Explainer: Making Sense of New Jersey’s Annual Structural Deficit

Mark J. Magyar | November 5, 2013 | Budget, Explainer, More Issues
Governors cite it to claim they cut billions in spending, their opponents cite it to claim fiscal mismanagement. Both are wrong

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During his first gubernatorial debate with Democratic challenger Barbara Buono, Gov. Chris Christie repeated his claim that “he closed an $11 billion budget deficit without raising taxes.” For Christie or any New Jersey governor, that would have been quite a feat because it would have represented a 37 percent cut in what was then a $29 billion budget — and clearly, Christie didn’t make a 37 percent cut in every government program from school aid to prisons to colleges to psychiatric hospitals.

No, what Christie was talking about is what budget experts call the “structural deficit” — an often-misunderstood calculation that represents the difference between projected state revenues at existing tax rates and the projected cost of funding all current programs at the same or increased levels and the current phased-in cost of meeting all future state obligations.

The Structural Summer

It is usually in the summer that the nonpartisan Office of Legislative Services makes a calculation of the “structural deficit” it expects the governor and Legislature to face the following spring when they begin negotiations to enact a balanced budget by midnight June 30 for the following fiscal year, as required by the New Jersey Constitution.

The OLS analysis invariably shows that the state faces a “structural deficit,” and the reliably red ink report is immediately put to partisan use by the party out of power.

When he was running for governor, Christie said the OLS’s summer 2009 projection of a $7.9 billion structural deficit was so bad that Democratic Gov. Jon Corzine “should stand up” and “say out of shame, ‘I’m not going to seek reelection.’” Republican legislators called unsuccessfully for public hearings on the “budget gap.”

One year later, when OLS projected a $10.5 billion structural deficit in the summer of 2010, Christie, now the governor, dismissed the projection as “completely fake” and an Assembly Budget Committee hearing as a meaningless partisan exercise.

An Early Look at FY2015’s Deficit

No legislator has publicly released an official report from OLS projecting the structural deficit in the FY2015 budget, but a source with knowledge of that report said that OLS projected a $6.9 billion structural deficit — a number that consists of $8.2 billion in projected “gaps” offset by about $1.35 billion in revenue growth. This structural deficit is $1 billion less than the structural deficit projected for FY2010 that Christie said should cause Corzine to resign in shame.

A Speculative Structure

OLS’ annual calculation of the state’s structural deficit — which is usually requested by a legislative Budget Committee member from the opposite party as the governor — is always accompanied by a disclaimer noting that it is a “speculative inquiry” and that “reasonable people can disagree” with its conclusions. In recent years, Facing Our Future, a nonpartisan blue-ribbon panel made up of former state fiscal officers and cabinet members, has added a similar disclaimer to its calculation of the state’s long-term structural deficit.

But structural-deficit projections are useful both because they offer an analysis of where the state is failing to meet its statutory and long-range fiscal obligations and because they provides an early warning on problems built into the upcoming budget.

The Pension Gap

The OLS’s calculation of New Jersey’s structural deficit for the next budget year, FY2015, would include the estimated $2.3 billion gap between the $1.7 billion in pension funding that the Christie administration is providing in the third year of a seven-year phase-in to full funding of the state’s pension obligation and the actual obligation, which would be about $4 billion this year.

The structural deficit would also include the $1.6 billion gap between full funding of the state’s property-tax rebate program as authorized by statute, which would cost about $2 billion, and the $400 million cost of the scaled-back program that is currently in existence. It would also include the shortfall between current and full funding of the state’s school-funding formula.

Tallying Up the One Shots

The structural deficit also would tally up all of the “one shot” nonrecurring revenues used in this year’s budget under the assumption that those revenues will not be available in the following year.

This year’s calculations, therefore, would include more than $600 million in one-shot revenues, led by the $295 million diversion of New Jersey Turnpike toll money and $194.5 million in Clean Energy funds diverted for use in balancing the budget.

Estimating Tomorrow’s Costs

Finally, the structural deficit would include projections of increased cost in the following year’s budget, such as estimates of how much the state’s Medicaid budget will go up. In contract negotiation years, assumptions are made about how much employee salary accounts will increase once a new contract is signed.

All of these projected budget gaps are then added up, and the projected increase in state revenue is subtracted from the total to provide a calculation of the net structural deficit.

No governor, of course, provides funding to meet all of the statutory and long-range funding obligations that are included in the structural deficit. Governors make policy choices and propose balanced budgets that fund those programs they can afford based on current revenue projections, including any tax or fee increases they are willing to propose. Addressing New Jersey’s full structural deficit, is clearly out of the question: It would require a doubling of the state’s 7 percent sales tax, for example, or a 65 percent increase in the state income tax.

That does not mean that the structural deficit is “completely fake.” It is a useful budgetary tool that shows the gap between what the state should be doing in an ideal world and the actual revenues that are expected to be available to meet those projected needs.