States Disguise Budget Deficits

The Securities and Exchange Commission filed fraud charges against New Jersey last week, accusing the state of misrepresenting its financial obligations. An opinion piece in today's Wall Street Journal, written by Steve Malanga, uses New Jersey as an example of how states use "creative accounting" to hide their debts.

Steve Malanga, of the Manhattan Institute, joined Varney & Co. this morning and said that other states need to sit up and take notice of New Jersey's troubles. "New Jersey has basically been in a state of fiscal crisis since 2002," said Malanga. "They are the lesson that you cannot continue doing this and expect that it won't come home to roost."

New Jersey is rated as being in the worst fiscal shape, but other states are not far behind. New York State Comptroller Thomas DiNapoli issued a report in April regarding New York's financial practices. He stated that Albany's budgets increasingly employ "fiscal manipulations" to represent a "distorted view of the State's finances." Malanga warned that if other states do not change their ways, they will be in New Jersey's position soon.

New Jersey is a case in how manipulations eventually backfire. "[New Jersey] was not only using these techniques to hide their fiscal problems, which many states are using, but they were hiding from investors," said Malanga. "They weren't actually being up front with investors about some of the things that they were doing, so it adds a whole level, if you will, to the dysfunction."

New Jersey's problems date back almost 15 years, when the state borrowed $2.8 billion and placed it in the state's pension funds in lieu of tax revenue contributions. In 2004, the state borrowed nearly $2 billion to close a budget deficit. As a result, New Jersey's overspending in its budget and underfunding of its pensions increased taxes and spending cuts.

It's questionable whether an end is in sight for New Jersey. Malanga explained, "any rational investor who looks at New Jersey's budget and New Jersey's situation, even if Governor Christie manages to fix the long term structural budget problems that they have, even if he does that, they still have find another $3 billion a year to start putting into their pension funds." The state's annual revenue is approximately $20 billion. According to Malanga, an additional $3 billion per year is a tough task.