RUTHFULLY YOURS

By JAMES FREEMAN

In 2010, New Jersey’s Chris Christie proved that a governor can take on teachers unions and not only survive politically, but attract an enthusiastic following. In 2011, Mr. Christie has a chance to prove that his inspiring YouTube speeches are translating into significant reform.

The most pressing need is to reduce one of the nation’s heaviest tax burdens. Thanks to Mr. Christie’s 2010 veto of a bill targeting the state’s high earners, New Jersey has surged from dead last in the Tax Foundation’s annual ranking of state business-tax climates all the way up to number 48. But Mr. Christie knows that being slightly better than New York and California is no recipe for job creation. And the Garden State’s suffering homeowners realize they are still the reigning champs when it comes to the nation’s highest property taxes. It’s a crown they are more than eager to relinquish.

Critical to reducing the tax burden is to scale back the outlandish pension promises that politicians have made to government employees, often without clear disclosure to taxpayers. One infamous giveaway in 2001 even helped trigger fraud charges from the U.S. Securities and Exchange Commission. The pols had cooked the books and pretended that the state’s pension funds had enough money to cover a 9% increase in benefits. After hoodwinking taxpayers, the state government then misled investors by repeating the fraud in various bond-offering documents.

Now the size of the pension disaster is coming into view. Officially, the state’s unfunded pension liabilities amount to $54 billion, but the state optimistically assumes average investment returns of 8.5% per year. Independent estimates put the shortfall closer to $175 billion. On top of that are the separate unfunded liabilities for retiree health benefits, which the state hopefully estimates at another $67 billion.

“Pension and benefit reform is going to happen,” Mr. Christie said this week in a visit to the Journal’s editorial board. It has to happen, not just to repair the state’s general fiscal health, but also to enable Mr. Christie’s signature reform of 2010. The legislature passed his cap limiting local property tax collections to increases of no more than 2%. But localities can break the cap in order to pay pensions and benefits, so if the governor can’t fix the pension system, he can’t deliver the property tax relief voters are expecting.

In fact, he only agreed with the Democrats who run the legislature to allow exceptions to the cap on the condition that they come back this year and reform pensions and benefits. “They made a deal with me and I’m going to hold them to that deal,” says Mr. Christie.

He may succeed. He’s already succeeded in re-framing the debate, as even Democrats are talking the language of reform. As State Senate President Stephen Sweeney tells me, “We have a system that can’t be sustained any more.” He adds that he will draft a bill this month and plans for a vote in February. But will Mr. Sweeney and his colleagues back the substance of reform or just the rhetoric?

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The Christie plan includes rescinding the fraudulent 2001 benefit increase, raising the retirement age to 65 from 62, eliminating automatic cost-of-living increases, and making teachers and other municipal workers pay 8.5% of their salary toward pension benefits, just as cops and firefighters do now. As for health benefits, retirees would have higher co-pays and current workers would pay higher premiums, bringing them closer to the deal that federal workers enjoy.

“I’m not afraid of raising the retirement age,” says Mr. Sweeney, and he makes little effort to defend the generous gifts his predecessors gave to state employees. As an official with the ironworkers union when he’s not serving in the legislature, he notes that his private pension benefits were always earned and properly accounted for. He contrasts this experience with the former legislators, often Republicans, who handed goodies to the government union bosses, who in turn proclaimed to their members, “Look what I got for you and I got it for nothing!”

But Mr. Sweeney still insists that most reforms shouldn’t affect anyone who’s been working for the government for at least five years, which would gut the Christie plan and do little to reduce the size of the unfunded-liability monster. In truth, the Christie reforms are hardly revolutionary. Few workers in the private economy have pensions today, since companies discovered they are unsustainable.

The ultimate reform is to move to a 401(k)-style plan that provides transparency to taxpayers while allowing government employees—not politicians or union bosses—to control their retirement savings with individual accounts. How to enact such reform in New Jersey? “You get a Republican legislature, that’s how you do it,” says Mr. Christie. “I’m dealing in a context where the Democratic Party in my state has been ruled by the public-sector unions.”

Mr. Christie adds, “I think I’ve shown I’m willing to be as aggressive as anybody on this stuff, but I’m also not going to be stupid, and I’m not going to propose something that I know I have no chance of getting. . . . Because then I’m just doing it for the theater of it.”

Will taxpayers punish Democrats in this fall’s state legislative elections if they don’t embrace Mr. Christie’s reforms? His approval ratings suggest that they will. The governor reports that 53% of voters support him with 36% expressing disapproval.

The wild card is this year’s redistricting, which could give Republicans a slightly better map on which to compete for state legislative seats. It could hardly be worse than the current electoral boundaries. “We got 53% of the vote the last time the whole legislature was up for election and we lost seats,” says Mr. Christie. “I think that’s the definition of an unfair map.”

There are no guarantees. The most important man in a complicated redistricting process is Stuart Rabner, chief justice of the state supreme court. Though Mr. Rabner was appointed by Mr. Christie’s predecessor, Democratic Gov. Jon Corzine, Mr. Christie is hopeful that he’ll cut a square deal.

In the meantime, the governor has to deal with the current legislature and the incumbent Democrats who run the place. As with pension reform, he has at least succeeded in changing the debate on taxes. Whereas they were pushing him last year to sign the “millionaires’ tax” increase, the governor reports that Democrats have recently introduced no fewer than 25 tax cuts.

Supply-siders shouldn’t get too excited. Many of the proposals involve narrow special-interest favors, but they do suggest a new political dialogue. Mr. Christie for his part plans to include his own tax cuts in the budget he introduces next month. To be competitive with other states, Mr. Christie says New Jersey needs to cut income taxes “across the board” and also cut business taxes “in a very broad-based way.” He cautions that the state government is constitutionally required to balance its budget, so the extent of this year’s tax cuts will depend on spending cuts and revenues. On the latter, he happily reports that the current fiscal year’s receipts are now running 5% ahead of projections.

The governor singles out a proposed tax break for movie production recently proposed by Democrats as unlikely to make it into his budget plan. But he praises a separate proposal to shift to a “single sales factor” taxation system for businesses that is now the law in most states. A company’s state income tax would be based on the share of its U.S. sales that occur in New Jersey, as opposed to the current system that also takes into account its property and employees within the state.

Does New Jersey have elected officials willing to take into account the weight of the tax burden on state residents? The next two months may answer that question.

Mr. Freeman is assistant editor of the Journal’s editorial page.