The Agony of the States
Here's what faces incoming New Jersey Gov. Chris Christie, according to Bloomberg News:
Christie, 47, takes office Jan. 19 as New Jersey faces an $8 billion deficit in the fiscal year beginning July 1, more than a quarter of the budget. To narrow the gap, he asked state department heads to prepare by Jan. 6 scenarios for cuts of 15 percent to 25 percent.
The article offers some painful hypotheticals: Trenton having to fire 100 police offers for instance, or 253 firefighters. Montclair closing a library. Trash pickup schedules abridged in other towns.
Embedded in the article are some deeper and more ominous truths about the crisis in state budgeting.
New Jersey spends about $35 billion a year, about $2.4 billion of which is untouchable debt servicing.
Now .. let's follow the options.
The biggest expense in the budget is payroll. $4.5 billion for pay for 57,000 current state employees, $2 billion for health benefits, and $2.5 billion to fund pension benefits. Since the employees are unionized, those payments can only be reduced if they consent. So almost 1/3 of the budget can only be reduced or restrained after protracted negotiation.
New Jersey spends about $6 billion administering services. (That number overlaps with the payroll numbers above.) Administration is always a tempting target for budget-cutters - until you read a story like the below, from the New Jersey Star-Ledger.
Two-thirds of New Jersey's cash-strapped hospitals stand to lose money under a proposal that would change how the state doles out $400 million for patients on Medicaid, the health insurance program for the poor. The change, slated for August, has nothing to do with New Jersey's budget woes. It's being proposed because state officials have finally updated a 1980s-vintage computer system that paid hospitals based on the types of services they provided two decades ago.
Proponents of single-payer often boast of how much less Medicaid and Medicare spend on administration that private companies. But what they gain on administration, they more than lose through the opportunities non-oversight opens for fraud, waste and abuse.
New Jersey spends $3 billion a year on Medicaid. That figure is unlikely to be reduced because of 1) endlessly rising health costs, 2) the expansion of the program in the Obama-Reid health plan and 3) the program's own perverse incentives: because the federal government pays more than half the cost, every dollar of cuts saves New Jersey less than 50 cents in expenditure.
Given those facts, the ax is most likely to fall on state transfer to localities - down-shifting to towns and counties the responsibility for identifying cuts. The library is always the first target of course: that threat is most likely to soften voters into accepting tax increases instead. New Jersey currently spends $1.6 billion to fund rebates in the state's very high property taxes. That line is the one most eagerly eyed by the spending agencies. Still, even a total elimination of the rebates will go only so far to close the state's $8 billion budget gap.
Some conclusions:
* Even grossly wasteful states can't cut or tax their way out of this emergency in time. Suppose there were $8 billon of waste in the N.J. budget, it is still not legislatively and administratively practical to cut a state budget by 25% before the start of the next fiscal year, July 1.
* It's hard to imagine how states can recover without a slowdown in the rise in health costs. Employee health benefits plus Medicaid account for almost 15% of state spending.
* Administration can be wasteful of course, but effective administration is indispensable to prevent even greater waste.
* The programs it is easiest to cut are those that the state does not operate itself. But those tend to be the most core functions of local governance: police and schools.
* Readjusting state government to new fiscal realities will take time: it will take months to deal with the unions alone. In the past, states have avoided rethinking during downturns like 1990 and 2000 because another revenue boom came along in time to rescue them. That may not happen this time. Responsible officials are going to have to do some hard work over many years restructuring governance - and rethinking the way local governments tax. In New Jersey for example, cutting income and corporate taxes sure looks like a higher priority than rebating property taxes, just as third party candidate Christopher Daggett said.
* In the interim, the federal aid to states included in the so-called stimulus plan looks like an inescapable if ugly necessity. The challenge to Washington has to be: set a specific and firm but realistic date for the termination of the aid. Otherwise, states will shirk the work of rewriting union contracts, fixing Medicaid, and eliminating lower-priority programs.
* If state Republicans can govern well in this crisis, they can rehabilitate and redeem the reputation of the national party. The GOP needs Chris Christie and Bob McDonnell to succeed - needs that success almost more than any success in Washington.