On Election Day 1992, the voters of Jersey City elected 33-year-old investment banker Bret Schundler, their first Republican mayor in 75 years. It seemed like a fluke: Schundler’s victory came in a special election to replace a mayor who bad gone to prison. He received only an 18 percent plurality in a 19-candidate field and would have to stand for reelection seven months later. Since the city of 228,000 had long been dominated by a Democratic machine, it seemed likely to many that Schundler would be only a caretaker mayor.
But he immediately set about reforming his city’s government. He put more police on the street, reduced property taxes, and drew on his Wall Street experience to develop a new method of collecting delinquent taxes. He proposed an imaginative school voucher plan that be argues would increase the quality of both private and public education. And he spoke of themes that struck a chord with normally cynical voters: individual empowerment, personal responsibility, responsive government.
In May 1993, Schundler garnered 68 percent of the vote to win a full four-year term, despite an all-out campaign against him that featured visits from such political luminaries as Jesse Jackson and Senator Bill Bradley. A former Democrat who worked for Gary Hart’s 1984 presidential campaign, Schundler has attracted national attention as, in the words of the Washington Post, one of the “new ideas Republicans.”
Schundler was interviewed by City Journal editor Fred Siegel; Lawrence Mone, director of research for the Manhattan Institute; James Pinkerton, a Manhattan Institute senior fellow; and Thomas Main, a City Journal contributor who lives in Jersey City.
CITY JOURNAL: What is it about your mayoralty that has drawn national attention to Jersey City, a small city that has been rather obscure since Boss Frank Hague ruled in the 1930s?
SCHUNDLER: Obviously, the first thing that drew attention was that I am a Republican. Jersey City had not had a Republican mayor since 1917, when the mayor was chosen by a commission. The last time the Republicans elected a mayor was in 1905.
But the reason people have continued to pay attention is that we’re talking about a new approach to governing, one that I think can create a model for the nation. During most of the twentieth century, the Democratic Party has been the dominant party in America, especially in the big cities, because it has promised to solve people’s problems. Republicans, on the other hand, have preached self-reliance. Voters looking for governmental help don’t want to be told to take care of their own problems, so naturally we Republicans usually did not fare well in the cities. My approach is different. I believe that government does have a responsibility to help people and should be proactive in doing so. I just don’t think it is doing a good job with the bureaucratic approaches it has taken.
Governments have been saying, in essence: If you have a problem, we will solve it by giving you something. That approach ignores the fact that man has a soul and is ultimately saved not by what he is given, but by what he contributes. You can take a poor person and give him a house, or food stamps, but if you haven’t given him a purpose, you haven’t given him anything. If that person doesn’t have a chance to contribute meaningfully, he will feel himself to be just a ward.
People need to have a socially reinforced philosophy that the purpose of life is to give, and that one should be happy not because of one’s circumstances but in spite of them. These are traditional aspects of both religious faith and secular thought in America. But recently the prevailing philosophy of government has been that values are irrelevant. I think that came out of the positivism of John Dewey and the materialism of Karl Marx. Culturally, we have transformed the right to pursue happiness into an entitlement to happiness itself, with government the guarantor. But to be truly happy, people need empowerment, not entitlement. When you challenge someone to be responsible, you are putting a burden on him, but you’re also giving him power. Internalizing this sense of responsibility is essential to happiness.
CITY JOURNAL: Jersey City is 78 percent Democratic and only 7 percent Republican. How were you able to win office here?
SCHUNDLER: I talked about the policy implications of the philosophy I am articulating. For instance, I specifically talked about putting more cops on the street, about lowering taxes, about bringing jobs back to Jersey City. I specifically talked about workfare, not welfare; and about school vouchers.
In doing so, I told the voters not only that I was going to help them, but that I was going to help them in the way that they want to be helped, by truly empowering them to be able to talk on safe and clean streets, pay affordable taxes, find a quality job, and send their children to the best school available—public or private.
