Christie Plugs $676 Million Hole With Borrowing, One-Shots

Mark J. Magyar | May 24, 2012 | Budget
Governor insists on income tax cut, but OLS says budget still $627 million short

Credit: Governor's Office/Tim Larse
May 24, 2012
While Governor Christie’s treasurer laid out plans to fill what it says is a $676 million budget gap with borrowing, fund transfers, and other one-shot revenues, the Legislature’s nonpartisan budget expert warned that state tax collections could still come up another $627 million short — if not more.

It’s much more than a disagreement over numbers, as Christie demonstrated yesterday by launching a vicious public attack on the integrity of David Rosen, the Office of Legislative Services budget officer, for daring to suggest that tax collections this year and next year will come in $1.3 billion lower than Christie projected in his February budget speech.

Indeed, the political stakes in this year’s budget battle could not be higher: Christie has based his political message on the idea that he can balance the budget without gimmicks — and pass a 10 percent income tax cut to prove that the “Jersey Comeback” he has bragged about is real.

Christie and his GOP allies aren’t the only ones hoping for higher revenues. Senate President Stephen Sweeney (D-Gloucester) and Assembly Majority Leader Lou Greenwald (D-Camden) seized upon Christie’s optimistic budget forecasts to propose ambitious income tax cuts built on property tax credits for the middle class.

Indeed, Christie and Sweeney almost reached agreement on a compromise plan last week before dismal April tax collections and Democratic infighting scuttled the deal.

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Greenwald, meanwhile, also has been pushing for a larger tax cut, one build on a “millionaire’s tax” that Democratic political strategists believe to be a political winner.

The fiscal implications of the tax cut extend beyond this year and are significant. While the Christie and Sweeney tax cut plans would cost the state about $195 million in revenue next year, all three plans would amend the state’s income tax laws to require tax cuts totaling $1.4 billion a year by Fiscal Year 2016 – a year when the state will be obligated to contribute between $2.5 billion and $3 billion to its pension system. Together, the tax cut and pension tab would eat up almost all of the future tax growth unless the state’s economy really takes off.

Furthermore, the short-term measures required to balance this budget will make future budgets harder. Christie had made reducing the state’s reliance on “one-shot,” non-recurring revenues, borrowing and other budget gimmicks a key promise in his 2009 campaign.

Christie’s February budget has been criticized for relying on $475 million in “one-shot” revenues, including tapping $200 million from the Clean Energy Fund and $200 million in affordable housing funds to help balance a $31.2 billion state budget that is the second-largest in state history (and the largest total state/federal budget in New Jersey history at more than $49 billion).

Coping with the $514 million shortfall in the current year budget and his projected $161.4 million in expected revenues next year required Christie to make other fiscally — and potentially politically — unpalatable decisions. The reliance on more than $900 million in one-shot revenues next year, including an additional $79 million from the Clean Energy Fund, creates a high hurdle that will have to be made up by added revenue growth in the Fiscal Year 2014 budget.

But the most controversial move is to take $260 million in New Jersey Turnpike Authority money earmarked to fund transportation capital projects on a pay-as-you-go basis as part of a new Transportation Trust Fund reauthorization and use that money to help balance the budget. The $260 million was originally supposed to go to the Access to the Region’s Core (ARC) rail tunnel that Christie cancelled in 2010, and now that toll money will have to be replaced by an increased $260 million in borrowing.

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Greenwald and Assembly Budget Committee Chair Vincent Prieto (D-Hudson) immediately connected the dots between the $260 million in borrowing required to balance the budget and the $195 million in revenue Christie needs to pay for the 10 percent across-the-board income tax he has proposed, which would disproportionately benefit the wealthiest taxpayers.

“Middle class New Jerseyans are going to have pay interest on those bonds for 30 years to pay for $7,000 tax cuts for millionaires when the average New Jerseyan won’t get enough of a tax cut to pay for groceries,” Greenwald said angrily.

“How do we explain to the public that we’re borrowing money to provide income tax relief that mostly benefits the rich?” asked Prieto.

State Treasurer Andrew Sidamon-Eristoff defended the borrowing for transportation capital programs as normal, but conceded, “I wish we had other options.” Under questioning by Assemblyman Gary Schaer (D-Passaic), he refused to accept any linkage between the $260 million Turnpike Authority fund transfer and the $195 million income tax cut that remains in the budget.

Sidamon-Eristoff did use his budget testimony to make a not-so-subtle case for Christie’s proposed income tax cut for the wealthy. He noted that the shortfall in this year’s income tax revenue is largely attributable to a decline in income tax paid by New Jersey’s “decamillionaires” – the 421 taxpayers with taxable income of $10 million or more.

“It appears that, on average, taxpayers in this group paid 10 percent to 20 percent less in 2011 than they did in 2010,” the treasurer said. “This suggests that in 2011 income tax revenue may have dropped as much as $150 million — or more, if the absolute number of such taxpayers actually fell instead of rising . . . This is yet more evidence of the irrefutable fact that we have a highly progressive income tax system that is reliant on a tiny fraction of taxpayers.”

Christie last week reportedly agreed to support a compromise income tax cut based largely on Sweeney’s plan that would provide a property tax credit of 10 percent up to $1,000 limited to taxpayers earning up to $400,000 a year. Sidamon-Eristoff yesterday sounded a surprising cautionary note that could only be interpreted as a criticism of the Sweeney plan.

