Top lawmakers and state officials are viewing this year’s budget as a rare opportunity to get many of the state’s messy finances in order. That’s thanks in part to an infusion of cash to the state’s coffers – billions of dollars more than previously projected, according to estimates by the legislative and executive branch’s own financial analysts.
“Since day one, there’s always this discussion, it’s not just this year’s budget,” Gov. Phil Murphy said at an April 7 briefing. “It’s what’s it going to look like the year after, and I think that’s probably a rightful narrative based on the way things used to be done in this state which is plug in a lot of holes with Band-Aids and barely make it to June 30 at midnight and then have to wake up the next day on July 1st and figure out okay, what other rabbits can we pull out of our hat.”
On April 6, the non-partisan Office of Legislative Services said the state will close its books at the end of next year with $550 million more than predicted by state treasury officials in February, which itself is $3 billion more than initially projected last fall. Those figures defied expectations by the Murphy administration, lawmakers and economists, that the COVID-19 pandemic and the resulting business shutdowns would shatter the economy and cut tax revenue by tens of billions of dollars.
“Remarkable, quite frankly,” Senate Budget Chair Paul Sarlo, D-36th District, said at the April 6 hearing.
The state’s financial performance was buoyed by more than $4.3 billion of new debt, soaring consumer spending driven by pent-up demand, and billions of dollars in federal aid, which helped keep money flowing through the state. According to OLS officials, the state received a combined $7.9 billion under the Trump-era COVID-19 relief measures. New Jersey is expected to get $6.4 billion from the Biden administration’s American Rescue Plan, with billions more for New Jersey Transit, airports, public universities, and municipal and county governments.
“This is in my opinion, a two- to three-year budget cycle,” Sarlo said on April 6. “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.”
But the money could dry up in the very near future, even as soon as the 2023 fiscal year, which starts on July 1, 2022. Most of the federal aid and bond money would be depleted by then, financial analysts warn, and combined with increased spending year over year the state could face a budget hole. “Clearly, we have a fiscal cliff… that we are headed for in fiscal 2023, if nothing else changes,” Thomas Koenig, the legislative budget and finance officer for OLS, told lawmakers on April 6.
Sarlo agreed, saying that he was worried about the uncertainty over state revenues in the next three years, and the prospect that federal relief will end, hence the need for much longer-term financial planning.
Murphy’s budget proposal calls for a record $44.8 billion in expenditures for the 2022 fiscal year, which starts July 1. It includes no tax increases and no spending cuts. “We don’t have a lot of appetite, trust me, to tax a lot more stuff,” Murphy said. And he argued against cuts, insisting that “the right kind of government is exactly what we need in a lot of situations.”
Murphy added: “[T]here’s no reason why we can’t grow at a significant clip in the years ahead, and that’s the best thing we can do to give us flexibility on continuing to provide services, provide property tax relief.
Eyes on the future
Credit watchers have taken notice. S&P Global Ratings said in a September report that pension and debt-service costs will continue to eat into the state’s finances, driving up expenses year over year.
“The state had a structural imbalance, it’s still shortchanging the pension contribution at a minimum,” Doug Offerman, a financial analyst at Fitch, said in a September interview. “The economy was finally churning along before coronavirus and the state was beginning to tackle those big challenges.”
On April 7, the day after the first set of budget hearings, Murphy suggested that although the state might not be able to pay down the COVID-19 bonds, there’s still billions more in high-interest debt that the state can repay much sooner with the help of the federal relief, assuming the federal government approves such a plan.
New Jersey is regarded as one of the most indebted states in the nation, with an estimated $49 billion on its credit card bill even before the new bonds. That, along with a woefully unfunded pension system, were the source of a myriad of credit downgrades over the past decade.
During the years of Murphy’s predecessor – Republican Gov. Chris Christie – the state absorbed a combined 11 downgrades across the three major rating agencies: Fitch, Moody’s and S&P. New Jersey saw two credit downgrades under Murphy, both in 2020, due to the gloomy financial outlook.
“The downgrade reflects our view that New Jersey will continue to have a significant structural deficit that will be difficult to close in the coming years because of decreased revenues as a result of the COVID-19 pandemic, combined with high and increasing debt, pension, and other post-employment benefit liabilities,” David Hitchcock, a credit analyst with S&P, said in a November report announcing one downgrade.
Fitch downgraded New Jersey in April, saying that the state’s debt and unfunded pension obligations made the state ill-prepared to handle a potential COVID-19 recession.
Some of the state’s largest business groups are suggesting that the administration use some of the unexpected funds to pay down at least a slice of that debt while the money is still available. Murphy and Sarlo have both appeared on board with the idea. “Let’s get ourselves back on a steady platform that we can move forward with,” said Ralph Albert Thomas, chief executive officer and executive director of the NJ Society of CPAs. “Let’s use it to pay down other debt that we can get rid of and get that addressed.”
The OLS reported that had New Jersey not gone ahead with the bond issue, it would have been met with an end-of-year closing balance only $165 million less than what’s being currently projected. And now with the new debt, the state is slated to end the year with a $6.4 billion surplus, much of which will be directed to the state’s rainy day fund.
But state Republicans – who unsuccessfully argued last year in the state Supreme Court that New Jersey should not be able to borrow any of those funds – have said that the bond issue was unnecessary. “The governor said we were at risk of being $10 billion, $20 billion, even $30 billion in the red,” Sen. Steven Oroho, R-24th District, said in his opening remarks during the budget hearing. “The administration used those sky-is-falling claims to sell the state Supreme Court on a $9.9 billion borrowing plan that wasn’t needed.”
He continued: “Republicans warned last fall that there was no emergency need to borrow … That’s proven to be the case, exactly as we predicted.”
Senate President Stephen Sweeney, D-3rd District, told various media outlets over the past month that looking back, he regretted the decision to go ahead with the borrowing. He’s proposed major cuts to public worker pension and retirement systems as a way to cut down on the state’s expenses, but those could take years to produce significant savings.
But Murphy contended that the state did not have the luxury to wait. When the administration went ahead with the borrowing in November, the nation was at the outset of another pandemic wave and the state was being hammered by political and economic uncertainty.
“I think we sold the bonds on November 18th, if I’m not mistaken,” the governor said. “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 January 5th, 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.”
State Treasurer Elizabeth Maher Muoio said officials were trying to fully gauge what kind of financial hit the state and economy would take from the pandemic. “We couldn’t simply say, as some are now suggesting, let’s wait until later in the fiscal year to make the decision to borrow,” she told lawmakers. “Imagine, though, how disastrous it would have been if we had somehow postponed borrowing and the opposite panned out. Imagine if, like the first wave, the economic ramifications of the second wave had mirrored the surge in cases.”