The market for municipal bonds is showing signs of skittishness, The Wall Street Journal reports. The New Jersey Economic Development Authority cut a bond issue by 40 percent on the news of increasing yields on tax-exempt debt as well as decreased demand. Governor Christie’s state of the state address used the word “bankrupt” to describe the state’s health care costs, a choice of words some are linking to the reduced bond sale. While it may be easy to pin the blame on the b-word, the state is in bad shape where its off-balance sheet debts are concerned, bested only by Illinois.
The yield for 30-year AAA rated General Obligation bonds rose to 5.01 percent yesterday, reflecting higher levels of perceived risk.
This bond-market news comes at a time when governments and public entities are trying to refinance their debts. During the financial crisis many governments brokered debt conversions with variable interest rates. This allowed government borrowers to keep their costs low, temporarily. About $109 billion in such deals expire this year. Governments will have to re-fi at higher rates or get new guarantees.
As the WSJ notes, the problem of a short-term cash crunch is likely more concentrated among smaller borrowers such as hospitals and schools. Most state and municipal borrowers will likely be able to rollover their debts.
Will the cap work to reform local government spending? The true problem in New Jersey is not necessarily the state’s large number of small municipalities. In the 1950s, New Jersey had the same number of local governments. Schools were financed with local revenues. What has changed in the interim? The amount of things that state and local governments do, who provides these services, and how they are financed.
Since the 1960s, the rise of the public sector union, state and federal aid to local governments, court decisions on education financing, state mandates, environmental and business regulations have already achieved a level of ‘fiscal centralization,’ by planting a state and federal spending agenda in municipalities. The challenge of local spending reform is first to recognize the degree to which governments are entangled. The funding for locally provided goods, like education, are centralized through state and federal mandates, regulations, and state financing formulas.
Cost overruns in infrastructure projects are common. As Christie succinctly notes, “jobs created” doesn’t mean much when there isn’t any money to meet payroll. That’s why asking a federal government awash in debt to pony up more funds isn’t the way to go. If the tunnel is a good idea, New Jersey and New York might consider the approach developed here by economist Steve Hanke to finance improvements to their shared infrastructure. Market Urbanism argues New Jersey’s real commuter problem is its underdeveloped cities. And The TransportPolitic offers another way around transit overcrowding.
Governor Chris Christie has announced his plan to tackle New Jersey’s pension shortfall. Officially estimated at $46 billion, Andrew Biggs and I estimate the figure is closer to $174 billion (using the risk-free discount rate to assess the size of the liabilities).
Today’s Philadelphia Inquirer reports Christie will ask for a rollback the 9 percent benefit enhancement enacted in 2001 for current workers. This is a good step to putting New Jersey’s pension plan on more stable footing.
In addition to this announcement, Orin Kramer writes in the New York Timesabout the role investment assumptions played in the pension crisis. He points to government standards that allow pension systems to measure their asset values looking back over a period of years which ultimately gives the plan the appearance of a higher level of funding.
Both articles emphasize the impact of decades of pension deferrals and also raise the issue of the role of government accounting standards in creating the pension crisis. As these issues are hammered out states will continue to face increasing fiscal pressures as benefit payouts increase making public employee benefits, in Governor Christie’s words, “the public issue of this decade.”
What’s gotten in to the governors? Across the country, a number of them seem to be fed up with their respective budget crises and are proposing bold action. As Eileen has written in the New York Post, New Jersey’s Governor Christie has shown remarkable resolve in tackling “the third rail of New Jersey’s budget: union-negotiated contracts and control.”
On Tuesday, I wrote about New York’s Governor Paterson and his plans to lay-off nearly 10,000 government workers (effective upon his successor’s first day in office). Now the Governor has gone a step further, announcing that he is “taking over” the budget cuts in order to keep the state afloat. After weeks of fruitless negotiations with state lawmakers, the state budget is more than 2 months overdue and there seems to be no consensus about how to deal with the $9.2 billion gap. So Paterson plans to impose dramatic cuts by including them in an emergency spending plan.
A little further west, in Illinois, Governor Pat Quinn and the state legislature are wrestling with a yawning $13 billion gap. Yesterday, the governor declared his intention to make the tough cuts that legislators seem unwilling to make. Of course, when pressed for details, he declined to offer a substantive plan. Hopefully, he’ll come around.
Hopefully, all of the governors will come around. A new report by the National Governors Association and the National Association of State Budget Officers (NASBO) will be released this morning. According to the Wall Street Journal(gated), it shows that states across the country still face a $127 billion gap over the next two years.
“Under the New Christie Paradigm, the Governor emphasized that the school budget vote was the electorate’s most important means of controlling school district spending and taxation. He urged the voters in yesterday’s elections to defeat budgets they deemed to be excessive, particularly those in which the local teachers’ union did not agree to a one year pay freeze.
It was evident even before the polls closed yesterday that the New Christie Paradigm had succeeded. The New Jersey electorate had been largely apathetic to school budget elections in the past, as evidenced by continuing abysmal turnout. Governor Christie had communicated to the electorate the effectiveness of the school budget vote as a tool to limit property tax increases. The citizenry of New Jersey responded to the Governor’s message by going to the polls in record numbers.”
In addition, the agency has laid off 200 people (about 2 percent of its workforce). This represents the, “deepest one-year workforce reduction in the agency’s 30 year history.” The reason it is such a drastic cut has more to do with recent history. In the past three years, transit payroll increased 24 percent between 2006 and 2009. Crunching payroll numbers, The Asbury Park Press finds that in this three year period, the number of employees increased by 14 percent, and average total pay (including overtime) rose from $57,474 to $62,794.
Management salaries will be cut by 5 percent, for Executive Director James Weinstein, who makes $261,324 a year, the reduction will amount to a little over $13,000.
New Jersey Transit’s $52 million stimulus funds will be used for special projects, including: $15 million to improve pedestrian walkways at Newark Penn Station, and $36 million for a new “intermodal station and parking facility” in Pennsauken, Camden County to allow light rail transfers to the Atlantic City commuter rail and bus service.