Jersey City voters are perhaps more jaded about bureaucrats and politicians than anyone else in the country. This has been the most machine-driven town in America, notorious for corruption. So voters are very skeptical of a politician’s honesty. I argued that power corrupts and that if you accrue all power to politicians, they are going to be abusive. I argued that we need a system in which politicians don’t have so much power in the first place. If we put power into people’s hands—for instance by giving them a voucher—we will have given them the means to protect their own interests, and they will no longer be subject to wanton misuse of power by politicians.
Jersey City is the most diverse city in America—about 30 percent African-American, 25 percent Hispanic, and 9 percent Asian. Forty-one percent of Jersey City residents don’t speak English at home; 14 percent immigrated to the United States within the past ten years. And yet people of every race, ethnicity, and religion were able to agree on these basic ideas. In the regular election, in which I ran against a machine candidate, I won nearly 70 percent of the vote.
CITY JOURNAL: You came into office with a $40 million deficit on a $290 million budget. The previous administration was saying the only answer was to raise taxes and cut city jobs. What did you do?
SCHUNDLER: We would have been bankrupt by today if we had followed that plan. They had planned to raise municipal property taxes by 54 percent, when Jersey City’s property taxes were already among the highest in the nation. People were already protesting by not paying their taxes; we were collecting only about 78 percent of taxes due. Raising taxes again would have put even more taxpayers into default.
We realized the only answer was to cut spending. We immediately began to reduce the city workforce, going from 3,200 to 3,000 employees through attrition. We will took at further options to reduce the size of the city payroll.
We also had to increase the tax collection rate. When only 78 percent of the people are having to cover 100 percent of costs, those who do pay must carry a much higher tax burden.
CITY JOURNAL: What is the average tax collection rate for cities in New Jersey?
SCHUNDLER: For cities it’s in the vicinity of the high eighties; for suburban communities it’s in the mid-nineties. We brought Jersey City’s collection rate from 78 to 92 percent.
CITY JOURNAL: How did you do that?
SCHUNDLER: For one thing, we began a program of rent receiverships. If the owner of a large apartment building isn’t paying his taxes on time, we’ll collect his rent. We also demanded that the Federal Government’s Resolution Trust Corporation pay taxes on properties it has taken over. Through these efforts we were able to get the collection rate up to about 90 percent. We eliminated a tax increase even before the bulk lien sale.
CITY JOURNAL: What is the bulk lien sale?
SCHUNDLER: Under state law, if an owner doesn’t pay his taxes within six months, the locality puts a lien on the property. Interest accrues on the delinquent taxes at a rate of 18 percent. The locality then tries to sell the lien by auctioning it off to investors who bid down the interest rate. The buyer collects the taxes and earns the interest, or takes over the property if the owner still does not pay.
Financial institutions have never bid on liens, because they are sold one at a time and the value of the asset is not enough to justify the cost of administering it. just as it is not worth a bank’s while to give a mortgage for $2,500, it is not worth it to buy a $2,500 lien. Thus, only individual investors were willing to buy our liens.
But buying liens is a lot of work for an individual investor as well. In order to collect, the lien holder has to threaten to foreclose; accordingly, individual investors had to be paid to be the bad guy. As a result, we had maybe five investors buying liens, and always at the full 18 percent. When our taxes began to escalate and more taxpayers went into default, there were far more liens on the market than these few investors could buy. Since the city wasn’t getting any money for those liens, its budget shortfall got worse and worse and it raised taxes higher and higher. This created a snowball effect as higher taxes led to still more defaults.
Having worked at Salomon Brothers when they created the secondary mortgage market, I was able to look at this and say: We can sell liens to institutional investors, by pooling them and issuing a securitized note. There’s an economy of scale that would make it much more effective to sell the liens as a pool than individually, and because institutions are already set up to collect debts, I don’t have to pay them 18 percent to be the bad guy.
