New Jersey's ugly truth
Whitman 'tax cuts' imperil pension funds
By John Catalinotto
The wild gyrations in the stock market should raise alarm
bells over the right wing's plan to get the government to
invest Social Security money in the Wall Street casino.
Millions of workers are now looking at the experience of New
Jersey, where pensions for state workers are in jeopardy
because of just such a move.
Christine Whitman, now President George W. Bush's director
of the Environmental Protection Agency, was the conservative
governor of New Jersey in 1997. The Republican Party had a
scheme to launch her as a national political figure: She would
cut taxes while balancing the state budget.
How could that be done? By law, she had to come up with
funds to back up the pension obligations to state workers.
However, capitalist politicians, just like capitalist CEOs
looking for a quick profit and an attractive balance sheet,
don't hesitate to use questionable methods.
Whitman was no exception. In 1997, she proposed that New
Jersey issue bonds to make a single big contribution to the
pension fund and cover any shortfall. Interest on the bonds was
to be 7.64 percent.
Whitman planned to invest the funds she raised through the
bonds--about $2.75 billion--in the stock market, which looked
to many like a "sure thing." This combination of borrowing and
investing, buying and selling, has been used by some big
brokerage houses but rarely by government.
Even one of her allies, the Republican chair of the Senate
Appropriations Committee, Robert Littell, called this a "wacko
idea." Her plan won out anyway.
The state then invested most of the money raised through the
bonds in stocks. Indeed, some 60 percent of the total pension
portfolio is now invested in stocks.
For a while, it appeared that Whitman had made quite a coup.
Stock prices increased rapidly. The state was making more money
on the increase in stock prices than it was obligated to pay on
the bonds. The first two years it earned over 19 percent,
compared to 7.64 percent for the bonds.
Indeed, because the bonds were set up so that early payments
to bondholders were low but later ones would be higher, Whitman
was able to cut taxes while still "balancing the budget."
Judith Cambria, an analyst for the League of Women Voters,
recently wrote an extensive analysis taking the governor to
task for her "irresponsible action over a long period of
years." Whitman had shifted the tax burden into the future--at
which time, conveniently, she would have moved to greener
pastures as head of the EPA. (How long the pastures will remain
green with the Bushites in charge of the environment is another
As Cambria put it recently: "You think what's going on in
the business world is bad? The last administration used every
trick in the book."
What comes to light with the stock price drops, however, is
not just Whitman's sleight of hand. It's her willingness to
shoot craps with the workers' pension fund. It's how the rest
of the state's politicians went along with her scheme while
intoxicated by the rising market.
That portfolio was valued at $94 billion two years ago. It
was valued at $72 billion this July 24--a loss of $22 billion.
The stock returns are now lower than the amounts promised for
This loss means that the state may have to make payments of
as much as $1 billion a year to the pension fund to assure that
workers get the pensions they are guaranteed by contract and by
law. The only place to get this money is general tax revenues,
which will also have to pay interest on the bonds.
It is likely that the state will now have to impose higher
taxes or make severe cuts in social services, or both, thus
making the working class pay for this gift to Wall Street.
According to a Paul Krugman opinion piece in the July 30 New
York Times, other states, such as Tennessee, may be in even
worse trouble than New Jersey because of similar schemes.
In the light of all this, the Bush administration's attempt
to impose a speculative burden on Social Security by tying the
national fund's assets to the performance of the stock market
is nothing less than criminal. Yet it has garnered support from
both Republicans and Democrats in Congress.
The New Jersey experience should be a wake-up call to
workers and their organizations around the country to fight to
defend guaranteed pensions and Social Security payments.
Reprinted from the Aug. 8, 2002, issue of
Workers World newspaper
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