“We were pleased to see the Senate President come in with his own form of income tax relief. And we agree income tax relief is important. I as a tax administrator would just urge everyone to be cautious in making our own income tax structure more progressive because it increases volatility,” Sidamon-Eristoff said, referring to Sweeney’s plan, which would make the state income tax more reliant on high-income taxpayers, as would Greenwald’s proposal to reimpose a “millionaire’s tax.”

“We tend to focus on very high income taxpayers,” Sidamon-Eristoff said in a comment that could apply equally to New Jersey’s tax system and Christie’s proposed income tax cut. “We have a system that heavily relies on high income taxpayers and we need more of them in New Jersey. Give me more millionaires so I can tax them.”

Sidamon-Eristoff’s defense of Christie’s original 10 percent across-the-board income tax cut, coupled with Christie’s sharp attack on “legislative Democrats” in general, without his usual niceties about Sweeney, raised doubts about just where the Christie-Sweeney tax compromise stands. Sweeney said last week he wanted to work with Assembly Democratic leaders on a compromise, and both Greenwald and Prieto said yesterday that they, like Sweeney, want to make sure that tax cuts go to the middle-income taxpayers who need them most.

Christie, meanwhile, used his scheduled speech on transportation policy at an Alliance for Action conference in Trenton yesterday to instead attack both legislative Democrats and OLS’s Rosen.

“We have a large number of Democrats who do not want to cut taxes under any circumstances for anyone,” Christie said. “For 855 days, I have prevented them from raising taxes. They want to talk down the state, and I’m not going to let them happen. I’m going to be out there a lot in the next 40 days.”

Referring to his own plan to cut state income taxes, the governor said that “if taxes do not get cut this year, it is the responsibility of one group of people and that is the legislative Democrats.”

Christie denounced Rosen, who has been providing non-partisan budget estimates to Democratic- and Republican-controlled legislatures in relative anonymity and with little controversy for almost 20 years, as the “Doctor Kevorkian of the numbers.”

Christie said neither the OLS nor its budget projections can be trusted. It is “an outright joke” to call the OLS “non-partisan,” since it “has always been the handmaiden of the [legislative] majority,” Christie said.
“Why would anybody with a functioning brain believe this guy?” Christie asked. “How often do you have to be wrong to finally be dismissed?” the governor demanded, asserting that the state would have been $1.6 billion in the red if it had followed Rosen’s projections last year.

It was Christie who got his numbers wrong yesterday: Rosen’s projections last year were just $177 million higher on revenues than Sidamon-Eristoff’s, and he made those projections in mid-May right before the stock market dropped. Rosen pointed out in his testimony yesterday that OLS’s median forecasting error for the last 11 budgets has been 3.2 percent, compared to 3.9 percent for state treasurers.

Rosen, who was the subject of a similar Christie rant in March when his original revenue forecast for fiscal years 2012 and 2013 was $537 million lower than Sidamon-Eristoff’s, laughed when told of Christie’s “Doctor Kevorkian” attack, but declined to comment.

Greenwald, Sweeney, Prieto and Assembly Speaker Sheila Oliver (D-Essex) immediatedly leaped to Rosen’s defense.

“The governor is now in full-fledged panic mode, lashing out at anyone who dares question him,” Greenwald said, calling Christie “unhinged” and his remarks “reprehensible.”

“The governor has apparently lost control of himself,” Oliver said. “If your child acted this way, you would scold him. If your neighbor acted this way, you would have nothing to do with him. If a business leader or a school principal acted this way, they would be dismissed. It is not acceptable for the governor of the state of New Jersey to act this way.”

The measured testimony by Rosen and Sidamon-Eristoff and the non-confrontational tone of the questioning by Assembly Democratic and Republican Budget Committee members contrasted sharply with the tone of Christie’s rant, which is already up on YouTube.

Rosen noted that neither he nor Sidamon-Eristoff foresaw the huge $330 million dropoff in this year’s energy sales tax receipts, which was caused by a mild winter and lower natural gas costs that enabled large companies to avoid making large prepayments in May on next year’s utility taxes. The drop may very well be a one-year blip, but Rosen lowered his forecast for next year by $40 million and acknowledged that this could be one of the riskier projections in the budget; the treasurer anticipates a full bounceback to next year’s levels.

While Rosen’s revenue forecast remains $624 million below Sidamon-Eristoff’s projection — which constitutes the most aggressive growth forecast in the nation — he emphasized that he is not being pessimistic. Indeed, “our forecast for FY 2013 rests on the expectation of a moderately accelerating economic recovery.

“A more robust recovery could lead to revenues exceeding our forecast. However, we believe that it is at least as likely that a continuation of weak recovery [or worse] will produce revenues below those that we are presenting today,” he cautioned. “In a statement earlier this week, Moody’s projected New Jersey’s revenue growth in FY 2013 will ‘remain in line with recent trends.’ If they are correct, and our revenues grow in FY 2013 at the same rate they are growing in FY 2012, revenues will come in about $900 million below the revised OLS forecast.”

In that case, OLS’s remaining $624 million difference with the Christie administration’s forecast would soar above $1.5 billion, Prieto noted.

The real problem, Rosen asserted, is the low $300 million surplus in Christie’s budget for next year, which tapped $288 million of the anticipated $588 million surplus going into the year as a one-shot to pay for additional programs.

Reiterating his testimony from March, Rosen concluded, “a budget that combines a projected surplus of less than 1 percent of revenues and revenue forecasts that seem to fall at the high end of the likely range is troubling.”

Joe Tyrrell contributed to this story.