By law, we are prohibited from borrowing for operating purposes, so the city can’t issue notes backed by these liens. Instead, we had to sell the collateral to an institution, which then issued its own notes. I hired a financial advisory company to go to Wall Street and interview firms to find out whether such a deal was doable and how much it would cost.
The advisory firm concluded that First Boston was the most capable of putting the deal together, given the amount of money we were willing to spend. First Boston assumed a substantial risk: it spent a lot of money doing the research and putting together a structure for the deal. I could have said no, and they would have been out all of that money. But they put together a great deal. We sold $44 million worth of liens, for which we got $25 million in cash and a note worth $19 million, on which we’re expecting about $8 million in interest. So we’ll get about $52 million for $44 million worth of liens.
I’ve set the stage for a saving not only to the city but also to the delinquent taxpayer. In the future, now that this type of deal is established, different firms will be bidding down the interest rate on the liens.
CITY JOURNAL: Does this strike you as ironic? After all, the 1980s—the decade of financial engineering—are supposed to be over. One could call this, without any pejorative, a sort of Milkenism.
SCHUNDLER: I have never had any moral qualms about Wall Street. My sense is that Wall Street works, and that America would be severely hurt if Wall Street didn’t work. Without the financial industry, governments wouldn’t be able to build hospitals, schools, roads, and so forth. People wouldn’t be able to build businesses if not for the money Wall Street provides. Financial innovations do not only benefit Wall Street firms; they ultimately result in savings to consumers. Mortgages in America are less expensive because of the secondary mortgage market. And because there are no copyrights on Wall Street, new markets become efficient very quickly, and the benefits of these innovations spread very quickly.
CITY JOURNAL: You have also proposed a novel method of financing education. Would you describe the state of Jersey City’s schools and how your plan would work?
SCHUNDLER: When I took office, our public schools had already been taken over by the state, not because of financial bankruptcy, but because of educational bankruptcy. We are spending an average of $9,200 per pupil and getting little in return. We used to have only 16 percent of students pass the three high school proficiency tests. The state recently inflated the curve, yet still only 44 percent pass.
The state takeover hasn’t helped, because it doesn’t address the fundamental problem. It’s not an issue of which politician controls the schools—the problem is that politicians have control in the first place. That control should belong to parents.
CITY JOURNAL: Your solution is a voucher plan?
SCHUNDLER: Yes, because vouchers put control over education directly into parents’ hands. Money is power. Whoever has control over education dollars will have control over the education system. Now, I know the state doesn’t have any extra money, and Jersey City certainly doesn’t have any extra money. But the trend has been for public education to become more expensive.
Meanwhile, 25 percent of Jersey City’s children are in private schools. This is very high by national standards, but 15 years ago we had 50 percent in private schools. As taxes have gone up, private school tuition has become difficult to afford. Again, we have a snowball effect: as people leave the private schools, tuition goes up for those who remain. So more people will leave. This trend will continue if we do nothing, and at some point this last 25 percent will move into the public system. That represents about ten thousand students. At $9,200 per pupil, that would be another $92 million per year in state and local spending. My plan would allow us to freeze spending at its current level.
The state gives Jersey City $6,600 per pupil in the public schools. Under current law, if a student leaves the public system, we lose the state funding for that child. I propose that the state freeze the amount of money it gives to Jersey City. If a child leaves the public system and goes to a private school, the city would still receive the same $6,600 for that child.
We would then take that money and put it into escrow. If a thousand children transfer out of the public system, we would have $6.6 million in escrow. We would divide that escrow—whatever the amount happens to be—by the total number of children in the private system: the one thousand new students and the ten thousand who were already there. That $6.6 million divided by 11,000 students amounts to about $600 per student—almost half the total cost of the average private grammar school tuition in Jersey City. We would give each child in the private schools a voucher for that amount.
As more children transferred out, it would benefit those in both the public and private schools. If, say, two thousand students transferred, the amount of the voucher would be $1,100, almost enough to cover the full cost of tuition.
