Murphy administration had boosted reserves to over $1B after state lawmakers had not prioritized the funds for years
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A big push by Gov. Phil Murphy’s administration to boost state budget reserves is likely to get a major test, thanks to the ongoing economic fallout from the coronavirus outbreak. Before Murphy’s focus on replenishing the reserves, state lawmakers had largely prioritized other policy goals over the last decade.
As businesses in New Jersey and across the country have been scaling back operations or closing their doors altogether in response to the spreading epidemic, financial experts are beginning to say the word “recession” with more and more frequency.
How deep an economic slowdown is looming, and how long it will last, remains to be seen. But it is almost certain to have an impact on New Jersey’s budget, which leans heavily on revenue from income, sales and business taxes to keep spending in balance — a requirement of the state constitution.
Any big loss of revenue could cause the Murphy administration to dip into a pool of budget reserves that he has pushed to well over $1 billion in recent years. That’s far more than the state has had in the bank in most years in the wake of the 2007-2009 Great Recession, when the reserve balance fell to only a couple hundred million at its low point, but it’s still a small share of New Jersey’s overall annual spending of nearly $40 billion.
So far, Murphy has expressed confidence about the state’s fiscal position during regular press briefings that he has been holding throughout the unfolding coronavirus outbreak. The governor also said last week that he’s begun to hold meetings with the state treasurer and other officials to keep tabs on the state budget as the epidemic continues. What happens at the federal level, and whether any aid for state budgets is made available, also remains to be seen right now.
“It’s too early to tell,” Murphy said during one of last week’s briefings. “There’s no question about the economic impact, particularly on small businesses, so we’re going to continue to do everything we can to stay on top of this.”
Where the funds are
New Jersey’s budget reserves are primarily kept in two separate funds — the unrestricted Fund Balance, which is more commonly referred to as the “surplus,” and the restricted Surplus Revenue Fund, which is commonly referred to as the “rainy day” fund.
The state’s reserves were boosted to $1.276 billion in the budget for fiscal year 2020 that Murphy signed into law in late June 2019. Included in that was a $401 million deposit into the rainy day fund, which was the state’s first since the fund was completely depleted during the Great Recession.
Revisions to the current fiscal-year budget that were announced by the Department of Treasury last month showed the Murphy administration was planning to close out the fiscal year at the end of June 2020 with a total of $1.5 billion in reserve. That came as Treasury also upgraded the revenue forecast for the remainder of FY2020 by nearly $1 billion and indicated an extra nearly $300 million could also be deposited into the state’s grossly underfunded public-employee pension system before June 30, which is the last day of the fiscal year.
Also boosting the state’s fiscal position before the coronavirus outbreak had been the pace of state tax collections in FY2020. They’ve generally been outperforming the original growth projections throughout the fiscal year, including through the end of February, when total revenues were up about 6% year-over-year.
If there is a recession, at least it would be coming toward the end of the fiscal year, said David Rousseau, a former state treasurer who served under former Gov. Jon Corzine and had to manage New Jersey’s budget throughout the Great Recession.
Impact on tax collections
Although income-tax withholdings are likely to be impacted — as well as the sales-tax and business-tax collections — before FY2020 closes at the end of June, Rousseau pointed to some help the state could get from April income-tax payments. That’s because even if they are eventually allowed to be delayed, they will reflect the economic conditions, including a strong stock market, that were in place last year.
“Most of the rest of the income tax we’re going to get this year is going to be based off economic activity that happened in 2019,” Rousseau said, after first bringing up the issue of depressed withholdings.
Even with the boost in budget reserves under Murphy, New Jersey still had less than 4% of total spending booked in reserves for FY2020, meaning the state could have to take on short-term borrowing or make unplanned spending cuts to make sure it can pay the bills during a downturn. In a comparison of state budget reserves, the latest state-by-state analysis released by The Pew Charitable Trusts indicated New Jersey had enough money socked away as of the end of the last fiscal year to cover operations for about 16 days. But the 50-state median tracked by Pew was closer to 50 days.
