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Analysis: Christie Offers No Tax Cut, But $205 Million In Veiled Tax Hikes

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Somberly warning that New Jersey would have to renegotiate its public employee pension obligations to fund vital services, Gov. Chris Christie yesterday unveiled a record $34.4 billion state budget that made the promised pension payment, left out an expected tax cut, and surprisingly included $205 million in tax increases that were defended as “closing tax loopholes to level the playing field.”

The tax changes, which included the extension of the state’s 7 percent sales tax to Internet sales by out-of-state retailers, did not quite square with the opening assertion of Christie’s Budget Address yesterday that he was presenting a budget that, “for the fifth year in a row, requires no new taxes on the people of New Jersey.”

Nor did Christie’s decision to once again use $324 million in New Jersey Turnpike toll money to balance his budget, forcing him to borrow more money for the Transportation Trust Fund again, square with Christie’s complaint that the rising cost of debt service -- along with pensions and retiree health benefits -- was eating up 94 percent of the funding available for new programs this year.

Overall, however, the budget for Fiscal Year 2015 was a status quo document that did not differ substantially from this year’s spending plan and was based on a 5.8 percent increase in estimated revenue that Assembly Speaker Vincent Prieto (D-Hudson) deemed reasonable.

The budget recommends small increases in aid for schools and Medicaid, modest competitive grant programs for school districts to experiment with extended school days and for municipalities willing to consider consolidation, and minor increases for drug courts and an innovative substance abuse program tied to employment services.

And while Christie aroused the ire of Democratic legislators and union officials with his call for state leaders to revisit the obligations imposed by the landmark 2011 pension and health benefits bill he pushed through with Senate President Stephen Sweeney (D-Gloucester), the governor’s speech was just that -- a speech.

No call for delaying the seven-year pension payment schedule under which he agreed to make next year’s required $2.25 billion record contribution. No call for public employees to pay more or retire later. Not even a call for a blue-ribbon pension commission. Not a single new pension policy initiative.

“This was the most low-key speech I’ve ever heard this governor give,” said Monmouth University political scientist Patrick Murray, echoing the private sentiments of many of the lobbyists and aides packed into the stairwells and onto windowsills of the Assembly Gallery. “This was racing under the yellow flag. They’re just trying to hold their position.”

A Holding Action

For Christie, holding his position would be a victory in the wake of the disastrous nose-dive in popularity and credibility he has endured since the release seven weeks ago of an email showing that his deputy chief of staff, Bridget Kelly, ordered the infamous George Washington Bridge lane closures in apparent retaliation against Fort Lee’s Democratic mayor for refusing to endorse Christie for reelection.

Since then, Christie has been the subject of 24/7 cable news coverage. Five high-ranking Christie appointees in the governor’s office or the Port Authority have been fired or resigned. The U.S. Attorney’s Office and the Legislature’s Joint Select Committee on Investigation have flooded the governor’s office and campaign with subpoenas. Christie’s approval ratings have dropped below 50 percent in New Jersey polls and he has lost -- and may never regain -- his frontrunner status in the 2016 Republican presidential race.

It was against this backdrop that a politically weakened Christie gave yesterday’s budget speech, and the drop in the number of national news cameras reflected his plummet in the national polls.

Yesterday’s speech seemed aimed at a New Jersey audience, rather than a national Republican electorate: A pre-Bridgegate Christie still running neck-and-neck with Hillary Clinton in the presidential polls might have been more aggressive and found a way to propose a tax cut -- even if Sweeney and Prieto had already declared it dead on arrival.

Instead, Christie yesterday took what several Democratic leaders praised as a “conciliatory” tone in his speech, focusing on New Jersey issues and resisting the temptation to declare that the threat to New Jersey’s fiscal future posed by mounting pension and retiree health benefits was part of a national problem that he could show the nation how to fix.