Meanwhile, overcrowding in the public schools would be relieved. Right now we’ve got tremendous overcrowding—37 students per class in some junior high schools. Let’s say 10 percent transfer out. Now the average class size is down to 33 children.
And only the state contribution would go into that escrow. The total local dollars going to the public school system would remain constant—I am committed to that. So we would have the same number of dollars per student from the state for those children who remain in the public system, and the same absolute number of dollars, divided by fewer students, from the local contribution. That means per-student funding in the public system would rise as more students transfer out. The public schools would improve, both because they would have less crowding and more money per student, and because they would be subject to competitive pressure from private schools.
CITY JOURNAL: What happens if the private schools respond to the availability of vouchers by jacking up their tuition?
SCHUNDLER: I think that’ll be great, because they need more money than they’re spending today. But I do have a mechanism to prevent them from raising tuition too much. I call it a state student credit. If the voucher is greater than the tuition amount, we would credit the student with the difference. Students could use that money for supplemental education—after-school tutoring, vocational education, or language or music lessons. Or they could save it up and use it for college. Hence, low tuition would be a selling point for a private school, since parents could take advantage of the extra funds.
CITY JOURNAL: Do you foresee any practical problems in determining standards private schools will have to meet before they are allowed to redeem vouchers?
SCHUNDLER: We have draft legislation in Trenton that spells out minimal eligibility requirements. It would require that schools not practice racial discrimination and that they meet safety and academic requirements. To minimize political interference in the public schools, it stipulates that the state cannot impose additional regulations beyond those that were already in place on January 1, 1990, without a two-thirds vote of the State Legislature.
CITY JOURNAL: Who’s carrying the ball for you in the legislature?
SCHUNDLER: I think I can persuade the Republican majority, together with the Democrats who represent Jersey City, to join in support of this initiative. This is the same coalition that initiated the legislation allowing the bulk lien sale, which was passed unanimously.
CITY JOURNAL: Won’t the teachers’ union resist your plan?
SCHUNDLER: Yes. During the campaign, the Jersey City Education Association, the local chapter of the National Education Association, sent out two letters to its members saying that Mayor Schundler would destroy the public school system and cause teachers to lose their jobs. I think that’s an amazing surrender, to believe that they could not compete if they had to. But the fact is, I got 70 percent of the vote, even after intense, high-profile criticism of my proposal.
CITY JOURNAL: But how do you expect to get the plan through the State Legislature, where the teachers’ union is a powerful force?
SCHUNDLER: I will have to convince suburban legislators that their constituents stand to benefit directly. Their schools have lost funds because more money keeps getting directed to Jersey City. My plan would allow the state to freeze what it’s sending us today. If the legislature does nothing, the cycle will continue and the state will have to throw more and more money at Jersey City, which will cause greater hardship in other communities but won’t help our children one bit.
I’m going to go to the suburban chapters of the teachers’ union and tell them that if this experiment does not go forward, they stand to lose their jobs. If we continue what we’re doing, and more money is directed away from the suburbs, teachers will be out of work in Morristown and Somerset County.
And if we don’t improve the schools in places like Jersey City, suburbanites will see their taxes go up even further, because the state will have to spend more money on prisons to house people who turn to crime because they cannot read or write.
CITY JOURNAL: Speaking of crime, one of your major initiatives has been to get more police onto the street. How have you managed to accomplish this in a time of budgetary constraints?
SCHUNDLER: Politicians will always be prone to use government to serve their own interests, and playing games with the Police Department is no exception. Machine politicians would go to the police and say, “If you campaign for me, I’ll let you sit in the gun-permit section and do paperwork all day instead of making you patrol the street.” So we had policemen doing clerical work and even delivering mail between station houses. We had a police force of 840—fairly large for a city of our size—but only 38 percent of our officers were on street patrol.
We brought that up to 65 percent, and in doing so we almost doubled the number of cops on the street without hiring a single additional officer. In fact, we’ve reduced the police force through attrition from 840 to about 810 officers. I’m about to hire 28 new ones, all of whom will go to the street. And I’m still not done civilianizing the station houses.
