make the payments when other sources of revenue are available. And remember, public employees aren't given an option: we are forced into these plans. If we must pay, the state must pay as well; that's what a contract is all about.

The state isn't allowed to default on its other creditors just because Chris Christie -- and, to be fair, many politicians in both parties -- doesn't want to face the political backlash of raising taxes or cutting expenditures. There isn't a court in the land that is so brazen as to allow the state to weasel its way out of this contractual obligation -- nor should they.

So we're back to the initial problem: where is the state going to get $2.5 billion? Here are some ideas, courtesy of the analysts at the Jazzman Institute:

#1: The Millionaires Tax. It has to come back. We had it before, and, contrary to the myths the courtesans of the plutocrats keep spinning, wealthy people weren't fleeing the state. We could get anywhere from half-a-billion to a billion dollars if we brought this tax back.

One of the arguments against the millionaires tax is that the state is already taxed too much. That's certainly true of the working poor:

But the wealthy? Not so much. Yes, I know almost all states are regressively taxed; so what? We have to do the same to coddle our millionaires? We have to give into their blackmail, or they'll move away? If they aren't paying their fair share to begin with, why would we care? Why would we want to continue to subsidize a moocher class if they're not creating jobs anyway?

The rich are doing very, very well. If public workers have already given up their cost of living increases on their pensions, the wealthy can afford to pitch in as well. It's only fair.

#2: Cut Back Corporate Subsidies. Christie's corporate tax subsidies haven't worked: the state lags in economic growth and job creation. Most of these subsidies make no sense: why spend millions to help a company move within the state on the promise of retaining a few hundred jobs?

Much as I loathe these tax breaks, I understand our current system is so screwed up that NJ has to play the game with other states. But I think it's more than reasonable to think we could get a billion dollars a year from a combination of a millionaires tax and a cut back in Christie's corporate tax subsidies. Not a bad start, and certainly not the drain on economic growth the mouthpieces for the ruling class pretend it would be.

#3: Cut Back Other Tax Expenditures. Perhaps the most underreported yearly story in New Jersey is the publication of the annual Tax Expenditure Report. Take a look at it some time and marvel at the real special interests that dominate this state; interests that have bought themselves tax breaks that do not expire.

According to New Jersey Policy Perspective, only half of the actual expenditures for special tax breaks are included in the report. Even still, there's plenty at which to marvel. Perhaps my favorite is on page 59: a $38 million exemption from sales tax on baked goods, so long as they aren't sold with utensils (Don't use that knife! Just dip your bagel into the cream cheese cup; see, you've saved the economy!).

It all adds up to $20 billion a year -- and maybe even more. If we cut back these tax expenditures by a mere 5 percent, we would have an extra one billion dollars in revenue. Is there anyone out there who doesn't think this is manageable? That we can't find at least a few items in here that we can easily live without?

#4: Start Managing the Pension Better. Here's David Sirota in Salon:

The second choice was the Christie administration’s decision to invest so much of New Jersey’s pension fund in high-risk, high-fee investments. As Pensions and Investments magazine just reported, New Jersey now ranks second in the nation for public pension investments in hedge funds.
In a radio interview, Christie recently bragged that this investment scheme delivered 12.9 percent returns last year. He didn’t mention that number was well below the 16 percent returns the median public pension delivered, according to Businessweek. Comparing the New Jersey returns with the median, pension consultant Chris Tobe said the gap represents $2.5 billion in returns New Jersey could have generated had it performed like the typical public pension. Tobe estimates that $1.2 billion of that difference came from the fees paid on the hedge funds, private equity firms and other so-called “alternative investments.” [emphasis mine]
If all this is true, we should be able to get a billion out of lower management fees and better returns. I think it's well past time to start asking the pension boards to justify the relative poor performance and high fees of New Jersey's public pensions.

#5: The Colorado Option. I'll admit it: as the parent of two teenagers and as a teacher, I'm more than a little squeamish about the thought of legalizing marijuana. I think there's a lot we don't know about pot's ill effects, and an automobile-centric society like ours probably shouldn't be legalizing more controlled substances until we figure out how people can get buzzed and still get back home safely.

But there's no doubt the taxes on marijuana would go a long way toward helping to pay off the pension obligations. We ought to at least have a frank discussion about the idea.

That said, let's put it aside for now and consider the other four: higher taxes on the already under-taxed wealthy; a cutback in corporate subsidies; a cutback in tax expenditures; and a cutback in pension fees. Unlike Christie, I'm willing to be conservative in my projections; maybe this won't be enough. Maybe we'll only get $2 billion or less from these changes.

