Ever since Whitman took office in 1994 by defeating the tax-raising Democratic incumbent, the debate has raged between those who say that Whitman is the greatest thing since sliced bread and those who say that she has cut state taxes by holding down aid payments to localities, forcing local taxes to rise. We’re not going to get into this discussion–it’s theology, not economics, and no one can prove things either way. What’s important is that Dole, who uses New Jersey as a role model for tax cutting, can’t do to the federal budget what Whitman did to the state budget.
Why not? Because if you look at the numbers, you see that Whitman’s most important budget cut wasn’t eliminating fraud or shrinking services. Rather, it comes from green-eyeshade types who discovered that the state could sharply cut payments to its pension funds without reducing benefits to retirees–something the Feds can’t do. Whitman’s four state budgets cut pension contributions by a total of about $3 billion from what they would otherwise have been, just by changing funding formulas. No muss, no fuss, no little old ladies thrown into the street. That $3 billion more than offsets the personal-income-tax cuts, which total about $2.6 billion. Reducing pension-fund payments does save money–although future employees and taxpayers will pay a stiff price if the funds falter a decade or two from now. But changing pension formulas isn’t what comes to mind when you think of bold, reforming governors hold- ing down government costs by cutting waste, is it?
Dole can’t do to federal retirement, medical or Social Security funds what Whitman did to New Jersey’s pension funds, which also cover retirees’ health care. It’s a question of bookkeeping. New Jersey, like most governments and businesses, makes pension contributions based on the benefits being earned by current employees. That way, when folks retire, the fund has enough to pay their pensions. Uncle Sam, by contrast, counts as an expense the checks that go to retirees, not the benefits earned by current employees. Current employees’ benefits aren’t funded at all. So the only way for Dole to cut federal pensions or Social Security expenses is to send smaller checks to current retirees. Ain’t going to happen.
New Jersey makes pension contributions based on a lot of complicated calculations and educated guesses. Among them: estimating what retirees’ final salaries will be, how long they will live, how much of an inflation adjustment you’ll have to pay them, how much the pension funds will earn on their investments. Change those assumptions, and you drastically change the amounts you have to put into your employees’ pension funds.
Take the state’s current budget, for the fiscal year ending June 30, 1997. One Whitman change–paying retirees’ medical benefits as a current expense rather than funding them in advance–makes pension payments $279 million less than they would otherwise be. Another change–paying the fund the same amount for each employee rather than paying more for older employees and less for younger ones–saves $318 million. Assuming that inflation will run 4 percent a year rather than 5 percent saves $125 million. Miscellaneous other changes, plus reductions in state payments to localities related to all this stuff, bring the state’s total savings to $955 million. That’s a lot in a $16 billion budget, and it nearly offsets the $1.2 billion cost of the Whitman tax cuts, which take full effect this year for the first time.
What’s wrong with this? Maybe a lot. Some government employees worry that the funding cuts put their future benefits at risk, even though things look pretty good today. And even though the state’s independent actuaries–Uber-accountants who measure pension plans’ financial soundness–approved everything. ““The pension plans have been afflicted with osteoporosis,’’ said Peter Christensen, an actuary for the state teachers union. ““The plans look strong now,’’ he added, ““but underneath, the bones are deteriorating. You sit down 10 years from now, and your hip breaks.’’ Whitman says the plans will stay sound: ““If we left things as they were, we’d have $20 billion more than we needed in the plans over the next 30 years.''
You can’t tell who’s right, and you won’t be able to tell for years. I think some of the changes–like reducing the inflation adjustment–are OK. But paying a flat amount per employee rather than basing payments on their ages saves money today while costing money in the future. I live in New Jersey, and I don’t like paying taxes. But it’s wrong to cut our taxes at our kids’ expense. Remember how Ronald Reagan’s imprudent tax cuts, abetted by a profligate Democratic Congress, added trillions to the national debt?
Whitman, as you might imagine, disagrees with my analysis that she in effect paid for her tax cuts by reducing pension contributions. ““We’ve made plenty of other cuts,’’ she told me. ““We’re still making cuts and making the government more efficient.’’ Yes, she has privatized the Department of Motor Vehicles, cut payments to some programs and eliminated others. And, of course, she splashily ordered some street lights turned off. But the pension savings are the big bucks. ““Of course,’’ she said, when I asked if lower pension payments made it easier to balance the budget, ““but if we hadn’t found them, we would have cut something else.’’ But cutting something else would have produced much more flak than putting less into the pension funds. Look. Most people think of these cuts as free money. About the only folks seriously peeved are government employees. There are lots more taxpayers than government employees. And public employees aren’t likely to love gut-the-government types like Whitman, anyway. Whitman, who said she learned of the potential to make big pension-funding cuts only after she was elected, would have to be foolish or naive to pass up the chance to save all that money so quickly and easily. And she’s neither foolish nor naive.
Dole’s folks say I’m making a big deal about nothing, because Dole never counted on cutting the federal budget exactly the way Whitman cut in New Jersey. ““The basic point of the Dole program is to increase overall growth,’’ said Annelise Andersen, an economist with the Dole campaign. That, combined with reductions in spending growth, will balance the budget, she argued. In reality, of course, Dole doesn’t have to balance the budget if he’s elected, any more than Ronald Reagan or Bill Clinton did. State laws force most governors to balance budgets. And unlike states, the federal government can create all the dollars it wants to cover its deficits.
The point here isn’t to mock Dole’s economic plan, though I think it’s about as likely to balance the budget as I am to sprout wings and a new head of hair. The point is that the only way Dole can cut taxes and eliminate the deficit with the same speed and ease as Whitman is by amending the Constitution to create a Secretary of Accounting. And to remember that when you hear about seeming miracles like Christie Whitman’s painless tax cut, look at the numbers, not the hype.
