This is a rush transcript from "The Journal Editorial Report," August 14, 2010. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: This week on the "Journal Editorial Report," a financial fix for the states. We'll talk about the congressional gift that keeps on giving to government workers. And at what cost to the poor?

And we'll talk with New Jersey Governor Chris Christie. He's closing his state's deficit without raising taxes. And they said it couldn't be done.

Plus, this city manager is set to take a pension worth tens of millions of dollars. And Californian's wonder why they have such a huge deficit.

Welcome to the "Journal Editorial Report." I'm Paul Gigot.

The House passed, and President Obama signed, a bill this week that would extend programs enacted in last year's economic stimulus package to help cash-strapped states avoid layoffs. It would give states $10 billion for education programs and $16 billion to help cover the Medicaid budgets in the first six months of next year.

Democratic Congresswoman Rosa DeLauro of Connecticut, in voting for the bill, said, "This is a bitter pill to swallow. As you can imagine for me personally, it's like 'Sophie's Choice.'" You may remember that later made into a movie starring Meryl Streep, a story of a mother who is forced by the Nazis to choose between her two children. It has come to this — Congress comparing spending cuts to the Nazis.

And joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; Washington columnist, Kim Strassel; and editorial board member, Matt Kaminski.

Kim, the Democrats got what they and passed the pill they want today pass. Why are they upset?

KIM STRASSEL, WASHINGTON COLUMNIST: They're upset because it turns out even a ballooning federal government occasionally bumps up against its limits. And in this case, what is they wanted was to pass the $26 billion bailout, but with so many Republicans and even House Democrats, many blue dogs, concerned about the size of the deficit, there was a pushback, and said we're going to have to cut some other programs in order to pass this. One of the things they decided to cut was billions of dollars of aid for food stamp for the poor.

GIGOT: Food stamps, wow.

STRASSEL: Food stamps. What, in effect, Democrats did in passing this bailout is said, we are putting on our priority list, union workers, public employees, ahead of the poor who use food stamps.

GIGOT: Wow, Matt, what's a good liberal to do?


You're supposed to— their whole moral reason for being is said to help redistribute income to the poor, to help them out. And here is the — they lose out to the other liberal priority.

MATT KAMINSKI, EDITORIAL BOARD MEMBER: Well, it's a much bigger emergency session, there's a reason for this, and there's a reason why she called it an emergency, Nancy Pelosi, in bringing them back from the summer recess.


The emergency is the midterms.


Those are three months away and they need the union support. Most importantly, the sort of $10 billion, $26 billion, went to teachers, who are all unionized. And that money will — a lot will come back to Democrats this fall, in the form of campaign donations.

GIGOT: Really, just puts off the day of reckoning for the states though, Dan. The states are getting their third or fourth bailout here in the last couple of years, so they don't have to actually make the difficult decisions, their own priority setting of what to cut and what to keep.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Well, it may literally put off the day of reckoning, Paul, because days before the vote, AFSCME, the big public employees union, was holding a rally in Washington, and they were announcing their intention before the vote to go out into the states and campaign for Democrats and against Republicans, who are opposing this, and which states have they targeted? California, Illinois and New York, the three states that are going bankrupt.

GIGOT: Why did they target those states?

HENNINGER: Because they want to ensure that the Democrats get reelected to ensure they're spending.

GIGOT: To keep that going?

HENNINGER: They're at the edge of the cliff. It's like the roadrunner. They want to pretend they can go off the end of the cliff and keep going.


GIGOT: Kim, this choice between entitlement spending. On the one hand, Medicaid, Medicare, which is so crowding out all of this spending.

STRASSEL: Everything.

GIGOT: That's forcing very difficult choices and even on good Democrats, more and more, as we go into the future years, and the entitlement spending growth. The poor may be left behind.

STRASSEL: No, and this is the problem, you know, the excuses the Democrats have been using so far. I mean, some of them actually came out this week and said, well, we're just bringing the food stamp level back down to what it was prior to the stimulus bill. But of course, their whole rational for passing the stimulus bill, in part, back then was that we need to increase money for the poor during this hard time. So as Medicaid grows, as Social Security grows, as Medicare grows, they're not going to have room to do the other priorities and someone is going to have to make very tough choices.

GIGOT: Either that or push for a big tax increase, and that's, I think, the longer game here. They want a value-added tax, something that increases government revenue enormously to be able to pay for everything.

HENNINGER: Yes, it's the old saying, in case of emergency, break glass, and behind that glass is the VAT hatchet.


GIGOT: Which is the value-added tax.

HENNINGER: Value-added tax.

GIGOT: Thank you all.

When we come back, the governor versus the teachers. We'll talk with New Jersey Governor Chris Christie. How he went toe to toe with that state's teacher's union, and won.


