By Allan Sloan
Tuesday, December 20, 2005

Budget insanity isn't confined to the federal government. In fact, if you look at my home state of New Jersey, you see the same types of phony budget numbers and denial of obvious problems that currently prevail in Washington.

There are two big differences, though. First, New Jersey's numbers are much smaller. Second, while Republican rule in Washington is undermining public finance at the national level, it's Democratic rule in Trenton that's doing the damage in New Jersey.

In Washington, Republicans (with a little help from Democrats) have undermined federal finances to pay for tax cuts; a war; and an outrageously expensive, badly designed Medicare prescription drug program.

In Trenton, Democrats (following a pattern started by Republicans) have undermined state finances to promise fat retirement benefits to people on public payrolls and to pay for a horribly expensive, badly designed school construction program.

Hello? Do we see a pattern here? In both cases, one-party government has done what it considers important and has used misleading numbers to obscure the true costs.

Let's start with the federal government, which -- unlike New Jersey -- isn't legally required to show a balanced budget. President Bush and his Republican supporters, claiming to be conservatives, spend the Social Security surplus on other things and are hocking the country to the eyeballs.

Uncle Sam reported a $317 billion deficit for the fiscal year that ended Sept. 30. That was supposed to make us feel good, because things had been projected to be worse.

But let's apply some reality. That $317 billion is after subtracting the Social Security surplus from the overall deficit. Add that surplus back, and you approach $500 billion. You also should add to the deficit the $70 billion of interest that the Treasury paid on other government trust funds. Thus, the real deficit approaches $600 billion.

In other words, unless you assume Uncle Sam will renege on his obligations to Social Security and federal pensioners, the real deficit is close to double the reported one.

Then there's New Jersey. Then-Gov. Christine Todd Whitman, a Republican elected in 1993 on a tax-cutting platform, indirectly paid for those cuts by diverting money that would otherwise have gone into the state's pension funds, which she and her allies said were overfunded.

But not putting money into the pension funds has gotten to be a habit -- even though by any measure, these funds are now way underfunded. According to a recent report by the state's Benefits Review Task Force -- a document every Garden State taxpayer should read -- the state hasn't put any money into the funds for seven of the past nine years, covering the shortfalls with phony accounting.

And get this. In 2001, with the Democrats in power and the stock market bubble already deflated, the state gave employees a 9 percent pension increase. Talk about brilliant timing.

State retirees can draw full benefits at only 55, an amazingly lush deal. The benefits task force suggested moving the age to 60, which upset some people. Social Security, by contrast, is in the process of boosting its age to 67.

Now watch this. The state says the shortfall in its pension funds is only about $12 billion, even though the funds have about $25 billion less in assets than the value of its pension promises. It's the magic of accounting. By coincidence, a recent bond offering statement put the state's total debt at $25 billion. So its bond and pension debt total $50 billion.

Then there's the school building program. To give you the short version, the New Jersey Supreme Court ruled that the state had to rebuild schools in so-called "special needs" districts (among them: the yuppie haven of Hoboken). This morphed into a statewide program that has run through $8 billion without coming close to finishing the job. The special needs districts may seek $14 billion more to get it done. Good luck finding anyone dumb enough to lend the state that much money.

The state's governor-elect, Sen. Jon S. Corzine (D-N.J.), is going to have to deal with this. Will Corzine, the former co-chief executive of Goldman Sachs, revert to his Wall Street dealmaking persona and try to negotiate lower pensions with state unions and get the state Supremes to back off? Will he raise already sky-high taxes to the moon and beyond? I can hardly wait to see what he does.

Somehow, we'll muddle through on both the federal and state levels. We always do. But it's going to be messy, painful and expensive. And it will be a classic example of the fiscal evils of one-party government. By either party.

Sloan is Newsweek's Wall Street editor. His e-mail issloan@panix.com.