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Opinion: The First Murphy Budget — a Dicey Proposal

A former budget director casts a skeptical eye on the governor’s proposed $37.4 billion budget, and finds much to be concerned about

Richard F. Keevey
Credit: Amanda Brown
Richard F. Keevey

Overview

The governor’s budget message was upbeat and positive. Who can be against helping people, building a sound economy, increasing opportunity, improving fairness, and making critical down payments for the future?

Further, posits the governor: no more gimmicks, sound revenue estimates, an expansion of the Earned Income Tax Credit (EITC), an increase in property-tax deductions for state income taxes, more dollars for the underfunded pension system, more tuition assistance for students, triple funding for New Jersey Transit, more school aid, a first step toward free community college for all residents, additional funds to combat the opioid epidemic, and a pledge to increase the minimum wage. No surprises: this was the governor’s campaign platform.

I agree with the goals, but I am a skeptic: former budget directors are like that by nature. I am concerned about revenue estimates, future-year needs, and some gimmicks. I doubt existing future requirements can be met — even less so given all the new initiatives. More on those issues later.

The budget

The proposed budget is $37.4 billion for fiscal year 2019, an increase of $1.5 billion (4.2 percent) over the current year.

Revenue: Taxes are estimated to increase by $1.7 billion, including increases to the income, sales, and corporation taxes. Nobody likes tax increases, but some are necessary: The questions are how much, from where, and how viable.

The governor proposes an income-tax rate increase to 10.75 percent on income above $1 million — generating $765 million. The sales tax rate is increased to 7 percent (it was reduced in 2016) and the tax base is expanded to include ridesharing services, transit accommodations, certain housing rentals, and so forth. Taxes on corporations are increased, as well as a tax on carried interest affecting hedge fund managers.

By legalizing, regulating, and taxing marijuana, $80 million is estimated beginning midway through fiscal 2019.

Spending: The largest item is $17.3 billion (46 percent of all spending) for aid to local governments and school districts. Education aid is almost $15 billion, including paying for pension and medical benefits ($3 billion) for retirees. Direct aid to school district increases by almost $300 million, principally for preschool and a “down payment” toward fully funding the school formula.

Grants-in-aid are the second-largest component of the budget at $10.4 billion, or 28 percent of total spending. The largest item is Medicaid at $4.5 billion; $2.4 billion is recommended for colleges, universities, and student financial assistance. Other budget items — totaling $3.1 billion — are grants to nonprofit organizations providing assistance for the mentally ill, developmentally disabled, elderly, veterans, children, women’s health, people with addictions, and hospitals. A $382.5 million subsidy is provided to NJ Transit. The largest increases include $244 million for Medicaid, $242 million for transit subsidies, and $50 million for community college tuition grants — the first investment in a three-year plan for tuition-free community college.

The remainder of the budget ($9.7 billion) pays for debt service on bonds ($2.7 billion), the operation of state agencies, and pension and health benefits for current employees and retirees.

The total amount for the ailing pension system, including for teachers, is $3.2 billion — an increase of $633 million, but still substantially less than the actuarially required of $6 billion.

Observations and concerns

My concerns are fivefold: First, can we fund these new initiatives into the future? I believe we cannot, as existing needs — simply for pensions and school aid — are already too large. Best to address what is absolutely required.

Second, I’m skeptical about the accuracy of the revenue projections. Without more information about assumptions, it is impossible to determine the validity of the estimates. But given collections to date, I believe the estimates are aggressive and contain several one-time items that will create gaps in the future.

Third, there are numerous doubtful-spending reductions listed in the budget document amounting to over $300 million, including “operational savings,” reduction in snow removal funds, “trend” reductions in certain programs — and increased federal funds. Similar actions were assumed in the current budget, and $1.3 billion in supplemental appropriations were necessary — with more to come.

Fourth, because the income tax is very volatile to downturns in the economy, especially when such a large amount is collected (more with the rate increase) from a small population of rich taxpayers, the estimate is questionable. For example, in the 2008 recession, the income tax decreased by $2 billion.

Finally, the surplus is meager — less than 2 percent of spending — and the budget specifically ignores the requirement to place money into the empty Rainy Day fund. Not much room for error.

The spending and the revenue proposals will now be reviewed by the Legislature. Before the final approval date of June 30, there will be four more months of tax collections, including the critical April 15 income-tax collection. By then we all will have a better handle on the revenue side of the equation and what the Legislature thinks of the spending items. It would also be prudent budget planning for the Legislature to request the governor project his budget plan for the next few years to ascertain its viability into the future.

Richard F. Keevey is the former budget director and comptroller for New Jersey — appointed by two governors from each political party. He held two presidential appointments as the CFO at HUD and deputy undersecretary for finance at DOD. He is currently a 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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