Analysis: For Christie, Plugging $800 Million Current Budget Gap Is Key

Mark J. Magyar | February 24, 2014 | Budget, Politics
Politically weakened governor needs to fix this year’s budget if he hopes to convince Democrats that NJ can afford a modest tax cut

chris christie
Gov. Chris Christie’s biggest fiscal headache is not how to pay for a $2.4 billion pension payment in next year’s budget, but how to fill a projected $800 million gap in the current year budget over the next four months.

For the politically weakened Christie, presenting a convincing solution to cover the revenue shortfalls, Internet gaming bust, and new spending needs in the FY14 budget in tomorrow’s Budget Address is the critical first step to convincing the Democratic-controlled Legislature that the state can afford a tax cut next year.

With fiscal experts saying privately that the state can expect a robust $2 billion in tax growth in the FY15 budget, Gordon MacInnes, president of liberal think tank New Jersey Policy Perspective, was sufficiently worried about Christie’s plans that he authored a preemptive op-ed this weekend arguing that tax cuts are ineffective economic tools and that Christie has been unable to fund vital services without budget gimmicks

For Christie, a public debate over a tax cut — even one built on “one-shot” revenues, fund raids, and other fiscal maneuvers — would give the embattled governor something to talk about in town meetings and Republican Governors Association fund-raisers where he isn’t talking about Bridgegate or the other scandals that have cut deeply into his New Jersey approval ratings and cost him his lead in the 2016 GOP presidential sweepstakes.

In this political environment, with Christie taking a daily shellacking over Bridgegate, it’s easy to forget how close Christie came in the spring of 2012 to winning approval of a four-year property tax deduction worth up to $1,000 on state income taxes originally proposed by Senate President Stephen Sweeney (D-Gloucester).

That deal foundered when the Christie administration started what is now a two-year streak of state tax collections coming up short of its own overly optimistic revenue projections almost every month. And Christie’s personal attacks on the Legislature’s nonpartisan budget expert David Rosen as “the Dr. Kevorkian of the numbers” only made it worse when Rosen’s more conservative numbers continually proved right.

This spring, for the third year in a row, Christie will have to fill a current-year budget gap of his own revenue forecasters’ making.

Click to enlarge/reduce

The first time, as his tax cut deal with Sweeney foundered, Christie made up a $676 current year shortfall for FY12 primarily by shifting $200 million in Clean Energy funds earmarked for homeowner assistance into the general fund to balance the budget, and by using $261 million in New Jersey Turnpike toll money that was supposed to go into the Transportation Trust Fund to balance the budget, which added to the state’s debt.

Last spring, Christie was bailed out when an income tax surge caused by high-income taxpayers shifting capital gains back into the 2012 tax year to dodge an increase in the top federal income tax bracket helped wipe out part of a $700 million current year shortfall. Treasurer Andrew Sidamon-Eristoff made up another $392 million by pushing back the payment of homestead rebates from May into August, a budget gimmick that created a “one shot” saving for the FY13 budget.

The Big Bailout

“This year won’t be as easy,” said one fiscal expert who asked not to be identified. “Christie got a big bailout in 2013 with the extra income tax money and moving up the property tax rebate. But you can only do that once. And the Turnpike toll money and Clean Energy funds are already included in this year’s budget, so that’s out.

“The other problem is the surplus. The surplus is so low he can’t go down to a $100 million surplus and expect the Legislature to go along with him on a tax cut. He’s going to have to show at least a $300 million surplus going into next year, even if it’s just to give himself some room in case the April or May revenue figures are bad,” the fiscal expert said. “If he can get through FY14, though, FY15 should be easy.”

Christie’s FY14 problem, like the previous two current-year deficits, includes a shortfall for the first seven months of the fiscal year that Rosen, OLS’s budget director, said in a letter to legislators last week would be higher than $400 million, based on his review of Treasury Department collections through January 31.

The $400 million figure does not include the full $135 million anticipated shortfall in Internet gaming revenues. The Christie administration forecast that online gaming would bring in $160 million, but the program did not get started for almost five months. Rosen put a $40 million “placeholder” in the budget for online gaming revenues, asserting that the administration had provided no evidence to support its claim, but even that projection is now expected to be high.


Compounding the problem is a $165 million shortfall in the final FY13 tax collections that the Treasury Department finally confirmed last week when it issued its end-of-year audit two months late.

Finally, as New Jersey Policy Perspective reported in its analysis, the severe winter is expected to add $70 million to $80 million to current year snow removal costs; another $20 million is needed for tort claims; and the New Jersey Sports and Exposition Authority, which hosted the Super Bowl earlier this month, needs another $25 million to $30 million infusion.

A Disastrous December

State revenues were running relatively close to projections through November, and Treasury officials did not know until early January that a disastrous December had knocked what was then a $330 million hole in the current year budget. Treasury undoubtedly has taken steps to cut or freeze unnecessary spending in the next month.

