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Without a 'Rainy Day Fund,' New Jersey Could Be Hurt By Another Big Recession

Conservative think tank faults state's ‘recession readiness’ just as lawmakers start to make plans for new tax cuts, investments, borrowing


If the United States were hit by another Great Recession, just how well would New Jersey stand up to the financial storm?

Not very well at all, according to some analysts. New Jersey doesn’t maintain a dedicated rainy-day fund to hedge against revenue drops. And the size of its general-fund surplus is just a small percentage of overall spending. What’s more, the state is still struggling to recover completely from the most recent economic downturn.

That helps explain why New Jersey finished 47th of 50 states in a new study of “recession readiness” that was released yesterday by George Mason University’s conservative-leaning Mercatus Center.

Only Pennsylvania, Illinois, and Arkansas finished behind the Garden State.

The study’s author, economist Erick Elder, measured how much revenue states would likely lose if a recession hit against how much they’ve been socking away to help absorb those losses. The states were then ranked in order of their preparedness.

Credit: George Mason University Mercatus Center
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“A few short years after the Great Recession, some states have managed to bounce back and prepare for the worst-case scenario," said Elder, who is also a professor at the University of Arkansas at Little Rock. “Others failed to learn from the experience.”

Though the study is an academic exercise, it has some real-world relevance for New Jersey, which is still struggling to recover all of the revenue lost to the last recession -- even as states as a whole in the U.S. have now fully rebounded. The study also comes out as lawmakers have begun talking about implementing new tax cuts and making large-scale investments, actions that could put a further strain on state finances if revenues can’t keep pace. And they also come as Gov. Chris Christie, a second-term Republican, is preparing next month to release his latest state budget proposal.

The material presented in the study “allows legislators to understand how choices they make concerning the accumulation of savings will affect their states in terms of their ability to manage the fiscal stress caused by economic downturns of varying degrees without significant changes in tax or spending policies,” Elder wrote.

New Jersey, like many other states, is heavily reliant on revenue generated from its income and sales taxes, two areas that took a big hit during the last recession. And Christie -- who is now seeking the GOP’s 2016 presidential nomination -- has struggled with several revenue shortfalls since taking office in early 2010 after his administration reduced taxes on businesses and then overestimated overall revenue growth.

But last year, the state enjoyed a roughly $200 million revenue windfall in the final weeks of its fiscal year. Further, the $33.8 billion budget for the current fiscal year, which began on July 1, projected a doubling of the state’s general-fund surplus to near $700 million. Tax collections were also estimated to grow by a little more than 3 percent in the current fiscal year, a more modest rate than some of Christie’s prior budgets.

And an assessment of how many days states would be able to operate solely on budget reserves that was released earlier this week by The Pew Charitable Trusts shows New Jersey, though still far behind the national median, is improving, going from just over three days during the 2014 fiscal year to seven in the 2015 fiscal year.

In the past, New Jersey Department of Treasury officials have responded to similar state-by-state rankings by pointing to the strides the state has made in recent months. They’ve also noted that unlike other states, New Jersey’s constitution gives the governor broad powers to hold back spending to ensure deficits aren’t created, something Christie has repeatedly done in recent years when faced with shortfalls.

When asked about the Mercatus study yesterday, a Treasury spokesman had a similar take, but also said the report reinforces calls made by the governor to reduce the cost of public-employee benefits in New Jersey.

“The Christie Administration has more than doubled our surplus since 2014 and held off repeated attempts from the Legislature to budget unsustainable tax and spending increases,” Treasury spokesman Chris Santarelli said. “Despite this progress, the Mercatus study calls attention to the fact that New Jersey’s budget is far more constrained than other states’, primarily as a result of growing employee pension and health benefit demands.”

“The Legislature needs to join the governor in continuing to advocate reforms that will address these costs and improve the state’s financial position,” Santarelli said.

And despite the new material released by both Mercatus and Pew this week, state lawmakers continue to talk about new policies that could result in making it harder for the state to deal with the next big recession.

Democratic legislative leaders recently worked with the governor to authorize a reduction in the sales tax levied on boat purchases in New Jersey that will go into effect on February 1. Legislative analysts have predicted the policy change will result in a net loss of revenue. Democrats have also proposed raising the tax exemption on retirement income and investing more dollars in other areas, including early childhood education.

A proposed constitutional amendment that seeks to ask voters in November to compel the state to begin making full contributions into the public-employee pension system in a few years also counts on state revenues increasing modestly each year. A public hearing on the proposed pension-funding amendment is scheduled to be held in the State House in Trenton today.

And Republican leaders, meanwhile, have been pressing Democrats to approve an easing or even a phasing out of New Jersey’s estate tax as they consider hiking fuel taxes to renew the state fund that pays for transportation projects.

The estate tax in New Jersey right now has the lowest income threshold among all states, and is also far below the federal government’s.

Since fuel taxes go into the state’s Transportation Trust Fund, however, any reduction of the estate tax would hit the budget’s general fund, which right now is where the surplus account is maintained.

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