Virginia and New Jersey wrangle over taxes, spending and pensions

In the past week Virginia and New Jersey have put together their proposed budgets. One thing they have in common: how much to set aside for pension benefits, and how to pay for it? Governor McDonnell of Virginia proposes less spending on education than is sought by the House and Senate. The Governor wants to fund spending with increased fees. The Senate prefers an increase in the gas tax.

Virginia operates with a biennial budget and McDonnell’s two-year $85 billion spending proposal is the largest spending plan in the state’s history. Of the $438 million proposed for education, $342 million is earmarked for teacher’s pensions. Governor McDonnell will make the annual payment (more or less) as calculated by state actuaries and proposes increasing the employee contribution to 6 percent. The Senate rejects increased employee contributions. The House, by contrast, thinks the Governor should go further with structural pension reforms.

In New Jersey Governor Christie will make 2/7ths of the full contribution to New Jersey’s pension system. It’s too little, too late and the needed contribution is already terribly underestimated. In addition Christie’s $32.1 billion budget represents a spending increase of 8.2 percent over last year. There are proposed spending increases for K-12 education and universities, but also cuts to municipal aid for distressed cities, including Camden which has been almost entirely dependent on state aid for decades. It appears optimistic revenue projections figure into the proposal. The Governor proposes a 10 percent cut in income taxes across the board and a restoration of the Earned Income Tax Credit (EITC).

The structural problems in New Jersey’s fiscal landscape remain. And these structural problems are apparent in many other states. It is not a problem easily solved. The means of financing schools – bound up with income taxes, state aid and their effect on property taxes and spending, instituted in 1976, remains in place. Factor in the resistance of governments to confront the real costs associated with employee pensions – a problem shared by all states and  many municipalities. The present problem is that recovering revenues may lead states to feel comfortable again. But that would be misplaced. Instead, lawmakers would do well to view their state’s long-term fiscal trends without the aid of rose-colored glasses.