Raids on Dedicated Funds Climb Under Christie

Governor relied on fund diversions more than Corzine, but less than McGreevey

Gov. Chris Christie has consistently and substantially increased raids on state funds that were built with dedicated taxes and fees in order to balance the state budget, a New Jersey Spotlight analysis shows. And without the two-thirds majority needed to override a Christie veto, the Democratic-controlled Legislature is virtually powerless to block the fund raids.

The diversion of billions of dollars in taxes and fees earmarked by previous legislatures and governors for specific purposes into the state’s general fund is not a new practice. But Christie’s ability to ride roughshod over a Democratic-controlled Legislature shows the virtually limitless power that a governor with ironclad control of his minority caucus can exert over the budget.

Christie’s most aggressive fund raids have been the diversion of more than $1 billion from ratepayer subsidies on customer utility bills charges that was supposed to go to clean energy programs. But the Republican governor also took hundreds of millions of dollars from fee-supported environmental programs, diverted toll revenue from transportation projects, and tried to grab more than $160 million in affordable housing funds.

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The fund raids and other “one-shot” revenues and budget gimmicks were critical to Christie’s ability to balance his budgets relatively painlessly, without enacting too many politically unpopular program cuts and without breaking his pledge not to raise taxes.

Christie has relied on raids on dedicated funds much more than his Democratic predecessor, Jon Corzine. But Christie’s record is much better than former Democratic Gov. Jim McGreevey, who cashed in billions of dollars in tobacco lawsuit settlements to balance his three budgets. McGreevey and three predecessors also diverted a total of $4 billion in Unemployment Insurance taxes to pay for hospital charity care.

“There were bad things done, dumb things done, and it was done on a bipartisan basis,” as budget expert Richard Ravitch put it in reviewing New Jersey’s long history of fiscal mismanagement.

Christie’s fund raids drew renewed attention last month when housing advocates challenged Christie’s attempted grab of $164 million in funds earmarked for the construction of affordable housing to balance last year’s budget and won a major victory in the Appellate Division of Superior Court.

Judge Jose L. Fuentes ruled that the Christie administration’s Council on Affordable Housing (COAH) violated “rudimentary notions of due process” in rubber-stamping the governor’s plan to use unspent affordable housing funds to balance the overall state budget, and said he expected COAH to fulfill “its statutory mission, to create and promote the development of affordable housing throughout our state.”

Conflict of Interest

That conflict between the statutory goals set for dedicated funds established by past governors and legislatures and the ability of their successors to use the budgetary process to override those goals has become particularly acute since Christie took office.

While the planned diversion of affordable housing funds was successfully challenged in court, Christie has helped balance his last four budgets by diverting more than $1 billion paid by consumers on their utility bills to promote energy conservation and alternative energy programs.

The Republican governor also diverted more than $600 million in toll revenues paid by motorists, requiring the state to borrow more money to fund transportation construction programs.

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In keeping with his conservative agenda, Christie has targeted environmental programs, taking tens of millions of dollars intended to promote recycling, clean up landfills and toxic spills, replenish beaches, and remove lead from urban housing. The current FY14 budget even includes the diversion to the general fund of an anticipated $40 million settlement to be paid by companies that polluted the Passaic River with toxic chemicals for cleaning up the damage.

“The $1 billion in clean energy funds that Christie has raided isn’t ‘free money.’ It is money that is paid by consumers on their gas and electric bills to promote solar power, wind energy, and conservation programs,” said Jeanne Fox, a state Board of Public Utilities commissioner who served as regional administrator of the U.S. Environmental Protection Agency under Democratic President Bill Clinton.

“Because this money is not being spent where it is supposed to be spent, New Jersey is falling behind other states in its energy programs,” she said. “That’s the case with other programs too. We all pay a price when the environment doesn’t get cleaned up or affordable housing doesn’t get built.”

Treasury Department spokesman William Quinn provided annual statistics on the Christie administration’s use of fund diversions and other one-shot nonrecurring revenues, but declined to comment on the pros and cons of diverting dedicated funds to balance the budget.