“This financial cushion can soften the need for severe spending cuts or tax increases when states need to balance their budgets,” the analysis said.
In addition, several policy changes that New Jersey lawmakers have enacted since the Great Recession ended have reduced some fiscal flexibility for the Murphy administration. They include the decision to help prop up the state pension system by making New Jersey’s employer payments at the end of each quarter instead of providing a lump-sum cash infusion at the end of each fiscal year.
What Christie did
Making a lump-sum payment had been the state’s regular practice until 2016, when the quarterly-payment reform was enacted by then-Gov. Chris Christie. Prior to the policy change, there was always a big pot of money sitting on the sideline that served as an additional backstop for budget reserves, albeit one that came at the expense of the health of the pension funds when it was tapped. (Corzine was able to divert $1 billion from the pension payment during the worst year of the recession, and Christie also shorted pension contributions when budgets came up short during his tenure.)
Meanwhile, another portion of the revenue that also used to be folded into the state’s year-end pension contribution is now going directly into the retirement system via the state Lottery on a monthly basis under another pension reform enacted by Christie before he left office in 2018.
Another tool Corzine was able to use to raise revenue to help prop up the state budget during the Great Recession was a tax amnesty, which involved the state offering incentives to collect tax payments that were owed to the state but had been previously uncollected. Launched in 2009, that effort raised about $725 million.
But lawmakers just played the tax-amnesty card again in 2018. That decision — made even though the state economy was in generally good shape — came as Democratic legislative leaders sought a one-shot source of revenue to help support spending increases proposed by Murphy that he wanted to back up with more sustainable revenues from proposed tax hikes. The Democratic legislative leaders rejected Murphy’s tax-hike approach and instead used a tax amnesty to raise about $280 million for FY2019.
Among those proposed tax hikes was a restoration of a 7% rate for the state sales tax, which would have undone a major tax cut that Christie enacted even as he increased spending during his final years in office. The sales tax alone counts for some $10 billion in annual revenue for the state budget; more than $2.5 billion came in last year during the final months of the fiscal year, according to a review of the monthly FY2019 tax-collection figures.
The public health crisis
Christie also convinced lawmakers to eliminate the estate tax — a nearly $500 million source of revenue — in 2016, even as he committed to ramping up public pension funding, which further squeezed the state’s ability to fully boost budget reserves back to the levels seen before the Great Recession. (In addition, the sales tax and estate tax produce revenue for the budget’s General Fund, whereas the state constitution allows the income tax to support only the Property Tax Relief. That means income-tax revenues, even when flush, cannot be used to prop up the General Fund or the Fund Balance.)
Another big issue Murphy will have to navigate in coming months, according to Rousseau, is that the current economic upheaval is occurring amid a broader public health crisis, which means the governor is being forced to make decisions outside of just what’s best for maintaining the state’s fiscal position.
“You have to take care of the health crisis first,” Rousseau said. “The focus has to be on health.”
But there could also eventually be some federal help coming to the state, which is something Corzine was able to take advantage of to avoid making more drastic cuts to state spending amid the 2007-2009 slowdown.
Murphy, in his press briefings, has already begun to point to the role the federal government should play in helping states, and just last week New Jersey Transit made an appeal for $1.25 billion in federal aid to help it navigate the ongoing coronavirus outbreak, which has reduced ridership by nearly 90%.
On Friday, Murphy joined with the governors of Connecticut, New York and Pennsylvania in asking for a cash infusion to the four states of at least $100 billion to help cover expected state-revenue losses, including a reduced sales tax haul, and added costs related to the ongoing coronavirus response.
“Without this funding, we will be forced to make incredibly difficult choices in light of our new fiscal reality,” the four governors wrote in a letter to President Donald Trump and congressional leaders.