The Christie administration didn’t even bother to scatter the five obscure changes in tax laws, exemptions, and penalties throughout the budget to make it harder for reporters to spot them. Treasury’s Budget Summary packaged the $205 million in revenue enhancements together with the explanation that “Governor Christie is taking action to level the playing field and promote tax fairness by closing corporate tax loopholes, removing inconsistencies, and modernizing enforcement for tax delinquents.”

It isn’t that the five changes would be controversial in New Jersey. State Chamber of Commerce President and CEO Tom Bracken applauded Christie’s budget and backed his interpretation that “this budget calls for no tax increases” and that the tax changes were merely a case of “correcting antiquated tax laws.” But Christie attacked his Democratic predecessor, Gov. Jon Corzine, for “raising taxes” because he extended the existing sales tax to services

Grover Norquist and other anti-tax activists would undoubtedly view the extension of the sales tax to Internet purchases from out-of-state retailers or halving the business-to-business sales tax exemptions for companies in some 35 cities and towns with Urban Enterprise Zones as violating a “no new taxes” pledge.

The $205 million in revenue enhancements is almost three times as much as the additional $77 million that New Jersey businesses will save in this fourth year of the five-year business tax cut plan approved by Christie and the Legislature in the budget they passed in June 2011.

Furthermore, Christie and Treasurer Andrew Sidamon-Eristoff needed the $205 million the tax law changes would raise to balance their budget, which is anticipated to close the next fiscal year on June 30, 2015, with a razor-thin $301 million surplus -- well under 1 percent -- of a $34.5 billion budget.

Tapping the Turnpike

Even with the business tax changes, Christie had to tap all of the $324 million in New Jersey Turnpike toll money to balance his budget, once again breaking his 2010 promise to use money freed up from his cancellation of the Access to the Region’s Core (ARC) rail passenger tunnel to ramp up pay-as-you-go funding and limit borrowing for the Transportation Trust Fund.

This year’s budget was to include the $324 million in toll revenue, plus $166 million from general state revenues, for a total of $490 million in pay-as-you-go funding for highway, rail and bridge construction projects. But Sidamon-Eristoff acknowledged during yesterday’s press conference that “there is no pay-go funding.”

This makes three years in a row that Christie has used the Turnpike toll money to balance his budget, forcing the state to borrow an additional $261 million for the Transportation Trust Fund in FY13, $375 million extra this year, and $476 million more next year, bringing Christie’s total borrowing for TTF to more than $5.6 billion and pushing annual transportation interest costs well over $1.1 billion in next year’s state budget.

The $324 million in Turnpike toll money is most likely the largest single piece in the $950 million in “one shot” nonrecurring revenues used by the Christie administration this year -- a total that represents just 2.8 percent of the total budget, which is the lowest percentage in Christie’s four years, Sidamon-Eristoff pointed out.

The treasurer said he would detail the nonrecurring revenues within the next couple weeks, but said the one shots included debt restructuring and legal settlements (last year’s the governor used a $60 million settlement in a Passaic River pollution case to help balance the budget, for example).

Not included, however, is a one-shot fund raid like the diversion of $162 million this budget year and $89 million the year before from the Clean Energy Fund, which is paid for by a surcharge on customer utility bills, the treasurer said. Instead, the state is taking $60 million from the Clean Energy Fund to pay for energy efficiencies in state agencies, he said, adding that he expected the program to continue in future years.

The biggest question that remained yesterday was just how the treasurer was going to close the $800 million-plus gap in the current year budget.

Sidamon-Eristoff said yesterday he would rely upon $694 million in lapses -- spending cuts in various programs -- in the current year budget, but declined to detail where those cuts would be made. He confirmed that the state would approve $292 million in supplemental appropriations, with additional snow removal costs from this winter making up about a third of the total.

Sidamon-Eristoff also said he expected improving tax collection to narrow the current revenue shortfall of more than $400 million in this year’s budget by the end of the fiscal year on June 30; that shortfall does not include the hole in the Casino Revenue Fund caused by the five-month delay in the start of Internet gaming and the failure of the program to meet expectations so far. He said the state is now expecting casino revenues to come in at just $33 million, down from the budgeted $160 million.