Fox and other Democrats charged that Christie’s diversion of dedicated funds has enabled the governor to rely upon taxes and fees passed previously by the BPU and other state agencies in order to balance his budget without making unpopular cuts and without violating his pledge not to raise any tax under any circumstance.

“I don’t care what the governor says, these fund raids are a tax on our citizens, and he is using that tax to balance the budget instead of spending the money the way it is supposed to be spent,” Senate Majority Leader Loretta Weinberg (D-Bergen) said after voting against the budget in committee last month.

The Debate Over Dedicated Funds

There has been fierce debate in the Statehouse over the legitimacy of gubernatorial fund raids, but the division is not along partisan lines: More often, it is a dispute between branches of government, with governors on one side and legislators on the other.

“We didn’t have so many dedicated funds because Brendan Byrne and I would veto them,” said former Gov. Thomas H. Kean. “The Legislature loves dedicated funds, but they tie the hand of the governor.”

Just last week, Assemblyman John McKeon (D-Essex) was pushing legislation that would have dedicated 0.2 percent from the state’s 7 percent sales tax to provide dedicated funding for open space acquisition and farmland preservation. But Democratic legislative leaders — with the tacit backing of Christie — balked at setting aside upward of $300 million a year for open space at a time when the state had to push off $392 million in homestead rebate payments because of lagging revenues.

McKeon, a veteran legislator, was ultimately seeking a constitutional amendment to protect the sales tax dedication for open space from raids by future governors. He understands that governors rely on the concept that the budget bill supersedes all other legislation to justify breaking the provisions of a law dedicating funds to a specific purpose.

When Christie needed to make midyear budget cuts in February 2010 to fill a $2.2 billion hole that had opened in Corzine’s last budget — and didn’t want to negotiate with the Legislature over which programs to cut – he issued Executive Order 14 declaring a “state of emergency” and proceeded to unilaterally slash spending, including diverting more than $300 million in clean energy funds.

At the time, Christie also wanted to take money from the portion of the hotel/motel tax that was dedicated to municipal aid, tourism, history, and the arts, but was stymied by a “poison pill” inserted when the law was enacted that provided that the tax would expire if the state failed to honor its commitment.

The provision was intentionally inserted because the purpose of the law from the standpoint of the tourism, arts, and history community was to guarantee that they would receive at least minimum funding even in tough budget times and to preserve the New Jersey Historical Commission and its grant programs from elimination. Based on a legal opinion, Christie continued the minimum funding that year and in subsequent years.

That was about the only battle that Christie lost, however.

Governors and their budget-makers have a tendency to regard fund diversions as “free money” — a relatively painless way to plug a budget gap for yet another year with revenues that are already on hand and without the political pain of cutting more popular programs or proposing tax increases or fee hikes. And that’s how they sell them to risk-averse legislators, especially in election years like this one.

While the leaders of the Democratic-controlled Senate and Assembly budget committees criticized Christie’s increased use of fund diversions in both the FY13 and FY14 budgets, they did not propose alternative spending cuts to replace them, as Christie administration officials pointed out.

The Hidden Cost of Budget Raids

Nevertheless, there is still a programmatic and a fiscal cost to these budget maneuvers. Environmental advocates charge that the energy fund raids have put New Jersey behind other states in promoting energy conservation and developing alternative energy sources — an allegation that the Christie administration disputes — and note that consumers are footing the bill.

In the case of the Clean Energy Program, the money comes from a “societal benefits charge” that has been tacked on to residential and business electrical and gas bills since 2001 to promote increased energy efficiency and renewable energy sources including solar, wind, geothermal, and sustainable biomass.

New Jersey’s high energy costs, as much as high taxes, make the state uncompetitive, business leaders argue, and if $849 million in societal benefits charges were indeed unneeded since 2008, returning that money to New Jersey businesses and families in lower utility bills would be just as welcome a “tax cut” as the property tax credit on income taxes that Christie and the Democratic-controlled Legislature have been debating for the past year.

Board of Public Utilities spokesman John Reinert said the Clean Energy program has not suffered as a result of the diversions, and that the BPU has adjusted “incentives to levels that continued program participation without overheating markets.”