But it's at least a good start. At some point, the state is going to have to consider some other things as well: consolidation (probably overblown, but it would likely save something substantial), the gas tax (it's way too low; come on, you've been to Pennsylvania, you know it's true), local income taxes, reining in health care costs (Obamacare isn't going to get the job done), etc. Until then, we've got some other options. We could do this if we had the will.

New Jersey has never been a ridiculously high tax state:
New Jersey does have one of the nation’s highest property taxes as a percent of residents’ personal income, ranking 3rd highest in 2006-2007 (the latest Census Bureau data available). This reflects New Jersey’s choice to rely almost exclusively on property taxes to support local services. If one considers total revenues local governments collect to support services (excluding state or federal aid), New Jersey ranks 24th among the states.
Local government revenue tells only part of the story. If one looks at total state and local revenue from their own sources as a percent of residents’ personal income, New Jersey ranks 31st in the country — i.e., in the lower half of states.
New Jersey’s income tax revenue ranks 20th in the country as a share of residents’ personal income, while its sales tax revenue ranks 38 th and its excise taxes rank 45th. In addition, New Jersey and its localities impose few fees or charges for services, ranking 48th in the country.
So let's stop the propaganda and figure out how we're going to fix the pensions. The first step was politically easy: public workers have done their share. Now, it's time for the wealthy and special interests to kick in as well. It's not too much to ask.

Well, Richie, I think we know just what to do about that...


Giuseppe said...

401(k)s are the biggest lie and fraud around. They were never intended to replace regular pensions, they were meant to be a supplement to a pension. Just ask the people who had their 401(k)s obliterated and wiped out during the great recession.
From a forbes.com article on the 401(k) fraud: As a former attorney with the SEC regulating mutual funds and later in-house counsel to one of the largest mutual fund complexes, it had long been clear to me (and frankly many other industry insiders) that 401k investors were doomed.

Why were they doomed? Regulators and employers were unconcerned about pervasive conflicts of interest; excessive, hidden fees and wrongdoing that resulted in billions being skimmed from 401k accounts. Lack of adequate employer contributions further ensured that there was simply no way there would be enough in 401ks to fund participants’ retirement goals. But that didn’t stop regulators, employers and the mutual fund industry from touting 401ks as “retirement plans” to unsuspecting workers. Fraud of this magnitude, involving trillions, makes Madoff look like chicken feed.

Here's the link to that Forbes article that tells the truth about these phony baloney 401(k)s: http://www.forbes.com/sites/edwardsiedle/2010/10/07/401ks-americas-biggest-investment-fraud-was-foreseen-and-preventable/

Giuseppe said...

More from the forbes.com article:
Two profound features of the 2008 market meltdown, both of which continue to plague the nation, were the housing bubble and the failure of 401ks. Remarkably, unlike the housing bubble which has been discussed exhaustedly, the dismal failure of 401ks as a retirement vehicle has received little attention. No meaningful regulatory reforms have been enacted. There have been no investigative panels or committees convened and no one has been held accountable. Nothing has changed—except that now it is clear that many older Americans will sink into poverty once they are unable to work.

In my opinion, which I have shared with the SEC, it ought to be illegal to call a 401k plan a “retirement plan” and those parties who promoted them as retirement plans should be held accountable.

Giuseppe said...

I'm so sick and tired of this zombie myth that people are fleeing NJ because of the taxes. If you look at the US Census figures for the past decades until the present, NJ has always gained in population. The rate of gain has gone down but a gain is a gain is a gain. The rich are certainly not fleeing NJ because NJ has one of the highest percentage of millionaires and billionaires in the country, it ranks 2nd in the country for this "honor." Retirees leave NJ for warmer climates and many of those retirees still retain ownership of their homes in NJ. So the new ploy of the right wing laissez-faire libertarians is to say that wealth is fleeing NJ. More BS garbage to propel the propaganda for lowering taxes on the rich ad the big corporations otherwise known as the job "creationists."

Ken Derstine said...

Even the bond ratings companies don't like what Christie is doing: Chris Christie Warned By Fitch on New Jersey Pension Cuts http://tinyurl.com/pvk2pah

And check out the latest from David Sirota at PandoDaily: We name the political donors whose firms got $14bn of pension cash from New Jersey http://tinyurl.com/q35d3oo