Budget Cuts Loom as Shortfall Tops $700 Million

Mark J. Magyar | January 4, 2013 | Budget
OLS: Sandy reconstruction, income tax surge will help, but not enough

The percentage of taxpayers with adjusted gross incomes of at least $200,000 in 2010. To see specific income statistics for any state, click on the state. To see Alaska and Hawaii, zoom out.

Spource: U.S. Internal Revenue Service, Tax Statistics 2010

Senate Budget Committee Chairman Paul Sarlo (D-Bergen).
With New Jersey facing a $705 million budget shortfall that could easily double by June, the Senate Democratic budget chairman yesterday called upon the Christie administration to lay out a plan to close the gap before the size of the deficit becomes virtually unmanageable.

Senate Budget Committee Chairman Paul Sarlo (D-Bergen) urged Gov. Chris Christie “to face up to the realities of the growing shortfall” and make the necessary midyear budget cuts.

“Every month that we delay, the options grow more limited,” Sarlo warned. “Certainly, we don’t want to be where the House [of Representatives] was, falling off a fiscal cliff” at the end of the budget year.

David Rosen, budget officer for the nonpartisan Office of Legislative Services, told Sarlo’s committee yesterday that it would be “optimistic” to expect the current $705 million gap not to grow over the next six months.

“Every month that revenues fail to grow by the 8 percent that Treasury projected adds to the deficit,” Rosen noted, and no state in the nation is experiencing consistent 8 percent growth.

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Proclaiming that the “New Jersey Comeback has begun,” Christie last year insisted upon enacting a $31.7 spending plan that anticipated the highest budget growth in the nation. He branded Rosen the “Dr. Kevorkian of the numbers” and charged that he was serving Democratic interests when he projected in May that state revenues for the 14 months ending June 30, 2013, would come in $618 million below Christie’s certified projections.

Christie spokesman Michael Drewniak dismissed Rosen’s analysis, saying the nonpartisan budget expert has been “persistently negative and persistently wrong about the state’s revenues.” Citing strong income tax receipts and an expected revenue boost from Hurricane Sandy reconstruction efforts, Drewniak insisted that there “are far too many unknowns as our state begins to recover to jump to any conclusions that the sky is tumbling down on us or engage the Democrats’ desire in making this a partisan game.”

Nevertheless, revenues have now come in below Treasurer Andrew Sidamon-Eristoff’s projections for 10 consecutive months stretching back to last March, and Rosen yesterday said his own projections will most likely turn out to be optimistic. With current revenues down $451 million and last year’s budget ending up $250 million short, hitting Sidamon-Eristoff’s original revenue projections is now virtually out of the question, Rosen said.

“As a result of revenue underperformance to date, the state would need spectacular revenue acceleration to hit the Executive’s budget targets,” Rosen testified. Where revenues have grown at 0.2 percent for the first five months, they would need to grow by 11.9 percent over the remaining seven months. Nothing in the national or state economic picture suggests that such growth is likely.”

At the current anemic 0.2 percent growth rate, the state’s revenue gap would be $2 billion by the June 30 end of the fiscal year, Rosen acknowledged under pointed questioning by Sarlo. But Rosen emphasized that he does not expect the final figure to be anywhere near that high.

Two Crises to the Rescue

Ironically, the state’s budget picture will be helped by a pair of crises that no one foresaw when Christie certified the revenue numbers last June — Hurricane Sandy and the recently concluded congressional battle of the fiscal cliff.

Based on the experience of Louisiana following Hurricane Katrina, Rosen said it would be logical for New Jersey to expect a modest short-term tax loss for a few months following Hurricane Sandy that would be more than offset by a large boost in revenues once federal funding and insurance payments for reconstruction begin to flow into the state.

“The likely magnitude and timing of the bounce is difficult to project,” Rosen said.

Based on the schedule Republican House Speaker John Boehner laid out yesterday, it will take almost 12 weeks for Congress to approve significant aid for New Jersey, New York, and other states ravaged by Hurricane Sandy, compared with just 10 days to send aid to Louisiana, Mississippi, and other states devastated by Hurricane Katrina.

Further, reconstruction projects in New Jersey could be slowed by adverse winter weather, which was not an issue in Louisiana. Still, Hurricane Sandy is likely to boost state revenue by hundreds of millions of additional dollars in the current budget year.

So far, Rosen said, the good news is that Hurricane Sandy has had relatively little short-term impact on state revenues. He noted that sales tax collections for the year were down 0.3 percent through September and October — before Sandy hit — and were down just 0.4 percent through the end of November after a month in which many businesses were closed for a week or more.