Reinert declined to speculate on whether there would be excess clean energy funds available for diversion again next spring for use in the FY2015 budget. But there is likely to be increased focus on future raids of Clean Energy Program funds that could be dedicated to promoting solar energy, now that PSE&G is coming In for a new rate hike solely to promote solar energy initiatives.

No Stopping the Governor

Christie’s working majority on the BPU gives him the ability to seize Clean Energy funds and he has enough Republican votes in both the Democratic-controlled Senate and Assembly to uphold his veto of any Democratic legislation that would seek to block his diversion of Clean Energy funds or any other budget maneuver, which is the reason that Christie’s privatization of the management of the New Jersey Lottery this year was never in any real danger of being blocked by Democrats.

That is why housing advocates decided to focus their battle against Christie’s plan to divert $164 million in affordable housing funds held by municipalities on the courts, rather than the Legislature.

East Windsor Mayor Janice Mironov, president of the New Jersey State League of Municipalities, criticized the proposed fund diversion as “nothing more than a brazen raid on municipal dollars to plug holes in the state budget.”

Christie based his attempt to seize the affordable housing funds on a law allowing the state to take unallocated housing money after four years, but Mironov noted that Christie’s effective dissolution of the Council on Affordable Housing for months delayed municipal plans for new affordable housing construction.

Mironov noted that it was a form of self-fulfilling prophecy, since by dissolving COAH, Christie guaranteed that it could not meet to disburse the funds. The court has reversed his actions.

Without the Appellate Division ruling last month, thousands of low- and moderate-income housing units paid for by developers’ fees and planned to be built in New Jersey suburbs would never have been constructed, housing advocates said. The Christie administration, however, remains determined to promulgate new rules to seize as much of the $164 million as possible.

Paying the Price

Raids on dedicated funds can carry a heavy future price tag, as New Jersey employers learned as a result of the state government’s long history of diversions from the Unemployment Insurance Trust Fund.

From 1992 to 2005, more than $4.6 billion in employer and employee contributions to the fund were diverted by both Democratic and Republican governors, the non-partisan Office of Legislative Services noted in a background paper tacked on to its analysis of the FY2014 Department of Labor and Workforce Development budget.

“These diversions depleted the surplus that was intended to ensure the financial stability of the fund during times of recession, such as the present time,” the OLS report pointed out.

By the time New Jersey’s unemployment rate rose from 4.6 percent in January 2008 at the beginning of the recession to a high of 10 percent in 2010, the state’s unemployment compensation trust fund account was long since depleted. In fact, it ran out of money in March 2009, just 14 months into the recession.

New Jersey consequently had to borrow $1.75 billion from the federal Unemployment Trust Fund to cover its unemployment claims, triggering higher federal unemployment taxes on New Jersey employers of $63 per employee in 2012, $84 per worker this year, and an estimated $105 per employee in 2014 — until the federal loans are paid back in May.

To cover $48 million in interest payments on the federal loan due in September 2011 and $44.7 million due in the September 2012, New Jersey employers were assessed an additional of $20 per employee in July 2011 and $18 in July 2012, with a third assessment of $8.30 per worker anticipated to go into effect this month to cover the 2013 interest payments.

Finally, state unemployment insurance payments, which range from a minimum of $371 to a maximum of $2,163 per employee, were scheduled to go up 10 percent this month in an effort to replenish the state Unemployment Insurance Trust Fund, which remains dangerously low.

To the relief of business groups, Christie conditionally vetoed the increase in state unemployment insurance payments for employers in late June and created a 12-member task force to make recommendations by October 1 on how to stabilize the state unemployment fund.

Unlike other fund diversions, the Unemployment Insurance raids won’t happen again: New Jersey voters in November 2010 approved a constitutional amendment to prevent future raids by requiring that contributions collected from assessments on wages be used solely for employee benefits, and prohibiting the use of “contributions from these assessments for any other purpose.”

Nevertheless, for many of New Jersey’s businesses, the increases in unemployment insurance levies — which are at least partially attributable to raids by McGreevey and his predecessors — have been larger than the business tax cuts that Christie and the Democratic-controlled Legislature enacted in the FY2011 budget in an avowed effort to make New Jersey more competitive.

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