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Opinion: New Jersey Budget Challenges Are Significant and Immediate

The new governor has many ambitious plans, but first he must make sure the 2018 fiscal years ends with a surplus — as required

richard f. keevey
Richard F. Keevey

The new governor faces immediate budget problems.

After inauguration in January 2018, the Budget for fiscal year 2019 must be submitted in March. And for the first six months of 2018, the governor must manage the budget he will inherit — and end with the year in surplus.

Governor, you have suggested many initiatives during your campaign, including increasing school aid, funding retirement commitments, expanding support for county colleges, addressing transit and infrastructure needs, funding womens’ health programs, and others.

However, let me suggest you face challenges in the current year and in formulating the fiscal 2019 budget — even before you address your new initiatives. Let’s consider the immediate problems.

Fiscal 2019 revenue loss

There is $1.2 billion less revenue available in 2019 than the current year. Specifically, $650 million in one-time revenue items are in the current budget — the two largest being $300 million in legal settlements principally related to environmental claims and $321 million for the sale of public broadcasting assets. And the continued phase-out of the estate tax, a decrease in the sales tax rate, and exclusions/deductions in the income tax will result in $520 million less revenue from these sources.

The remaining revenue base will yield an additional $1billion — at best. Not sufficient to cover the lost revenue and address normal program growth. How to address this “squeeze” will be a challenge.

Fiscal 2018 needs more than current appropriations

But first, current-year problems are evident and real. The current budget is balanced, but with only a $409 million surplus — barely 1 percent of spending. There is no money in the Rainy Day Fund.

A close reading of the state’s Official Statement (OS) issued in October 2017 for a state bond sale contains several warnings that challenge the new governor to end the current year in surplus — which he must do. The full disclosure requirements in the OS indicate that “various factors could result in expenditures being significantly higher or lower than current forecasts.” Consider the following issues:

  • $10 million is budgeted for snow removal, but expenditures during the past four years averaged $70 million per year.

  • $125 million in “savings” is assumed for reforms to health benefits for current and retired employees, but to date no reforms have been enacted. Since the state is on a “pay-as-you-go system” for health benefits, additional appropriations may be necessary.

  • $82 million in savings are assumed for various “benefit and management initiatives.” The distribution and source of these “savings” are not specified. Absent actions, appropriations are necessary.

  • $147 million is required to fund fully the Homestead Exemption Program but only half the required amount is appropriated.

  • $200 million has been proposed to address the opioid crisis.

In addition to this $564 million, the OS discusses other troubling situations:

  • In recent years, the Tort Claims Liability and Medical Malpractice Self-Insurance Funds have exceeded original appropriations. Furthermore, medical costs for Family Care programs fluctuate based on utilization and drug prices and rebates. Residential placement costs fluctuate based on the number of clients needing emergency placements. These elements and more need to be carefully monitored — and additional appropriation will be necessary if estimates do not materialize.

  • Contracts with the majority of state employees have expired. Additional costs may be incurred if negotiations result in increases.

  • The state’s role in oversight and fiscal support of local governments could be further tested. The state’s Division of Local Government Services, for example, has assumed many functions for Atlantic City, and additional state aid was made to the city and its school district. Additional monies may be needed for Atlantic City. Further, other distressed communities face shortfalls.

  • Federal aid that supports many state programs is undergoing significant scrutiny and reductions by the president and Congress. This will present the state with difficult decisions.

  • Based on a series of audits by the Federal Office of the Inspector General, approximately $900 million in Medicaid claims is being challenged for possible recapture of funds. The state has appealed and hopefully many findings will be resolved, but some claims will be upheld; the timing for repayments is uncertain.

Furthermore, the revenue estimates for fiscal 2018 are on the high side. For example, the assumed grow rate for the sales tax is 4.4 percent: The previous year’s growth was 1 percent and the rate is further reduced for fiscal 2018. So, revenues must be carefully monitored for the remainder of this year and actions taken if estimates deteriorate.

Observations

Many of these items are quite certain — one-time revenues, doubtful realization of management savings, additional appropriations for Homestead rebates and the opioid epidemic. Others are quite possible as they were required to be disclosed for the state’s recent bond offering.

With a razor-thin surplus and no Rainy Day Fund, there is little margin for error to ensure the current year ends in surplus as it must, and the budget for next year meets basic program needs.

I believe additional revenues will be needed in the long run to address the beleaguered pension systems, fund school aid needs, and address infrastructure deficiencies. I have previously suggested you consider appointing a Tax Policy Commission to recommend a viable set of revenue options that can be acceptable to you and the Legislature and, most importantly, properly explained to the public.

But new revenues might very well be needed sooner simply to address the existing budgetary needs noted above. Addressing both will require difficult decisions — made by you and the Legislature.

Richard F. Keevey is former New Jersey budget director and comptroller appointed by two governors from each political party. He also held presidential appointments as the CFO at HUD and the deputy undersecretary of defense for finance. Currently, he is senior policy fellow at the Bloustein School of Planning and Policy at Rutgers University and a lecturer at the Woodrow Wilson School at Princeton University.

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