California and New Jersey's Impending Fiscal Disasters

If it is one thing that American politicians do well it is to mismanage and waste taxpayer money and wealth. We have previously discussed many examples of this dubious skill:

• The National Science Foundation spent over half a million dollars to develop a video game that simulated promo week.
• The National Institutes Of Health did a study that found, in general, men hanging out in bars prefer thinner and younger women.
• The U.S. Navy spent about $300 million building two ships almost to completion and then spent tens of millions of dollars to turn them into salvage when they decided they did not need them in the first place.
• The Pentagon’s financial systems are so bad that even professional auditors have thrown up their hands and declared that the financial processes of the Defense Department are so screwed up that they cannot be audited.

These types of gross mismanagement and wasteful spending exists in the tens of thousands ways over the years that American politicians have wasted our wealth.

But nowhere have American politicians shone as brightly in their ineptitude as in managing the long term health and financial future of Americans. They have allowed the Social Security system to get so fiscally out of whack that the system has been and will continue to pay out more in benefits than it collects in Social Security taxes forever unless changes are made to the system. Failure to do so has saddled the entire system with well over $44 TRILLION in unfunded liabilities and will eventually cause the collapse for what many Americans is their retirement financial lifeline.

Medicare and Medicaid are not much better. Both programs are consuming more and more of government budgets, both at the Federal and state level and are growing so fast that without some type of bold and effective changes both processes will collapse the medical safety net of tens of millions of retired and poor Americans.

But the problem of systemic mismanagement of critical retirement processes for every American is not restricted to the U.S. Federal government:

1) According to a January 13, 2018 article by the New York Post:

• The New Jersey government employee retirement system is so underfunded that the incoming New Jersey governor has to either earmark ALL new state government tax dollars to the retirement funds or “sit back and watch the fund head to collapse.”
• According to a recent Manhattan Institute report by Steven Malanga and Josh McGee, despite a healthy economy, lower unemployment, a skyrocketing stock market, and recent state resident tax hikes, it may still be too late to save the retirement system and its funding from collapse: “New Jersey’s pension system may have already reached an unfixable tipping point.” 
• But this dire situation should not come as surprise since a financial analyst warmed back in 2015 that: “You can’t grow your way” out of so vast a hole, even with higher investments. “It’s almost mathematically impossible to close the [funding] gap.”
• The Manhattan Institute attributed this failure to fiscally manage the retirement funding for state employees to a “tale of elected officials willing to grant retirement benefits to workers without having the money to pay for them” and labor groups pushing for (and getting) “enhancements” even when there was no funding for them.”
• Things have been so mismanaged that New Jersey is in the worst shape from a retirement system perspective with an unbelievable $124 billion in debt.
• It has only 30% to cover what’s needed for future state employee retiree benefits, well below the 40% funding level that the Rockefeller Institute of Government considers the crisis level, i.e. New Jersey is well beyond the crisis level.
• It is obvious that a situation like this was a long time coming, it is not like it sprung up last Tuesday. But despite this easy to recognize day of reckoning, New Jersey politicians were too timid, too arrogant, too stupid, or too lazy to actually confront the problem long ago when it was more manageable.

And by waiting so long, you eventually get into a “tax more, spend more” death spiral. The incoming governor is a strongly supported by the labor unions that represent current and retired New Jersey state employees so he is unlikely to try anything that would reduce benefits that might tick off his political supporters. Which means he will have to raise taxes, something he has promised to do to the tune of $1.3 billion. 

Given that New Jersey residents are already some of the most highly taxed people in the country, the out migration of taxpayer residents from states like New Jersey will accelerate which will reduce the tax base which will reduce the tax revenue stream,etc. And the death spiral is in action. And sadly, even if the new governor gave all of the incremental tax dollars to the retirement systems, it would hardly make a debt in the over $100 billion that are needed.

2) But New Jersey is not alone when it comes to state politicians not being able or not wanting to run a fiscally sound government, accro\ording to a recent Bloomberg report:

• As we have reported many times in this blog, California is a fiscal basket case with far more pension and state government employee medical liabilities then it will ever be able to cover.
• Up until recently, Governor Jerry Brown and the rest of the liberal California political class have insisted that they can dish out overly generous benefits to state government employees regardless of how high they raise taxes.
• But the unthinkable recently happened in that because of recent court rulings, Brown can actually reduce those overly generous benefits.
• Brown said that in the next recession, the governor “will have the option of considering pension cutbacks for the first time.”
• But just because they may have some legal flexibility that does not mean they can fix what the fiscally broke since the California Public Pension fund can cover only about 68% of its future liabilities.
• California is only one of many states with a an impending fiscal meltdown since combined all state governments are about $1.7 TRILLION short of what is needed to meet their promised benefits.

Bottom line is it looks like all of this recent teeth gnashing is too little too late. As we have always said, American politicians have no clue when it comes to being economically and fiscally wise in protecting taxpayer assets. They have dug a hole with the promises they made to state government employees and it should be interesting to see how they are going to pay for those promises either politically or financially. Going to get interesting.

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http://www.reason.com
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