The only revenue to take a major hit due to Sandy was the casino tax, which was up 4.7 percent through September, but was down 7.6 percent by the end of November. The decline is relatively unimportant, however, because casino taxes make up less than 1 percent of overall state revenues and are dwarfed by income, sales, and corporate business taxes.

The best news for New Jersey’s budget is that the state income tax, which makes up about one-third of state budget revenue, is down just 1 percent, or $31.5 million, from the Christie administration’s projections. That tax could very well exceed its 5.7 percent growth projection by the end of the year.

Rosen, who has access to the Treasury database that is updated daily, said the December income tax numbers are “very good.” This year’s “April surprise” in income tax collections is likely to be a good one, Rosen said, due to decisions by wealthy taxpayers to cash in stocks or take additional income in 2012 before higher federal income tax rates and capital gains taxes kicked in on January 1, 2013, as a result of the fiscal cliff negotiations.

“While some of this activity, such as paying bonuses in December rather than in January or February, will have no net effect on state fiscal year revenues,” Rosen said, “special dividends paid in 2012 or capital gains taken in 2012 to avoid higher federal taxes later, will boost 2013 Gross Income Tax collections in New Jersey. The magnitude of this windfall may be hinted at when we see the fourth-quarter estimated payments, but will remain uncertain until April.”

Because New Jersey’s state income tax is one of the most highly graduated in the country, the wealthiest 2 percent of residents pay almost half of the total state income tax, making it likely that the final windfall will be in the hundreds of millions of dollars.

Doomsday Scenario

Nevertheless, despite the expected Hurricane Sandy and income tax windfalls, New Jersey’s overall state revenue trend for the year remains bleak, Rosen and Sarlo agreed. “It’s not a doomsday scenario, but the economy is sputtering,” Sarlo said.

Sen. Joseph Pennachio (R-Morris) noted that Rosen’s shortfall calculations do not include any undisclosed actions the Christie administration may already have taken to cut previously authorized spending by lapsing funds into the general budget. Nor do Rosen’s projections include the $648 million surplus built into the budget, including $183 million originally earmarked by Christie to be used for the first phase of a state income tax cut this month if his revenue projections came in as scheduled.

Prospects for an income tax cut this year — unlikely at best in September — were clearly washed away when Hurricane Sandy hit, wiping out the prospects for the quick turnaround in October, November, and December tax revenues that Christie was still hoping for.

“You do the math. Does it work?” Sarlo demanded, when questioned by reporters about whether Christie’s tax cut was still alive.

Sarlo noted that the New Jersey has yet to make any provisions to provide additional state aid to municipalities or school districts to make up for revenue that will be lost when homeowners and business owners file tax appeals to lower property tax payments on properties that were destroyed or severely damaged by Hurricane Sandy.

Further, the Democratic budget chair noted that the Treasury Department’s most recent budget prospectuses acknowledged that the state faced other major budget problems in addition to the current revenue shortfall. Sarlo said that the state budget could have an additional hole of up to $500 million as a result of unrealized Medicaid and Social Security tax savings, lower energy-related taxes, and unrealized one-shot revenues from the privatization of management of the New Jersey State Lottery and the anticipated diversion of affordable housing funds.

Sarlo and Rosen both said filling the state budget gap will be harder if the administration waits much longer to act.

“Clearly, the later you get in fiscal year, the harder it is to find places to cut spending,” Rosen said. “By time get into May, most of the money is spent. Most of the money that is not spent consists of commitments like Medicaid you can’t change or aid to school districts that have already built their budgets on. The two biggest pots of money left are the pension payment, which is slightly more than $1 billion and the homestead rebate program of $450 million.”

The $450 million program that provides property tax rebates or credits to senior citizens, the disabled, and middle- and lower-income homeowners would be a particularly difficult program to cut in a year in which the governor and entire Legislature are up for reelection.

Further, failing to make the promised $1 billion pension payment would immediately result in a lawsuit by the state’s public employee unions challenging the state’s failure to make its legally required contribution under legislation passed in 2010 , which raised required pension payments for every public employee in the state, Sarlo noted.

The various budget issues, coupled with the growing revenue deficit, makes it imperative “for the treasurer to give us a plan to rebalance the budget,” which is the executive branch’s constitutional responsibility, Sarlo noted. “The treasurer has to come here and show us his ideas.”

Sidamon-Eristoff declined Sarlo’s invitation to appear before the committee yesterday, and Sarlo said he has offered the treasurer several other dates this month. “If he can’t make those dates, he should tell us what day he can appear, and I’ll bring the committee in,” Sarlo promised.