Flush with cash

New Jersey in a peculiar situation: too much money and not a solid idea of where to spend it. As of the latest estimates, the state is looking at a $6.3 billion closing balance come June 30. That’s thanks to billions of dollars in federal aid, nearly $4 billion of bond issue proceeds and higher tax revenue fueled by pent-up consumer demand.

Now the state’s official accountants – the Treasury Department and the non-partisan Office of Legislative Services – are forecasting that the surplus could be hundreds of millions of dollars higher than what was estimated during a revenue estimate this spring. “Treasury is confident that the overall revenue forecasts will increase by hundreds of millions of dollars due to the federally induced surge in consumer spending,” State Treasurer Elizabeth Maher Muoio told lawmakers on May 17.

“Our sales tax forecast, for example, is likely to rise by at least several hundred million in FY 2021 alone. So, all in all, the revenue outlook for the remainder of the current fiscal year and going into [fiscal year 2022] is positive and improving.” The state won’t have the final figures until June 9, thanks to a delay in the state’s income tax filing deadline, from April 15 to May 17.

On top of the surplus, the state is slated to get roughly $6.4 billion under the American Rescue Plan, which President Joe Biden signed in March. Despite several restrictions, states have broad leeway to use the funds for COVID-19 expenses and to make up for tax revenue lost during the pandemic.

“What we’re dealing with is truly an anomaly,” said Assemblyman Jon Burzichelli, D-3rd District, who heads the Assembly Appropriations Committee. “We have to make decisions that will pay dividends for decades. But we can’t just live happy and fat.”

GOP criticism

Many Republicans have warned of exactly that – a budget rife with so-called “pork spending” or that did not reflect the state’s dire finances. During budget talks last September, they accused Democratic officials of packing unnecessary spending into the state’s $40.7 billion budget, which runs through June 30.

“You’d have thought the sky was falling when the governor was talking about” the state’s finances, Sen. Steven Oroho, R-24th District, a ranking GOP member of the Senate Budget and Appropriations Committee, said in September. “We’re not nearly anywhere near what he said.”

What we’re dealing with is truly an anomaly. We have to make decisions that will pay dividends for decades. But we can’t just live happy and fat.
– Assemblyman Jon Burzichelli, D-3rd District

Senate Budget Chair Paul Sarlo, D-36th District, admitted he was “very concerned” about “spending on new programs that we’re not going to be able to afford in the future.”

“We need to be very strategic … it’s got to be long-term investments” like paying down more expensive debt and alleviating structural deficits – or bills that don’t necessarily have the funds to support them – Sarlo said. With $44 billion in debt, New Jersey is one of the most indebted states in the nation.

When the pandemic hit last spring, Gov. Phil Murphy warned of falling tax revenue, as a result of mass business closures. As a result, the state got billions of dollars from the Trump administration and borrowed roughly $4 billion to cover mounting pandemic response costs and revenue shortfalls. Murphy warned last spring that the state could see a budget hole of at least $10 billion in the coming year. But analysts suggested that New Jersey might have gotten by without any of the new debt, drawing the ire of Republicans who sued unsuccessfully in court to block the borrowing proposal.

Murphy and Muoio contend that they did not have the luxury to wait. “I think we sold the bonds on November 18, if I’m not mistaken,” the governor said in April. “What was the world like then … Donald Trump claimed that he had won the election and was going to litigate that literally and figuratively right up until inauguration day. We had two run-offs in Georgia that were not taking place until Jan. 5, and you had an avowed leader in the Republican caucus, Mitch McConnell, saying there was no way there would be any state and local aid.”

According to Baye Larsen, an analyst with Moody’s Investors Service, one of the three main Wall Street credit rating agencies, “the state’s financial performance this year has been much better than expected, we’ve seen even better revenue performance than anyone had anticipated.”

“The state did a good job of holding back on spending at the onset of the pandemic and during the first half of the fiscal year, so the state ended up with a very strong surplus that’s much larger than anybody anticipated.”

Moody’s and the other big agencies – S&P Global and Fitch – all agreed that the state needs some degree of prudent financial planning, and should not amass more expenses that won’t have a source of funding once the windfall dries up.

States run the “risk of a fiscal cliff” given the limited time frame of the ARP funds, said Doug Offerman, an analyst with Fitch. “If states become used to. .. those funds being there, a few years from now when the funds are gone and they have to support services with their own revenues, it could create budget challenges,” he added. “That’s not just a New Jersey problem, that’s a risk for many states that are seeing these funds.”

Ben Dworkin, who heads the Rowan Institute for Public Policy & Citizenship, said that the upcoming re-election campaigns of Murphy and all 120 members of the state Senate and Assembly could affect how state leaders want to spend the money.