GIGOT: Democrats say it can't be done. But New Jersey governor, Chris Christie, is managing to close on an $11 billion budget deficit in his state without raising taxes.

I spoke to Governor Christie earlier this summer and asked him how he did it.


GOVERNOR CHRIS CHRISTIE, R-N.J.: Well, we did it because we stuck by our principles. We said right in the beginning we are going to reduce spending and we've reduced nine percent from last year's budget. We said we would spread the pain evenly. Every department in state government got a cut, every one was reduced. We said we would not raise taxes on the people in the state of New Jersey and we vetoed the tax increase that the Democrats tried to put forward. So we stayed to our core principles. We stood firmly on them. We negotiated in areas where we had to negotiate, but very little. Ninety-nine-point-eight percent of the budget that I presented on March 16th was passed on June 28th.

GIGOT: What's your response to those people who say, you know what, part of that $10 billion deficit you closed, you kicked the can on a $3 billion pension contribution down the road. That's not a real long-term savings.

CHRISTIE: Well, what I would say to them is I've already worked towards pension reform, which we passed a good amount of pension reform in March, but until we get all of it, I'm not going to throw good money into bad into this system. And I certainly am not going to raise taxes in order to do it. We have to bend the benefit curve and get pensions to be more realistic and then I'm happy for make the state to make their contribution.

GIGOT: So you'll make that contributions, but only if they reform the pension system, which, I assume, means benefits.

CHRISTIE: It means benefits, absolutely. We have to change the way the system operates and we have to go to a tiered system. There's a whole bunch of different ways to reform this to make our deficit in the pension system, which right now is at about $50 billion. We need to do something. We're never going to have enough money to pay that $50 billion debt, so we have to bend the benefit curve and that's what we'll be working on this fall.

GIGOT: I want to show an ad that's been run by the teacher's unions in the state, against you and against your spending reductions. Let's see it.


AD NARRATOR: New Jersey's teachers, firefighters and police, they educate our children and keep us all safe, but Chris Christie's latest plan to limit local spending will make it harder for them to do their jobs. Christie's new proposal could cut funds for firefighters. It will make class sizes larger and cut programs for students. And it could force communities to layoff police, firefighters, and even more teachers.

Call Governor Christie. Tell him to stop hurting the people who our families rely on the most.


GIGOT: How do you like that black-and-white photo of you? That's one of the best they can find?

CHRISTIE: I've seen worse.


I've seen worse, but that's not as bad as it could be.

GIGOT: What's your reaction to that ad? They say you've got to cut firefighters, cut police, layoff teachers. What's it about?

CHRISTIE: Absolutely not true. Maybe they should get to the real world where people — you know, 55 percent of Americans during this recession have either lost their job or had their pay cut. If these folks would just take a pay freeze, we'd be able to avoid all the things they talk about there.

So, what I think we need to do is to have everybody share in the sacrifice, the private sector is sharing in the sacrifice. The public sector needs to share in the sacrifice also. And so, this is just a normal scare tactic that they play. But you know what, the people in New Jersey are getting smart to this, and they realize they're the ones being asked to pick up the tab.

GIGOT: How much do they spend on television, on these ads and related ads, to take your approval rating down?

CHRISTIE: Since March 16th, they've spent over $7 million.

GIGOT: Over $7 million. That's teacher's dues money, union dues money, mandatory dues money?

CHRISTIE: Absolutely. In fact, the CWA, the state workers union, asked for an additional point and a half assessment on the dues just to run ads against me.

GIGOT: Really?


GIGOT: The special — the Christie assessment.

CHRISTIE: The Christie assessment, yes.

GIGOT: The other bit it mentioned is you can't take on the teachers. The teachers union, they're sacrosanct. You get accused of laying off teachers and accused of hurting kids. And they've used that, as we've seen in the ads, they're trying to use that argument. Tell me a little about your relationship with the teacher's unions. And is the public changing in its perception of how education works?

CHRISTIE: People love their teachers. I loved my teachers in the public schools in New Jersey. Parents love the teachers, but they don't love the teacher's union and it's because the teacher's unions have been unwilling to be a part of the shared sacrifice.

GIGOT: You asked the teachers, as part of this budget, one of your first offers, take a pay freeze, which was what was going to be what, five, six percent?

CHRISTIE: Yes, it would have saved about $750 million.

GIGOT: And they refused?

CHRISTIE: Absolutely.

GIGOT: Did that help or hurt your argument that, you know what, we'll make some cuts for education. Did they seem to be simply not cooperating?

