Candidates’ Blind Spot
Deficit Will Dampen Happy Talk When New Governor Takes Over
Bob Patricelli and Jim Smith say 2018 hopefuls are ignoring the looming deficit.
The current state gubernatorial campaign debate is missing the point. The hard truth is that all of the candidates are running for the dubious honor of commanding a ship of state that is on fire and about to sail off a fiscal cliff. They should be terrified and sounding the alarm. But spreading bad news is not how you get elected.
The coming cliff is the $4.6 billion deficit projected for the upcoming biennial budget — 11.6 percent of appropriations for fiscal years 2020 and 2021 starting on July 1, 2019. These deficits will continue and will grow by $500 million per year thereafter. The victorious candidates will arrive in the Capitol in January 2019 only to face a budgetary punch in the gut that will deflate any campaign happy talk of tax cuts or increased spending.
By law, the governor and the legislature must pass a balanced biennial budget in the 2019 session. What can they do to close the budget gap? There are limited choices, and none of them are attractive.
First, they could cut spending, and they must. But close to two-thirds of the state budget is consumed by personnel costs (compensation, benefits and post-retirement expenses) and by aid to municipalities (including education). Both of these categories are hard to cut. Squeezing aid to municipalities only adds pressure to increase property taxes at the local level. Cutting state employee compensation and benefits runs directly into the labor agreement — called SEBAC — that was negotiated and approved in 2017 and lasts for 10 years. Those costs are locked in unless the public employee unions agree to re-open the contract, which should happen, or court decisions evolve to permit collectively bargained contracts to be forcibly reopened in the face of severe economic crises.
Further, SEBAC went beyond compensation arrangements to include stringent job security or
“no layoff ” provisions that do not expire until after the next biennium. The contract states “… through June 30, 2021, there shall be no loss of employment for any bargaining unit employee hired prior to July 1, 2017, including loss of employment due to programmatic changes.” The agreement does allow “restructuring and/or eliminating positions provided those affected bump or transfer to another comparable job,” but these seniority-based bumping rules narrowly limit the opportunity to restructure state government in the near term.
Second, they could revert to past practices of not fully funding that portion of the Annual Required Contribution, or ARC, associated with prefunding the payment of pensions and health care for already retired state employees. But that is exactly how we got into the problem of having approximately $70 billion in unfunded state employee and teacher retirement liabilities that drag down financial market ratings and employer confidence, and crowd out other needed spending.
Third, they could raise taxes. But that flies in the face of the need to stimulate, not depress, economic growth, and is a good way to lose an election. (The Commission on Fiscal Stability and Economic Growth, which issued its report March 1, proposed a pro-growth redistribution of state taxes, but that was revenue neutral and not intended to close a budget gap.)
Fourth, they could raid the $1.1 billion Budget Reserve Fund, better known as the rainy day fund. But those funds are intended to be used to cushion the effects of an economic downturn on state finances, not to fund general budget deficits, and in any case would be a non-recurring fix.
Fifth, they could hope for a miracle in the form of enhanced tax receipts. That could actually happen in the event of a stock market correction that leads investors to rebalance portfolios and take capital gains. But wait, we tied our hands with a golden cord of good budgetary intentions. The so-called “volatility cap” enacted in 2017 prudently requires that capital gains receipts above normal levels be deposited in the Budget Reserve Fund and that once a 5 percent reserve is reached, surpluses are to be used to pay down unfunded liabilities. The legislature can set aside these constraints by a 60 percent vote in each house, but at a loss of credibility in the capital markets for what would again be a non-recurring budget fix.
Most likely, they will pursue some combination of the above.
These are the hard choices around which the election should be fought — but you wouldn’t know it by listening to the debate to date. Business and labor leaders, nonprofit heads, the press — everyone — should be pressing the gubernatorial and legislative candidates about their understanding of the budget issues and what they propose to do about them. That debate is needed not only to help elect the right candidates, but to prepare us all to take the tough medicine that will need to be administered in the year ahead.
The good news is that it is still possible to fix our state, as the Commission on Fiscal Stability and Economic Growth recommended. It will require taking the hard steps needed to resolve our budget deficits and start on the path to pay down unfunded liabilities, along with comprehensive tax reform, infrastructure investments and economic growth initiatives. We can do it, but we have to start by being honest about the crisis we are in.