The police, of course, have resisted. When I said I would take officers out of desk jobs and put them on the street, they replied that somebody had to do the desk jobs, and there was no room in the budget for it. I thought to myself. If that’s true, I might as well reduce the number of uniformed officers and hire more civilians. After all, I don’t need someone at a policeman’s salary doing paperwork in the gun-permit section.
But in fact, I believe we need the extra police on our streets, so I’m not going to lay off any police personnel. Instead, I am going to bring in civilians to do the desk jobs. I acknowledge that I will be increasing the Police Department budget and the number of people on the Police Department payroll. I accept that, and I’ll be shrinking other areas of the city payroll to compensate for that commitment.
CITY JOURNAL: It sounds like the reason you’re able to do this is that none of the police were working for your campaign, so you didn’t have to cut any deals with them.
SCHUNDLER: That’s right. Many individual officers did support me, but I didn’t invite them in to do campaign work.
You know, one of the reasons politicians give in to special interests is that we don’t believe that regular people will ever appreciate the good things we do when we fight organized interests on their behalf. Politicians are wrong about this; the people do appreciate what we do for them. Even so, Marx said that if you’re going to effect a revolution, you have to make a class “in itself’ become a class “for itself.” That is, people have to understand their own interests and become mobilized. Unfortunately, you may be able to do that for one election, but the next time around, if you have not changed the system, the organized interest will be mad, but the people will no longer be mobilized.
That’s why I favor solutions like vouchers, which empower people directly. On the one hand, vouchers make it possible to reduce the number of people on the government payroll. By doing that, vouchers shrink the total size of the vested interests in government that wield such disproportionate clout. But what is even more important is that they help to make the general public into a class “for itself.” People won’t give up power once they’ve had it. If you give people vouchers, they will never give them up, and your reform will be permanent.
I believe it is important to have faith in the people, but it is also important to create a system that protects politicians who do the right thing, by keeping people mobilized. Vouchers are a means to organize the people around their interests permanently. If we empower ordinary citizens, they will become a mobilized interest in protection of their own well-being, and that will embolden politicians to fight for them.
CITY JOURNAL: Are there any other cities from which you have learned things that have helped you govern Jersey City?
SCHUNDLER: Milwaukee has a school voucher program, and it is moving to see a woman like Polly Williams, who fought the good fight and changed attitudes within the black community. The black elites had been supporting the status quo but eventually were pressured by the rank and file to change their views.
But I don’t really look to other cities as direct examples. For the most part I just walk the streets and get my ideas by talking to Jersey City residents. People will tell you what they need—you don’t have to be a rocket scientist. If politicians would actually listen to them, most of the problems would disappear.
CITY JOURNAL: New York is in the midst of a mayoral campaign. What lessons should the candidates take from your experience in Jersey City?
SCHUNDLER: A mayor should boldly lay out the solutions to a city’s problems. Even if he can’t always effect them by himself, he can rally popular support for them. I talked about things in my campaign that were not directly under the mayor’s control. But when I walk the streets, people don’t want to hear me say, “That’s not my job—that’s the Federal Government’s job.” They don’t want to hear me throwing blame. They’ve heard enough of that.
They want to hear me take responsibility and say, “I’m going to try to get it done.” They don’t begrudge the fact that I can’t get everything done, but they want to see me out there fighting for them. What they’re electing is not just a technocrat to administer the bureaucracy. They’re looking for a leader to make the city better for them.
CITY JOURNAL: Do you think your proactive approach to government could work in a city as large as New York?
SCHUNDLER: I believe that in ten years New York City will be totally transformed—the whole governmental system will be changed. I think that will be the case in Jersey City in four years. The experiments will be done in places like Jersey City, where the problems are perhaps more manageable. Once those experiments have succeeded, they’ll be emulated in cities like New York.