The treasurer’s projection that revenues would increase by 5.8 percent in FY15 and support a $34.435 billion budget was actually smaller than the increase of 6.5 percent or more that some fiscal experts privately were expecting.

Sidamon-Eristoff’s 8.2 percent projected increase in state income taxes actually is less ambitious than it sounds: The increase in the top federal income tax bracket as part of the federal fiscal cliff negotiations in late 2012 led wealthy individuals to shift hundreds of millions of dollars of income into the 2012 tax year, causing a one-time spike in FY2013 income tax collections and a corresponding reduction in the FY14 receipts against which the FY15 increase is calculated.

The treasurer is anticipating a 6.7 percent increase in corporate income taxes, which he acknowledged are the hardest to project, a 6.1 percent hike in sales tax collections, and only 1.5 percent in the various other taxes that make up approximately a quarter of the budget.

Christie yesterday built on the warning he issued in his State of the State speech in January about the corrosive impact of growing pension and debt payments on the state’s ability to afford the investments in schools, higher education, tax relief, job creation programs, transportation infrastructure funding, healthcare, and crime prevention initiatives.

Christie reminded the Legislature -- and the pension bill’s chief sponsor, Sweeney, who was seated just behind him -- that they had worked together to pass legislation requiring the state to ramp up its contributions, public employees to work longer and pay more into the pension system, and retirees to forgo cost-of-living increases until their pension funds were solvent.

The $2.25 billion payment Christie announced yesterday was by far the largest in state history, bringing the Christie administration’s total pension contributions to $5.3 billion -- more than twice as much as the $2.4 billion put in over 10 years by five previous governors. Of this year’s payment, Christie noted, 78 percent went to help pay off the unfunded liability left by past governors.

“Though the historic 2011 reforms we enacted together immediately reduced New Jersey’s state and local unfunded pension liabilities by 32 percent, it doesn’t go far enough,” Christie warned. “Without additional reforms, New Jersey taxpayers still owe $52 billion to fully fund the pension system.”

Detroit, NJ

Comparing New Jersey’s situation to Detroit, Christie warned that Detroit went bankrupt because it owed $6.5 billion in debt for retiree health benefits and $3 billion for pensions -- a result of “promises made by politicians that they knew they could not keep when they made them.”

However, Democratic leaders and union officials dismissed Christie’s doomsday scenario and rejected his implicit call for Sweeney and other leaders to renegotiate the terms of the pension reform to get further concession from public employee unions and their members.

“We’re not doing it,” Sweeney said emphatically. “We made a commitment. We’re not breaking the commitment. If we stay the course, the pension system will be fine -- it’s not going to bankrupt us. What’s missing here is we haven’t grown our economy. That’s the issue.”

Sweeney said Christie should not be “trying to renegotiate” when he and everyone else involved in the pension legislation understood that it would take seven tough budgets to put the pension system back on track.

Prieto noted that it was the state government -- not public employees -- who failed to make the required payments to the pension system and put it on the verge of collapse, a point made by Wendell Steinhauer, president of the New Jersey Education Association, and other union leaders.

“Gov. Christie is doing the right thing by making the full, legally required pension payment this year. But he is doing the wrong thing by misleading New Jersey residents about the state of the pension system,” Steinhauer said. “Pension costs are not ‘exploding.’ As a result of deep, painful cuts absorbed by public employees and retirees in 2011, pension costs going forward have been curtailed, and the state is finally on the road to responsible, sustainable pension funding practices. It’s not easy, but it’s necessary and it’s legally required."

Milly Silva, the executive vice president of Service Employees International Union Local 1199, United Healthcare Workers East, who ran for lieutenant governor on the Democratic ticket against Christie last November, said “Christie’s attack on public employees is the same old song” – one he always returns to when he is in political trouble.

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