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Commentary By Steven Malanga

Chris Christie Faces Fiscal, Political Reality

Economics, Governance Tax & Budget

New Jersey Governor Chris Christie has become a national figure in less than six months in office. He’s been extolled by syndicated columnists as he takes on the state’s powerful public sector union, while Newsweek magazine has wondered, is he the best governor in America? And Fox Business’ Neil Cavuto recently asked Christie if he was a candidate for president.

And yet where it matters, in his own home state, Christie’s approval rating has slumped to just 44 percent, which is only slightly higher than President Obama’s. Behind Christie’s sagging poll numbers is a stark reality that politicians in other places where the fiscal and economic holes are deep must all grapple with, which is that true reform involves taking things away from many different constituencies, which is not so easy.

Jersey’s newly passed budget, which Christie deemed a political victory, is an example of the risks that budget balancing carries for the leader of a government with such deep fiscal woes. Christie’s agenda of trimming public sector employee benefits and pay was wildly popular with voters. Some 60 percent approved, which is not surprising considering that the state’s public employee benefit costs alone have soared from $1,976 per worker in 2002 to high of $4,893 in 2008.

But a number of Christie’s other budget-balancing moves, including cutting municipal and school aid, were just as wildly unpopular, even though Christie made a compelling case that local governments could make up the shortfalls if they won concessions from public workers. What voters in Jersey discovered instead is that decades of political maneuvering have rigged the game against them, and some seem to be taking their frustration out on Christie. When he urged them to defeat local school budgets that built in big spending increases, voters in nearly 60 percent of towns complied. But that only sent the budgets to the local town councils, some of whom ignored voters and rubber-stamped the big spending increases and the higher property taxes that go along with them. Voters won’t have the opportunity to vote the officials who ignored their will out of office for a few years, and anyway, some Jersey local governments are controlled by political machines which can withstand a little voter anger.

Christie has also earned the ire of some of the very voters who supported him, including suburban homeowners. That’s because he mostly eliminated a program of property tax rebates as part of his budget-balancing act. The rebates, ostensibly designed to relieve local tax pressures, have been unsuccessful; instead both state taxes used to pay for the rebates and local property taxes have been rising rapidly for years. Yet in a state where people have become cynical about taxes ever moderating, the rebate checks were one tangible piece of relief for homeowners.

Christie’s biggest fight was to hold the line on taxes after a series of big increases (and many little ones) in recent years, including a so-called “millionaire’s” tax passed in 2004 and a sales tax increase in 2006. Politicians sold both of those to voters as necessary to end the state’s constant fiscal crises, and obviously the taxes didn’t. Still, 60 percent of voters said they wanted Christie to raise taxes this year, but mostly on someone else. They specifically endorsed another tax increase on the rich, that is, on those earning $1 million or more, who make up about one half of one percent of Jersey taxpayers.

But beyond this year’s budget, the bigger risk that Christie faces is that voters will soon come to suffer “reform” exhaustion because the state’s problems are so deep. This spring’s budget battles were only the first step in solving a nearly decade-long fiscal slump, exacerbated by an economy that has stagnated since 2001. Jersey even missed the bubble years of 2005 through 2007. Its private sector employment was flat before the crash of 2008.

As now one of the most highly taxed places in the country, Jersey has lost the competitive advantage that won it numerous corporate relocations in the 1970s, 1980s and early 1990s. Its chemical/pharmaceutical sector, a major driver of the economy for years, has collapsed, shrinking by one-half since 1990 as companies merge or head to cheaper venues. The state’s financial sector, including many jobs at firms that fled New York to relocate in the Garden State, is on the ropes, with nearly 10 percent fewer jobs than the peak of 2001 and not much prospects for near-term growth. As a result, revenues from taxes and fees in Jersey have shrunk from $32.6 billion in 2008 to $27.7 billion this year.

It doesn’t get much easier going forward. Christie balanced this year’s budget in part by skipping $3 billion in payments to the state’s pension system, which is already among the worst-funded in the country. A recent study by Northwestern University Finance Professor Joshua Rauh estimated the state’s pension funds could go broke within a decade; others estimate they could run out of money as early as 2014. It’s not clear where Jersey is going to find another 10 percent in revenues so that it can start making its annual pension contributions again.

Christie has already moved on to his next set of battles, which includes enacting a meaningful property tax cap and passing what he calls a ‘toolkit’ of reform measures, including changes to arbitration procedures and civil service rules, that will give local officials a better ability to keep municipal and school budgets under control. After that he faces a titanic battle to reform the state’s unaffordable public employee pension system. Through the spring budget wars, the state’s teachers’ union spent $4 million on advertising bashing Christie, yet that will be nothing compared to what they will mount against him once the pension fight ensues.

Christie has said numerous times that he will live or die politically with this reform agenda, even if it means he’s just a one-term governor. There is no other alternative for the state, he argues.

Yet there is another alternative, which Christie can see right across the Hudson River, in New York State. It’s called managed decline. Whole areas of New York have been semi-depopulated since the state went on a war against business and wealth beginning in the 1960s, prompting Eliot Spitzer to declare in 2006 that upstate New York resembles Appalachia. The incredible earning power of Wall Street has kept downstate from following suit, though increasingly the New York City economy looks like a donut, with the middle class hollowed out.

Yet through it all politicians in New York have managed to secure for themselves their own prerogatives. Albany boasts the most expensive state legislature in the country, and they’ve gerrymandered the landscape to ensure that most get reelected year after year, even as residents flee the state seeking opportunity elsewhere.

I’ve little doubt that many state and local politicians in New Jersey are hoping that voters quickly weary of Christie’s reform agenda so that the political class can get back to reconstructing Jersey as a haven for itself, like New York. Christie’s slumping approval ratings give them hope.

This piece originally appeared in RealClearMarkets

This piece originally appeared in RealClearMarkets