Budget shortfall puts N.J. in a tough spot

Posted: May 19, 2014

With a budget time bomb ticking down and just six weeks left on the clock to find $800 million in revenue, state officials are warning of very tough choices that could affect payments to schools, hospitals, and the state pension system.

The problem doesn't stop there.

The shortfall means New Jersey has $800 million less than anticipated for the $32.6 billion budget for the fiscal year ending June 30 - and may also need to find a similar amount for the next fiscal year's $34.4 billion plan.

The gap opened up after April income-tax receipts widely missed projections because the state underestimated the impact of the federal "fiscal cliff" tax fallout from 2012.

The budget was already squeezed by escalating pension payments the state is required to make - from $1.58 billion this year to $2.25 billion next year, and rising.

Gov. Christie said he would announce a plan this week for the budget. At a forum in Washington last week, the Republican governor said he would "exercise executive authority on the limited options and do what I need to do."

There is little room for error. Next year's budget proposal includes a surplus that is less than 1 percent of spending - one of the slimmest cushions in the country.

"We face incredibly difficult choices," Treasurer Andrew Sidamon-Eristoff told the Assembly Budget Committee, noting that the areas of spending left in this year's budget - including payments for Medicaid, nursing homes, hospitals, school aid, and health benefits for teachers and state employees - "impact nearly every New Jerseyan."

New Jersey isn't alone in confronting a revenue shortfall. A number of states, including Pennsylvania and Connecticut, also have shortfalls, said Lucy Dadayan, a senior policy analyst with the Nelson A. Rockefeller Institute of Government.

Nationally, collections of major taxes grew by just 0.7 percent this quarter - the weakest growth since the first quarter of 2010, according to the institute.

Most states, however, accounted for the anticipated slowdown, said Elizabeth McNichol, a senior fellow with the Center on Budget and Policy Priorities in Washington.

A study released this year by the center ranked New Jersey third worst among states on long-term budget planning, based on a lack of multiyear forecasting and independent oversight of pension funding, among other factors.

Revenue forecasting isn't perfect; "That's why you need to have a rainy-day fund," McNichol said. "You need to have reserves. You need to not be living on the edge and using onetime measures."

Though the state has finally committed to making pension-fund payments - after years of neglect before Christie's tenure - those obligations are "coming back at the worst time," she said.

The budget pressures, growing at a time when the state economy continues to trail the nation's, have caught the attention of the three major credit-rating agencies, which recently downgraded the state's debt.

Citing a history of revenue shortfalls and reliance on onetime fixes to plug the gaps, Moody's, which downgraded New Jersey last week, predicted budget solutions "will be increasingly difficult."

In anticipation of higher tax rates in 2013 as some Bush-era tax cuts expired, many high-income taxpayers opted to take capital gains in 2012, earlier than they might have.

As a result, the state got a boost in income-tax receipts in April 2013, while receipts this April fell far short of projections.

State economists "said, 'We just missed it,' " Christie told the Peter G. Peterson Foundation Fiscal Summit. "The great thing about an economist is, that's all they have to say. I'm the one who has to fix your miss."

In recent years, Christie has used onetime measures to fill revenue gaps, including by shifting property-tax rebates from one year to the next. This year, the state restructured tobacco-settlement bonds for an extra $92 million in the current budget, giving up $400 million in years to come.

To generate revenue, Christie - while including fee increases in his proposal - has ruled out raising taxes, saying the state would drive out the highest earners and lose revenue. Instead, he has repeated his call for more changes to the pension system.

"The only way is to stop the insanity of a defined-benefit pension system that we cannot afford," Christie said, also citing public employee health benefits as a problem.

Democrats, who have opposed any more pension-system changes, appear to be drawing battle lines with Christie over the budget, including the idea of a so-called millionaires' tax.

"When he said everything's on the table, he forgot something," Senate President Stephen Sweeney (D., Gloucester) told reporters Friday at the Democratic State Committee conference in Atlantic City.

Sweeney said there was "nothing wrong with the pension system. We fixed it." The problem, he said, is "the fact that [Christie] hasn't grown the economy to enable us to grow into the pension payment."

The state's budget problems predate Christie. In the mid-2000s, though the economy was strong, New Jersey was raising taxes, said Joseph Seneca, an economics professor at Rutgers University and former chairman of the New Jersey Council of Economic Advisers.

"That was a signal that expenditures were rising too fast," Seneca said. "It wasn't rocket science, but nobody wanted to bite the bullet."

Complicating the picture is the fact that since the recession, New Jersey's economy has not been growing at the rate of the national economy, Seneca said.

The state unemployment rate fell in April to 6.9 percent - its lowest level since November 2008, but still higher than the 6.3 percent U.S. rate.

New Jersey's job growth has been tepid, Seneca said. As the United States added 273,000 private-sector jobs in April, New Jersey added 3,300 - 1.21 percent of the nation's growth. As of 2012, New Jersey constituted 3.26 percent of the national economy.

The state has recovered 40 percent of all jobs lost in the recession, according to New Jersey Policy Perspective, a liberal-leaning think tank. Nationally, the private sector has added back all the jobs it cut in the recession, though government payrolls are still below their peak.

Between slow economic growth, the pension burden, and the $800 million shortfall - which Seneca said showed the risks of the state's reliance on the income tax, a volatile revenue stream tied to high earners - "it's a whole set of problems aligning," he said.

Most of the state money budgeted for this year has been spent, leaving few options, said David Rousseau, who served as deputy state treasurer under Democratic Govs. Jim McGreevey and Jon S. Corzine and as treasurer under Corzine and who is now a budget and tax analyst for New Jersey Policy Perspective.

Christie could plug the hole by shifting part of this year's $1.58 billion pension payment - scheduled for the end of June - to July, Rousseau said.

He said Christie could repeat the maneuver the following year - pushing the costs from one fiscal year to the next, delaying payments into the pension system by only a matter of days.

"By doing that, you've balanced the current-year budget, you haven't disrupted schools," Rousseau said.




Inquirer staff writers Andrew Seidman and Jonathan Lai contributed to this article.

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