What NJ can – and can’t do – with $6.4B in federal COVID relief

New Jersey is slated to get $6.4 billion under President Joe Biden’s $1.9 trillion landmark American Rescue Plan approved in March. Combined with municipal and county governments, the total amount of COVID-19 relief balloons to $10.2 billion, plus billions more for Amtrak, New Jersey Transit, airports and universities.

Gov. Phil Murphy said on May 10 that state officials were reviewing the U.S. Treasury’s rules put out that day for the restrictions on those funds. He said it was too early to tell how it would be spent.

“We now need to get a very specific sense of the parameters,” the governor said.

Generally speaking, the funds can go toward making up for tax revenue lost during the pandemic, and can provide money for health care and COVID-19 vaccine efforts, unemployment assistance, to pay for essential workers and the rehiring of public workers, and small business aid.

It can also go toward long-standing infrastructure issues such as construction and maintenance or upgrades for water, sewer and internet. And to “address systemic public health and economic challenges that have contributed to the inequal [sic] impact of the pandemic,” reads a Treasury fact sheet.

The $6.4 billion is not scored into any of the state’s spending plans.

“With this funding, communities hit hard by COVID-19 will be able to return to a semblance of normalcy; they’ll be able to rehire teachers, firefighters and other essential workers – and to help small businesses reopen safely,” reads a May 10 statement from Treasury Secretary Janet Yellin.

State tax revenue for New Jersey performed better than expected by billions of dollars, thanks in no small part to federal aid from the Trump era, billions of dollars in new debt, and pent up consumer demand driving soaring gains.

Murphy warned in 2020 that state tax revenue would collapse because of the COVID-19 pandemic and related business closures, in term pushing through $4 billion of debt. But state financial analysts now argue that the new debt was likely not necessary, drawing the ire of state Republicans who unsuccessfully sued last year to block the plan.

The American Rescue Plan funds cannot go toward pension funds, debt payments, legal settlements, or deposits into rainy day funds, according to the Treasury. And, they can’t go toward tax breaks, which has drawn legal challenges by Republican lawmakers.

Economic recovery

Federal limits on using the funds for tax breaks could complicate New Jersey’s own post-COVID economic recovery efforts.

The Treasury said that states cannot use the money to “directly or indirectly offset a reduction in net tax revenue” through the end of the fiscal year during which those funds have been spent. Republicans across the nation are heading several efforts in court to have that provision thrown out.

States have to demonstrate how they paid for any tax cuts from sources outside of the federal aid, “enacting policies to raise other sources of revenue, by cutting spending, or through higher revenue due to economic growth.”

Federal stimulus used toward state tax breaks would need to be repaid to the Treasury.

For New Jersey, the state’s $14.5 billion Economic Recovery Act was approved in January, months before Biden signed his relief plan. But it’s not clear whether tax breaks and related policies enacted after the March approval could put the state in violation of the federal rules. And a bigger question looms on how many degrees of separation are acceptable between federal relief and the money going toward state tax breaks.

Stabilizing finances

New Jersey State Treasurer Elizabeth Maher Muoio and several top lawmakers proposed using some of the funds to pay down state debt, like more expensive, much older credit card bills that the state has carried for years.

“It’s incumbent upon us to work with this administration … to pay down debt and … make sure that we make these investments strategically… that we plan for the next two or three fiscal years,” Senate Budget Chair Paul Sarlo, D-36th District, said in April.

GOP state lawmakers meanwhile proposed using $1 billion of the stimulus funds to pay off some of the state’s existing $49 billion of debt. And business groups contend the move would be a key first step to getting the state on stable financial footing. But, that route would not be possible under the current restrictions, nor could the state put money into the rainy day fund.

Under Murphy’s $44.8 billion spending plan, which kicks off on July 1, the state will begin with a $6.4 billion surplus, of which half will be depleted through June 30, 2022, when the upcoming fiscal year ends.

Money also could not go toward the state’s beleaguered, vastly underfunded public worker pension system, which has been the source of a combined 11 credit downgrades by the three main Wall Street rating agencies over the past decade.

Murphy’s budget calls for fully funding the state’s pension for the first time in decades. He’s proposing $6.4 billion in proposed pension payments into the system, the full amount actuarially recommended for the state.