CHRISTIE: I think that's what people saw. People saw that they had an opportunity to avoid layoffs, to avoid program cuts, and if they would just freeze their pay for a year. Contrast that with the fact, as I said before, 55 percent of the people in America have either lost their job or had their pay cut during this recession, so people didn't have a lot of sympathy for the fact that they were not going to share in the sacrifice. And in New Jersey, for the first, time, we averaged having our school budgets approved by the voters. The average over the last 10 years, 74 percent approval. This past year, 59 percent were disapproved.

GIGOT: Wow, fascinating. The other issue I want to ask you about is the millionaire's tax. The Democrats in the legislature said rather than go through the spending cuts, what we're going to do is raise taxes on millionaires. It's a time-honored tactic. It's been done in New Jersey. You had a similar tax before that. It was passed by the previous governor and phased out. They wanted to reinstate it. You vetoed it. Can't the rich afford to pay those taxes? Why did you veto that?

CHRISTIE: That's really not the question of whether someone can afford to pay a tax, it's what kind of atmosphere you want to set up in your state. We've raised taxes 115 times in eight years and still have an $11 billion deficit. So if raising taxes fixes the problems, we should be in the black with all the times we raised taxes. It doesn't. We drive business and people from the state. Boston College did a study that, between 2004 and 2008, $70 billion in wealth left the state.

GIGOT: Where are they going?

CHRISTIE: Florida, Pennsylvania, Connecticut.

GIGOT: Florida has no income tax.

CHRISTIE: No income tax at all. And all these states have a lower tax structure on property taxes, income tax, sales tax, than New Jersey does.

GIGOT: What's been the political blowback for you and Republicans from that veto of the millionaires' tax?


GIGOT: None? They have not — you haven't seen the drop in the polls? You haven't seen any backlash at all?


GIGOT: What's your reaction — the reaction you get from the Democrats and the legislature when you told them you'd veto it because it's bad for the state's economy, and you know it, people are leaving the state? Do they just say, so what? Or do they say, you know, you're right or do — we have to go through the motions for this because our constituents, our interest groups like this? What do they tell you about it? Why would they push something like that if they know you're going to veto it?

CHRISTIE: I think because they thought they could get a political advantage out of it. And I think also they really wanted to fund government to an even greater extent.

GIGOT: No cuts?

CHRISTIE: No, they wanted— and listen, there still had to be cuts, but this would have created hundreds of millions of dollars more of tax money. In the end, what it was doing was killing our economy. And I think — listen, in Trenton, they're so addicted to spending, they're not used to it. And we've got to try to get them off it.


GIGOT: When we come back, they're mad as hell and they're not going to pay for it anymore. For these small-town California residents, the news that their city officials stand to earn tens of millions of dollars in pensions is proving to be too much.


GIGOT: It was just what a state running a $19 billion deficit didn't need. The news coming out this week that employees of tiny Bell, California, are making a killing in salaries and pension benefits. Take former Bell city manager, Robert Rizzo, with an annual salary of $800,000 and he stands to earn tens of millions from his pension. Or how about former police chief, Randy Adams? He worked just one year in Bell, earning a salary of $450,000, which would give him a pension worth an estimated $15 to $17 million dollars. Bell, California, is a town of 40,000 people. Very nice work, if you can get it.

And what's even more troubling is the news that CalPers, California's agency that overseas public pensions, turned a blind eye to this bonanza. But it hasn't escaped the notice of attorney general, Jerry Brown, who promptly announced an investigation.


JERRY BROWN, CALIFORNIA ATTORNEY GENERAL: In my opinion, they should have screamed to high heaven when they saw a salary of this magnitude. Whether they had a legal obligation, that's something we're looking into. And if it isn't the law, it ought to be the law.


GIGOT: We're back with our panel.

So, Matt, I think what people want to know is how could this happen? And is this an exception or all too typical?

KAMINSKI: A study out this week that shows that public-sector employees earn almost double what the private-sector employee earns.

GIGOT: Across the country, just not California.

KAMINSKI: Across the country. And it's increased by 50 percent just in the last ten years. And here we have a perfect example of why this — we see this trend in the country nationwide, in California itself. He was the city manager of this tiny, small town and the city council, for some reason, thought they could not do without Mike Rizzo. But what's interesting about his case, that his salary spiked in the last two years that he was there. One year, he got a 49 percent raise. And in California, your pension is determined pretty much on where you finish. So by raising him up that high, now, CalPers, the California pension fund, is stuck with $600,000 bill for the rest of his life per year.

GIGOT: And this spiking, Dan, is really a very, very familiar gambit among public employees, because their salary in the last year often determines what they make for the rest of their lives.

HENNINGER: That's right. And you know, where does Jerry Brown get off saying if they had known this they should have screamed to high heaven?


GIGOT: What do you mean? He's the attorney general. How is he supposed to know this?

