While some of the worst-case scenarios laid out by state officials for New Jersey’s finances haven’t emerged, many analysts and budget experts worry the state has only managed to stave off the inevitable. The anxiety hinges on items frequently derided as one-shot revenues – money the state will not have in its coffers in the next year. That creates a structural imbalance with the state incurring more expenses than it can pay for.

The $32.7 billion spending plan Gov. Phil Murphy signed on Sept. 29, after the 2020 budget was extended for three months, includes $4.5 billion of borrowing. Part of the money would come out of a Federal Reserve program meant to soften the financial blow for states that took a financial hit because of the pandemic, and will be paid back over three years. Another portion would go through the public market and will be paid back over a period of 12 years. Bonding is expected to move ahead sometime by the end of 2020, through a potential combination of the two. Interest rates for either option would fall between 2% and 6%.

“Will there be a significant structural budget gap next year, when presumably they can’t deficit bond?” asked David Hitchcock, an analyst for the Wall Street debt watcher S&P Global Ratings. S&P is one of the three primary rating agencies that gauge the risk public entities pose to potential lenders. The other two are Moody’s and Fitch.

Upward of 15% of the state budget relies on one-shot revenues, largely due to the “deficit bonds and shortfalls in full actuarial based pension contributions,” according to a Sept. 9 S&P report.

The 15% figure is a portion of a theoretical 12-month budget—July 1, 2020 to June 30, 2021, even though the current fiscal year was pushed back to Oct. 1. In all, the 12-month budget clocks in at a record-high $40 billion in spending.

“Appropriations in fiscal 2021 would increase over the prior year, which we see as evidence of the state’s political and practical difficulty in cutting expenditures, in large part due to rising pension, debt service, and Medicaid costs,” S&P stated.

Pension contributions this year are a record $4.7 billion, less than the $4.9 billion Murphy wanted, which would have made up 80% of what the state actuarially should to be paying into its unfunded pension liability. That’s been the source of 11 credit downgrades over the past decade from the three rating agencies.

Fitch downgraded New Jersey in April, citing concerns that the state may be ill-equipped to handle a COVID-fueled recession.

With that backdrop, Murphy and legislative leadership, all Democrats, agreed to inject $2.5 billion into the state’s rainy day fund, in the event of a second wave, a lack of state aid in a future iteration of a federal COVID-relief package or a drawn out economic recovery.

“Rainy day funds are sort of a good news story heading into this downturn,” said Josh Goodman, who examines state fiscal health for the nonprofit Pew Charitable Trusts. “It really makes a big difference. States like New Jersey are really in a more difficult position because they didn’t have savings.”

New Jersey only just began to build back its rainy day fund under Murphy at the start of 2019, the first time since the Great Recession. A 2019 analysis by Pew found that New Jersey had enough squirreled away to keep the lights on for 3.9 days, compared to the national average of 7.7 days. Pew warned in March that New Jersey was one of nine states with a fiscal imbalance.

“A look beyond states’ budgets at a fuller accounting of their financial activities shows that New Jersey has accumulated the largest gap between its revenue and annual bills,” Pew stated. “Between fiscal 2004 and 2018, it took in enough to cover just 91.1% of its expenses—the smallest percentage of any state.”

That shortfall, according to Doug Offerman, a financial analyst at Fitch, “certainly takes the state in the wrong direction.” Though he maintained that “in some ways that’s predictable at a time of recession.”

“The state had a structural imbalance, it’s still shortchanging the pension contribution at a minimum,” he said in an interview. “The economy was finally churning along before coronavirus and the state was beginning to tackle those big challenges.”

‘Fiscal cliff’

The state has the authorization through June 30, 2021 to issue up to $9.9 billion in debt, over two separate periods. Participation in the Federal Reserve program closes on Dec. 31, but whether the terms are extended is still up in the air, according to Greg Mennis, a public retirement system analyst at Pew.

“It’s designed to smooth revenue, so instead of having this huge near-term drop, and then hopefully a relatively quick recovery with big increases in tax revenue, you can look over a long-term and smooth out the use of revenue,” he told NJBIZ.

“If you don’t do it that way, you’re going to be shutting down programs, only to have to start them up again,” he added. “If things are better than expected, it suggests using less of that money for the state budget and holding it in rainy day reserves.”

The speed of that recovery is key, warned Sheila Reynertson, senior policy analyst at the progressive think tank New Jersey Policy Perspective, who worried that “this is going to be a long, slow drag on our economy, despite being “able to skirt [fiscal year] 2022.”

“So we’re looking at a fiscal cliff in 2023, and that’s where we’re going to have to figure out what’s the priority. In 2022, is it to maintain everything as we have in 2021, or do we switch gears and try to prepare ourselves for 2023?” she said.

Hitchcock warned that while the economic conditions were not as bad as what was projected in the spring, economic growth is still “very sluggish,” meaning “a slower snapback.”

Regina Egea, the chief of staff for Republican Gov. Chris Christie between 2013 and 2016, and president of the conservative think tank Garden State Initiative, agreed to a certain extent.

“They created an incredible hole for next year by not controlling any spending,” Egea said. “How do you think you can make yourself whole next year when you made all these one-time cash infusions? The uncertainty for revenue normally drives an organization to be conservative on the spending-side.”

Republicans criticized the budget as having hundreds of millions of dollars in “pork-spending” and pet projects for Democratic lawmakers. Proponents of the budget countered that most of the items have been there for years, and consisted of social services vital for a populace hit hard by the pandemic and ensuing recession.

Senate President Stephen Sweeney, D-3rd District, maintained in the days before Murphy signed the budget on Sept. 29 that he would push through an array of cost-cutting measures, such as steep cuts to the pension system for current and future school and state employees, and shared services among local governments and school districts.

“We got another budget coming quick and we got a lot of tough decisions to make,” Sweeney said shortly before Murphy signed the budget.

But Offerman cautioned that savings can “take a long time for any state’s pension system where you do change benefits.”

“You’re leaving your existing workers grandfathered in under the current package. Many of them still have decades ahead in their career,” Offerman said.

Murphy on Sept. 30, said “it’s just far too early to tell” whether the state would borrow money to plug budget holes in fiscal year 2022, should tax revenue collections lag, or should the federal government not come through on state aid. “We’re still in tough times,” the governor said. “We still need federal cash. And boy, would I be the happiest guy in the state if our economic recovery exceeds our reasonable projections over the next nine months.”

Offerman warned that New Jersey is “only a few short months away from the governor having to submit an executive budget for 2022.”

“That’s going to be a year where the pension contribution is … going higher, and the cost of paying off the borrowing this year is going to be added to the budget,” he said.

State officials and lawmakers have insisted that should federal aid come through, they could use it to pay down the bonds.

But even if billions of dollars in federal aid becomes available, it could come with a variety of strings attached, like the $2.3 billion of relief that could only be used for expenses specifically related to the state’s COVID-19 response.

Reynertson said she was worried that could hold true for a future tranche of federal aid. “I don’t think they’re going to use any federal money to do that,” she said.