“The Democrats in the Legislature and the governor don’t want a fight, which they’ve done in previous” budget negotiations, he said in an interview. “None of these players want that heading into an election year, so the efforts to settle your disagreements beforehand and just move forward are significant.”

Burzichelli admitted that state spending, in general, can certainly be political in nature. “We have to be very careful,” he said. “Every year, if it’s not an election year, you’re building to an election year. Every budget has consequences.”

Sarlo said the federal funds would not likely be used right away, especially since they can’t be spent until late in the summer. Instead, they’ll be spent over several years. Those funds are not scored into Murphy’s proposed $44.8 billion spending plan, which will cover state expenses between July 1 and June 30, 2022.

In the meantime, the state has many ways it can spend some of the surplus. In February, Murphy proposed putting some of the funds back into the rainy-day fund, while using others to pay for the state’s annual pension bill and for K-12 state support.

The U.S. Treasury put out guidance that bars states from using relief money to pay down existing debt, to go toward pension payments, the replenishment of rainy-day funds or to finance economic incentives for businesses. “There were dozens of questions that … states could weigh in on” regarding the U.S. Treasury’s restrictions for how states can use the ARP funds, Muoio told lawmakers. “That’s something we would like to pursue information on from the Treasury – the extent to which some of these funds can be used to potentially retire some of this higher-rate debt.”

Josh Goodman, a state financial analyst with Pew Charitable Trusts, said there’s uncertainty over how many degrees of separation are acceptable between the federal funds and the money that ultimately goes toward those expenses. “To the extent states have a budget surplus, they can use … their own money for those purposes, and the federal funds can give them flexibility to do that because they’re using that money in other areas. That kind of frees up their budget to do things like put money in the rainy-day fund, pay down debt, wind down some of the one-time budget maneuvers they did over the last years.”

Funds cannot go toward paying for tax breaks and other economic subsidies meant to lure businesses into a particular state – a complication for New Jersey which is deploying a $14.5 billion nearly decade-long economic incentive package.

Investments in the future

Many advocacy and lobbying groups contend the ARP funds and any surplus money should go toward boosting the state’s post-COVID economy recovery, and toward fixing some of the state’s long-standing financial problems.

The federal COVID funds may be used for long-standing infrastructure issues such as construction and maintenance or upgrades for water, sewer and internet. The state’s ancient technology infrastructure needs a comprehensive upgrade and overhaul.
– Ralph Albert Thomas, New Jersey Society of CPAs.

Muoio warned against slash and burn tactics to balance the state budget. “We saw how long it took New Jersey to emerge from the Great Recession when state government chose to cut its way out of an economic crisis at a time when the demand for critical services skyrocketed,” she said in April. “As a result, we have chosen to invest our way out of the current crisis.”

But Regina Egea, a chief of staff for former Republican Gov. Chris Christie and head of the conservative think tank Garden State Initiative, pushed back, saying that more spending is unnecessary. “Rather, this unexpected enormous amount of cash ought to serve just two purposes: eliminate or restructure as much debt as is possible over the next 16 months, to the end of the next fiscal year, and stimulate real consumer spending and real business activity.

Tom Bracken, president of the New Jersey Chamber of Commerce, said businesses will need considerable access to capital in order to reopen coming out of the pandemic.

Businesses have so far gotten billions of dollars in forgivable loans under the federal Paycheck Protection Program, and hundreds of millions of dollars in state grants from the New Jersey Economic Development Authority. “We need our economy to be humming along to generate revenues to pay for the increased budgets that have been passed,” Bracken said.

And sorely needed infrastructure projects do not necessarily have an ongoing cost commitment, Bracken said, making them prime spending items to stimulate the New Jersey economy.

“The federal COVID funds may be used for long-standing infrastructure issues such as construction and maintenance or upgrades for water, sewer and internet,” said Ralph Albert Thomas, who heads the New Jersey Society of CPAs. “The state’s ancient technology infrastructure needs a comprehensive upgrade and overhaul.”

“The current infrastructure cannot support the public’s modern-day needs, a harsh reality we saw play out for thousands of unemployed workers and anyone visiting the Motor Vehicle Commission,” he said.

Sheila Reynertson, a policy analyst with the progressive think tank New Jersey Policy Perspective, said the budget afforded an opportunity to address some of the longstanding racial and economic inequities that were laid bare during the pandemic.

“Lawmakers will get the biggest bang for their buck if they target aid to those most in need and begin dismantling structural inequities exasperated by the pandemic,” she said in an email. “Long-term investments in workers, education, and infrastructure have the potential to undo pandemic-induced hardships — especially for women and Black, brown, immigrant, and low-income families — and pay dividends well into the future.”