HENNINGER: Look, Paul, we've been through a period here where all these private corporations have been brought into the dock for not having oversight over the risks they've been taking and so forth. This has gone on for years and years and years. And the cost of these pensions going forward has been well-known. Has the legislature done anything about it? Has any district attorney general blown the whistle on it? No. Now that the wolf is at the door, they're saying, oh, my gosh, somebody should have looked into this.

GIGOT: Shock, shock, gambling going on in the casino.

All right, Kim, what's the role of CalPers here, which is the public's pension, runs these — this operation, should know what their payouts are, how much the they're paying are getting. Should they have been on the ball here?

STRASSEL: Well, this is where the story is headed now. Because we know for a fact that CalPers did a routine audit in 2006, and knew about excessive pay levels in the town of Bell going to some officials and didn't say anything. It's very possible that they also knew — I mean, CalPers needs this information and in order to calculate the pension payouts and expectations of what it will pay, so it's possible it knew about more recent numbers as well. And Mr. brown in going to look into this.

But overall, everyone is now wondering how much do they know and how much is going out? A foundation out in California that wrote on pension reform recently put out numbers showing that, these days, there are more than 9,000 retired California government workers, already, who earn more than $100,000 a year on pensions, some of them significantly more than that.

GIGOT: This reflects, if you ask me, Matt, the power the government workers unions have in negotiating with political officials, because CalPers is represented, run by people, politicians, either by union official representatives or politicians, support of unions. So they have an incentive to go along with the big pay days and then put off the day of reckoning where taxpayers, as they are now, in California, are going to have to take out of their own annual tax payments money to fill that bill.

KAMINSKI: Look, California might be a lot of France where —


GIGOT: Where you used to live, yes.

KAMINSKI: Absolutely. These public sector unions run that state. That's not an exaggeration. Five years ago, if you recall, Governor Schwarzenegger tried to push through this referendum for a spending cap to overhaul the states. The prison guard unions, the teachers union, SEIU, they went full in and the referendum shot down, and the last best opportunity to reform California is gone. And now we're stuck with the bill.


HENNINGER: Well, you know, the people out in front of the Bell city council meeting, most are Mexican-Americans, and now what they were shouting? (SPEAKING FOREIGN LANGUAGE). In Spanish, means "get out." I'm with them, (SPEAKING FOREIGN LANGUAGE).

GIGOT: Kim, does Jerry Brown — can he make this an opportunity? He's running for governor now, right.


GIGOT: So he's got to look like he's on this case. Is he proposing enough reform to be credible in the governor's race?

STRASSEL: Not at all. He's proposing traditional things. We're going to raise retirement rates. We're going to cut back benefits a little bit. What needs to be done here is the public sector unions have got to be shift to what most Americans have these days, defined contribution plans, otherwise known as 401Ks. It's the only way they'll get the bills under control.

GIGOT: Kim, I couldn't agree more.

We have to take one more break. When we come back, our "Hits and Misses" of the week.


GIGOT: Time now for "Hits and Misses" of the week.

Kim, first to you.

STRASSEL: This is a big miss for Senate Majority Leader Harry Reid, whose latest foot-in-the-mouth was that he could not believe that anyone of Hispanic heritage could ever be a Republican. This is enormously offensive to people like Marco Rubio, running for the Senate in Florida, who, as a son of Cuban immigrants knows — appreciates, more than most, the Republicans views on free markets for free people. But it also strikes me as just the traditional Democratic attitude, as sort of condescending, lumping minority groups into one big case, and assuming no matter what Democrats say or policies they push, those voters will be there for them.

GIGOT: All right.


KAMINSKI: This is a hit to Bob Gates who, this week, became a rare voice of fiscal sanity in the federal government. The Pentagon chief announced plans to cut $100 billion from the defense budget. He's going to close the command in Norfolk and cut back on the number of contractors he plans on using, as well as streamline his own bureaucracy. He said there's too much of a cultural endless money. These are worries that Democrats on the hill might wish to be inspired by.

GIGOT: Here, here.

All right, Dan?

HENNINGER: Paul, Charlie Rangel took to the floor of the House of Representatives this week to defend himself against those famous ethics charges, but he did a lot more than that. Have a look.


REP. CHARLIE RANGEL, D-N.Y.: But you're not going to tell me to resign to make you feel comfortable. So to all of those —


HENNINGER: Paul, this speech was a classic, one for the record books.


Vintage political oratory that only a lifetime politician could deliver. The best part of it though was he said he's not going to settle. I'm not going away. So we're going to see this all through November. It's better than reality television. Congress of the United States —

GIGOT: All right, thanks, Dan.

That's it for this week's edition of the "Journal Editorial Report." Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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