An October decision from the Murphy administration to unfreeze tens of millions of dollars in aid to some of the state’s poorest municipalities will help take the pressure off finances, but is still worrisome for two recipients – Paterson and Union City – according to a report by Moody’s.
On Oct. 17, the state treasury released half of the $235 million that Gov. Phil Murphy froze when signing the current Fiscal Year 2020 budget on July 1, then arguing that the state might not have the revenue lawmakers envisioned when they sent him a budget.
The majority of the frozen spending was $114 million in financial aid to local governments, known as “transitional aid.” Nearly $54 million of that was released last month.
At that time, treasury officials said that they were satisfied enough with tax collections that they could justify releasing that amount of spending.
“Since these municipalities frequently have razor-thin margins, failure to restore the entire amount will likely still lead to the need for draconian cost-cutting or large tax increases,” reads the Thursday report from the Wall Street credit rating agency.
Moody’s, in July, indicated that the aid freeze could mean credit downgrades down the road, but appears to have backed off from that projection.
The nine largest awards for the current budget are: $33 million to Paterson, $22.3 million to Camden, $20 million to Union City, $5.7 million to Trenton, $4.1 million to Nutley, $3.9 million to Atlantic City, $1.4 million to Salem, $1.2 million to Seaside Heights, and $500,000 to Penns Grove.
Most of these cities run on a calendar year of Jan. 1 to Dec. 31, rather than the state budget which runs from July 1 to June 30.
Since the transitional aid is typically not awarded until later in the state’s fiscal year, local governments have some wiggle room and “the risk of significant budgetary distress, though real, is not imminent.”
Paterson’s transitional aid makes up 12 percent of its revenue or “319 percent of fund balance,” Moody’s notes, so dipping into their reserves would not make up for the last state dollars. “Few of the municipalities in question have substantial reserves, so covering a transitional aid gap in this way could leave them with little to no buffer,” reads the report.
Union City, meanwhile, has a negative fund balance of $7.2 million stemming from a “sharp one-time rise in health care costs,” the report adds — meaning the city owes that much more money than it is taking in. And its plans to get finances back on track have been “materially complicated by the aid freeze.”
These towns have few options to bring in their own money, hence the need for state aid. They are bound by a 2 percent increase on the tax levy year over year.
Spending cuts would reap few benefits since many of the local government expenses are legacy costs such as “deferred infrastructure expense,” and contractually bound obligations such as pension and health care costs, and certain public worker salaries.
And the state has often been reluctant to allow municipalities to pay their bills via deficit financing, where it would borrow to pay expenses.
“We objected to the Governor’s decision to put the Transitional Aid program, designed to support those most in need, into jeopardy. We are, now, gratified that a first step has been taken to begin to fund the program at the level specified in the State’s Budget,” the New Jersey League of Municipalities said in a statement on Oct. 18.