Storm Costs Won’t Necessarily Spell Budget Disaster

Mark J. Magyar | November 13, 2012 | Budget, Sandy
Federal aid, insurance payouts for reconstruction work could offset lost revenues

Credit: Governor's Office/Tim Larsen
rebuild sandy
Hurricane Sandy shut down much of New Jersey’s economy for a week to 10 days and wreaked havoc on Shore towns that are the backbone of summer tourism.

But the superstorm will not necessarily result in the state budget disaster that some fear, according to the Legislature’s leading budget analyst.

In fact, based on the experience of Louisiana following Hurricane Katrina, state revenues could even get a net boost as a result of massive reconstruction financed by federal disaster relief funds and insurance settlements in the remaining seven-and-a-half months of the current fiscal year, David Rosen, budget and finance officer for the nonpartisan Office of Legislative Services, said in an interview.

“When Katrina hit in August, Louisiana’s contingent revenue forecasting group met in October and reduced their revenue forecast by 10 percent,” Rosen reported. “The Republicans in the Legislature loved it because they wanted to cut spending anyway. But when the revenues came in, they exceeded the pre-Katrina amount.”

“The amount of federal and insurance money coming in was enormous, and it was amazing how quickly it got spent,” Rosen said of post-Katrina Louisiana. Louisiana’s “sales tax bubble” lasted two years, riverboat casino revenues soared because of new patronage from the construction workers who poured into the state, and income tax revenues suffered some in the first year because people who were rebuilding deferred as much tax as they could, but bounced back strongly the second year.

Governor Chris Christie has expressed confidence that Hurricane Sandy won’t have a major impact on the state budget, adding that he would cut or redirect spending as needed to handle any added cost not covered by federal disaster relief. While U.S. Sen. Chuck Schumer (D-N.Y.) has talked about seeking federal disaster relief that could include increased aid to affected state governments, U.S. Rep. Leonard Lance (R-N.J.), whose specialty is fiscal issues, said Friday that dealing with the fiscal consequences to state budgets is traditionally a state responsibility.

Rosen said any net increase in New Jersey’s state revenue related to Hurricane Sandy won’t be enough to change the state’s bleak overall revenue picture for this fiscal year.

“We were in a bad budget position before Sandy, and we’re still in a bad budget position today,” Rosen said.
Rosen has reported a $254 million hole in the projected budget for Fiscal Year 2012 that ended June 30, and a $175 million shortfall in projected revenues for the first three months of this fiscal year that has already eaten most of the state’s projected surplus for Fiscal Year 2013.

It was that “narrowed financial cushion and current trend of below-projected revenues” that led Fitch Ratings on Thursday to lower the bond rating to F-1 – one level below the top rating the state received last year — for $2.6 billion in revenue anticipation notes that the state is issuing to cover cash-flow needs through the end of the budget year. The state used up the $2.1 billion credit line it opened in early July; the new $2.6 billion will pay off that $2.1 billion credit line and provide the state with an additional $500 million.

The state has been taking out revenue anticipation notes to cover cash flow shortfalls for years; before Christie, the state usually borrowed at least a billion dollars to pay for the issuance of property tax rebate checks prior to the November elections.

The one area where Hurricane Sandy will most likely have an impact on the state budget is cash flow, Rosen said.

“In terms of where we end up by the end of the year, it could very well be a net positive,” Rosen concluded. “But we could have a bad month or two. The October revenues that are reported in November might not show much impact, other than in casino revenues.”

Casinos closed early on Sunday, Oct. 27, and did not reopen until Friday, Nov. 2, but casino patrons were already leaving the Atlantic City on Saturday, Oct. 26, so state casino revenues should logically be down at least 13 percent for October. November could be harder to predict because patronage for at least the first 10 days of the month would presumably be affected by gasoline shortages and the disruption in people’s lives caused by the slow restoration of power.

Gas- tax revenues would presumably be down somewhat for the two weeks following Sandy when so many gas stations lacked either gas supplies or the backup generators needed to pump gas, although increased gas sales to power home generators could offset some of that drop.

Similarly, the loss of a week’s pay by hourly workers whose service sector businesses were slow to open and the permanent loss of jobs at the devastated Shore might be offset somewhat in the November income-tax collections by increased jobs and hours in the construction, tree service, utility and government public-works and public-safety sectors.

Sales-tax revenues have been down consistently – one of the main reasons|state revenue projections] have failed to meet the Christie administration’s forecasts for seven months in a row going back to last March – but assessments of the impact of Sandy on sales tax figures will be slow to come in because sales tax figures are always reported a month late. Therefore, the drop in sales tax likely due to three days of business closures in late October would not be reported until mid-December, and the November numbers would not come in until mid-January.

That mid-December to mid-January window is the period when the Democratic-controlled Legislature was supposed to determine whether there is sufficient funding in the budget for the $200 million-plus income tax cut that Christie urged the Legislature to enact prior to the storm, but there has been little discussion of tax cuts in the wake of Hurricane Sandy’s devastation.

A Treasury Department official did not respond to requests for comment, but state Treasurer Andrew Sidamon-Eristoff is bringing together economic experts for a conference today aimed at assessing the impact of Hurricane Sandy on the state’s economy.

Reconstruction of the Jersey Shore and other areas of New Jersey and New York damaged by the megastorm is expected to rank second only to Katrina in cost. One insurance expert has estimated the cost at $30 billion to $50 billion.

A 2010 study by the independent Public Affairs Research Council of Louisiana showed that federal funding received by the Louisiana state government doubled in the three fiscal years following Katrina.

That is not expected to be the case for New Jersey, Rosen noted. First, Katrina caused about three times as much damage as Sandy.

Second, the Bush administration was embarrassed by the furor over the ineptness of the initial response by its Federal Emergency Management Administration to Katrina, and overcompensated as a result.

Third, as conservative commentators have begun pointing out, New Jersey and New York are two of the nation’s wealthiest states, while Louisiana was one of the poorest.

Finally, and most important, the political and fiscal climate in Washington is different, with a just reelected President Obama and a Republican House of Representatives at loggerheads over how to reach a compromise over revenue increases and spending cuts to avoid automatic “fiscal cliff” tax increases and drastic spending cuts that could drive the national economy back into recession.

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