With a growing surplus and a modest growth forecast that lines up closely with the latest revenue projections from nonpartisan legislative analysts, the state budget seems to be in pretty solid shape heading into the next fiscal year.
But that stability will face a strong test over the next few months as several big issues remain unresolved, including an elusive deal on state transportation funding and a looming court decision that could further weaken New Jersey’s public-employee pension system.
Those concerns and others are giving lawmakers much to worry about as they start to dig deeper into Gov. Chris Christie’s $34.8 billion proposed spending plan in advance of July 1, the deadline that’s set in the state constitution for a new budget.
“There are clouds of uncertainty looming over this budget that we need to address,” said Senate Budget and Appropriations Committee Chairman Paul Sarlo (D-Bergen).
Sarlo’s comments came yesterday during his committee’s daylong review of the latest official budget figures. They were presented first by officials from the nonpartisan Office of Legislative Services, and later by acting state Treasurer Ford Scudder.
For Scudder — who was named treasurer by Christie last fall — yesterday marked his first-ever appearance before lawmakers in Trenton. His nomination has yet to be formally submitted by the governor.
Sarlo welcomed Scudder with an ice-breaking joke after listening to him read a lengthy opening statement that covered both the status of the current fiscal year spending plan and an outline of the proposed budget for the 2017 fiscal year.
“Hopefully the governor pays you by the word,” Sarlo said, drawing laughs from those attending the hearing in the State House.
But the two quickly got down to business, with Sarlo pressing the acting treasurer on a number of the state’s most pressing budget issues, including the lack of a concrete plan to renew the state Transportation Trust Fund.
The state has been spending more than $3 billion annually – counting federal matching funds — on road, bridge and rail-network improvements. But the trust fund will run out of money at the end of June unless a new source of revenue can be found. Christie’s proposed budget includes only a placeholder that assumes there will be $1.6 billion available for transportation spending.
Democrats have called new borrowing and increasing the state’s gas tax, but so far Christie has yet to agree with them.
“Where does that $1.6 billion come from?” Sarlo asked the acting treasurer yesterday.
Scudder responded by saying the trust-fund renewal will be subject to negotiations with the Legislature that would hopefully occur over the next several weeks, citing prior trust fund reauthorizations that played out in a similar fashion.
“This is something that is always decided by the Legislature and the executive, and we anticipate that it will be again this spring,” he said.
Earlier in the day, Sen. Jennifer Beck (R-Monmouth) made the case that the trust fund could be renewed without a hike of the gas tax. She’s put forward a plan to extend the trust fund for seven years by combining money from three sources: expected growth in state tax collections, new revenue from increased fines for motor-vehicle offenses, and new borrowing.
“There is a way for the Legislature to act and implement a TTF with no tax increase,” Beck said.
Part of a potential deal that has emerged has been a proposed trade-off of new revenue from the gas-tax hike sought by Democrats for a phase-out of New Jersey’s estate tax, which is something that Republican lawmakers have long sought.
Lifting the state income-tax exemptions on retirement income from pensions and 401(k) plans could also be part of a deal, along with allowing charitable contributions to be deducted from state income taxes.
What about lost revenues?
But Sen. Teresa Ruiz (D-Essex) pressed Scudder yesterday to explain how the state could absorb the loss of revenue from a phase-out of the estate tax. Legislative analysts predict the change will cost $120 million during the first year and $550 million once the tax is fully repealed.
Scudder conceded there would be less revenue coming directly into the budget from the estate tax if it were to be repealed. But he argued there would be a broader benefit because wealthy individuals and business owners who might otherwise leave the state would instead stay and expand their businesses.
For example, some published reports have suggested the recent move from New Jersey to Florida by hedge-fund billionaire David Tepper will cost the state $50 million in tax revenue.
“Think of all the different services that that ($50 million) could have provided,” Scudder said. “The estate tax, I guarantee you, does cause people to make that move.”
Earlier, Scudder took issue with those who downplay the impact the state’s tax policies have on those who decide to leave New Jersey for lower-tax states. New Jersey is one of only two states in the country to levy both an estate tax and an inheritance tax, and the state’s $675,000 estate tax exemption is the lowest in the country.
“Years and years down the road, looking back from heaven, what would you not do to leave an extra 16 percent of your estate to your children and your grandchildren rather than to my office? And if you don’t think people think that way then you’re just wrong,” he said.
“That’s what we work for, to pass money down to our offspring. That’s what we’re all on this earth for,” Scudder said.
But Ruiz remained unconvinced. “I’m just a little apprehensive with something that I know is a tangible number and something that to me is a kind of hypothetical scenario,” she said.
Case before high court
Sarlo also pressed Scudder to explain what, if any, contingency plans the state has for a case pending before the state Supreme Court that involves cost-of-living adjustments for retirees receiving a state pension. The adjustments were suspended as a part of a 2011 bipartisan pension-reform effort, but a group of retired workers sued the state to restore them.
The high court heard oral arguments last month and a decision could come down at any time. If the state loses the case, it could be on the hook for billions of dollars more in benefits owed to retirees, further weighing down a system that is already roughly $43 billion in debt.
“How are we paying for it if that happens?” Sarlo asked. Scudder responded by saying it’s unclear right now what the court’s ruling will be.
“Your guess as to what those scenarios would look like are probably better than mine,” Scudder said.
Earlier in the day, Frank Haines, the legislative budget and finance officer for the state Office of Legislative Services, also warned the committee about the impact of the pending court decision. He cited an analysis by Moody’s Investors Service that figured adding back the suspended cost-of-living adjustments could force the state to increase planned pension contributions by 30 percent. That would mean boosting the $1.86 billion contribution that Christie has set in his proposed budget by another $500 million.
Haines also raised concerns about another potential budget hole. Christie’s proposed spending plan is counting on $250 million in savings from employee and retiree healthcare changes, but he said those changes are “not yet adopted and perhaps not yet fully developed.”
But Catherine Brennan, the chief of OLS Revenue, Finance and Appropriations Section, said her agency’s revenue projections for the remaining months of the current fiscal year are just $73.2 million off those of the Christie administration. And the gap between OLS estimates and the administration for the 2017 fiscal year is $88.9 million, she said.
While there have been huge discrepancies in revenue estimates in some recent years, the difference between OLS and the administration through the end of the 2017 fiscal year is less than .2 percent, she said.
Sarlo said the general agreement in forecasts will help lawmakers as they work on the budget in advance of July 1.
“It makes it much easier, quite frankly, for us,” he said.