But with the state facing an $800 million current year shortfall including the snow removal and other unexpected spending needs, Christie will still need to identify one or more major fund raids or one-shot budget savings to show the Legislature it can make up the difference. The problem for the Christie administration is that it may have already used the easy, large-scale budget gimmicks

The biggest – and most controversial – would be to shift a portion of this year’s required $1.7 billion pension payment, which is not expected to be made until just before the June 30 end of the current fiscal year, into the following year’s budget – a fiscal gimmick similar to the $392 million homestead rebate shift the Christie administration made to balance its FY13 budget this time last year.

Sidamon-Eristoff, who argued that homeowners would not suffer terribly by the three-month delay in the receipt of property tax relief, could argue similarly that giving up two months of investment earnings by putting $600 million, for example, into the pension fund later than planned would cost the pension funds no more than $12 million or so, and would enable the state to cover its present budget shortfall.

It may have been that budget maneuver — not a desire to avoid paying next year’s $2.4 billion pension payment — that Christie was signaling with his “State of the State” speech complaint about pension and debt costs crowding out other vital state needs. Christie said earlier this month that he would make next year’s pension payment, but he did not say anything about when this year’s bill would be paid.

A Personal Betrayal

While Sweeney, in particular, would be inclined to regard a partial shift of this year’s pension payment into next year’s budget as a personal betrayal by Christie, the governor can include the proposal — or similar options — in his Budget Address tomorrow and challenge the Democratic-controlled Legislature to come up with a better idea.

“The governor won reelection, he gets to go first, and the legislature gets to react,” the fiscal policy expert noted. “We all know that at the end of the day, the governor gets 98 percent of what he wants because the alternatives are usually worse. I don’t see how he doesn’t go for a tax cut. First of all, assuming he can figure out a way to get through FY14, the money is going to be there. This might be the easiest budget in 10 years. What do the Democrats do?”

State revenue growth of 6.5 percent – which is less than Christie is likely to project – would generate almost $2.1 billion next year on the $32.3 billion in revenues that would be collected this year if the state closes the budget year with the current $400 million shortfall in the 16 largest taxes and a $135 million hole in expected Internet gaming revenue.

Christie can also expect to reap an estimated $450 million in Medicaid savings from a full year under the Affordable Care Act — a $225 million increase over the six-month savings in the FY14 budget.

That more than $2.3 billion in revenue growth and Medicaid savings would readily cover the $700 million increase in pension costs from $1.7 billion to $2.4 billion; any pension payments or other FY14 bills that get pushed into FY15; the $250 million in bond premiums for the Transportation Trust Fund that will not be available this year; the $77 million fourth-year additional cost of Christie’s original business tax cuts, and other built-in costs.

Christie would still have enough money left over to provide significant increases in state aid to K-12 schools and higher education — as well as enough for a $250 million down payment for the first year of Sweeney’s property tax credit on state income tax bills and a restoration of the 25 percent cut in the Earned Income Tax Credit for the working poor that was a casualty of the FY11 budget cuts.


That doesn’t mean New Jersey can really afford the full FY18 $1.4 billion phased-in cost of the 10 percent across-the-board income tax that Christie originally proposed in 2012 or the property tax credit of up to $1,000 that Sweeney proposed as an alternative — or that such a tax cut would be preferable to the increased spending on transportation infrastructure and higher education and K-12 schools that New Jersey Policy Perspective’s MacInnes proposes instead.

Furthermore, the only way Christie could propose such an easy-to-swallow budget for FY15 would be to continue to rely heavily on one-shot budget gimmicks that add to New Jersey’s debt, which climbed last year to $78.4 billion, keeping the state among the top five in the nation in per capita state government debt.

Ongoing Raids

Christie will undoubtedly still need to continue to raid $300 million from the Clean Energy Fund and dedicated environmental funds, which would bring the total amount of money diverted from the Clean Energy program that is funded by surcharges on customer utility bills to well over $1 billion in Christie’s five budgets.

The governor will most likely continue to divert most or all of the $324 million in New Jersey Turnpike Authority toll money intended for the Transportation Trust Fund to the general budget, and probably skip most or all of the $166 million in state tax revenue payments that are supposed to go into pay-as-you-go transportation projects next year under the Transportation Trust Fund refinancing he announced after cancelling the Access to the Region’s Core (ARC) rail passenger tunnel project.

That would lead to a further increase in the state’s annual transportation debt payments. With Christie paying a historically low 2.4 percent in pay-as-you-go financing, New Jersey’s transportation debt has already jumped from $11.8 billion under Corzine to $14.9 billion under Christie, with annual interest payments topping $1 billion last year.

For Christie and for past governors, however, the political cost of pushing off fiscal problems into the future and overrelying on one-shot revenues and budget gimmicks has always been outweighed by the budget relief such maneuvers provide.

For Christie, who desperately needs a FY15 budget with a tax cut if he is going to begin the long slog back from Bridgegate and other scandals, it’s an easy choice.