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Murphy’s Bail-Me-Out Math

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eye on the news

Murphy’s Bail-Me-Out Math

The New Jersey governor threatens huge layoffs if Washington doesn’t solve his budget woes. June 3, 2020
Covid-19
Economy, finance, and budgets

As Washington debated a bill last week to provide states with new coronavirus aid, New Jersey governor Phil Murphy announced that, unless Congress comes up with more money to help him close a projected $10 billion budget deficit, he might have to fire as many as half of the state’s 400,000 government workers. “I don’t think there’s any amount of cuts or any amount of taxes that begins to fill the hole,” Murphy said. Though many other governors issued similar—if not such extreme—warnings to Congress about impending cuts, Murphy’s declaration was perhaps the starkest example of how politicians are blaming the coronavirus exclusively for their budget woes.

The problem, however, is that Murphy, a liberal Democrat elected with the backing of the state’s most powerful public-sector unions, has spent the last two and a half years in office declining to enact reforms that would rein in the budget, including getting control of enormous employee pension and health-care costs. He’s let the bills pile up even though—long before the virus appeared—fiscal watchdogs warned him that New Jersey faced significant future shortfalls. Even so, the budget hole that the governor says he can’t possibly fill without Washington’s help is in fact smaller than the $11 billion gap that the state confronted in fiscal 2010. Murphy’s threat illustrates why providing states with huge, unrestricted aid to help their budgets rewards bad fiscal practices and undermines local reform efforts.

In February, before the virus hit the U.S., Murphy proposed a $40.9 billion budget, anchored by a plan to raise taxes on those earning more than $1 million a year to 10.75 percent. That would have made New Jersey’s income-tax rate the nation’s third-highest. The governor’s budget included more money to pay the state’s increasingly hefty employee-benefits bills and to make community college tuition-free. Tom Moran of the Star-Ledger, the state’s largest paper, called the proposals “a liberal battle cry” that offered “no plan to significantly cut spending, or to lower the burden of property taxes.”

It’s not as if the state doesn’t know how to save money. In 2016, a bipartisan commission recommended sweeping reforms to Trenton’s employee pension and health-care benefits in order to derail a growing budget nightmare. The commission warned that, by fiscal year 2021, the state would need to spend nearly $10 billion annually just to fund employee benefits. The commission described gold-standard health benefits for public employees that go well beyond what workers at even the most generous private-sector companies receive, and an underfunded pension system that needs nearly $6 billion annually to stop the rapid pileup of debt.

The commission recommended reforms that included providing state workers with the same level of health insurance as employees at Fortune 500 companies and converting the state’s expensive defined-benefit pension plan into a hybrid system offering workers a modest annuity and a 401(k)-style contribution plan. Total savings, the commission projected, would have amounted to $6 billion in the next fiscal year. That’s more than half the projected deficit that Murphy is now panicked about trying to close.

Murphy had plenty of warning about how harsh the next recession would be. In a study published last fall, Moody’s estimated that New Jersey was the second least-prepared state to deal with a downturn, after Illinois. The ratings agency predicted that the state’s fiscal hit in the next recession would amount to up to $6 billion. Even before the virus struck, in other words, Jersey should have anticipated a giant budget hole from an inevitable economic downturn. But Murphy, eager to win backing from public-sector unions, had pledged not to seek reforms to their benefits, so he let the risks grow. “The governor is so tight with the public worker unions that he’ll never make the cuts that are needed to fix the state’s structural fiscal crisis,” the Star-Ledger observed.

Murphy has said that, absent any Washington aid, he might be forced to borrow billions of dollars to avoid what he describes as intolerable budget cuts. That might be tough, because the Garden State already pays some $4 billion a year on its bond obligations and has the second-worst state credit rating. Borrowing money is appealing, though, because it would let Murphy use the crisis to “shift costs onto some future governor, while he lives it up today by throwing money at every liberal program he wants,” the Star-Ledger’s Moran noted.

Why the rest of the country should subsidize New Jersey’s fiscal mismanagement is a question that congressional representatives from better-run states should be asking.

Photo by Lars Niki/Getty Images for 2019 Montclair Film Festival

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