A blend of tax hikes and spending cuts — not one or the other — is the only way New Jersey can dig itself out of its fiscal problems, including seemingly annual budget gaps, according to a new report on New Jersey finances issued by one of the top Wall Street credit-rating agencies.
The report released yesterday by Moody’s Investors Service maintained New Jersey’s A3 credit rating, but it also raises questions about the latest budget projections from Gov. Chris Christie’s administration, which hold firm to an expectation that revenues will grow enough to cover increasing contributions into the underfunded public-employee pension system even as a package of tax cuts continue to take hold.
Christie’s administration took issue with the report after it was released yesterday, faulting the rating agency for assuming that “people don’t respond to incentives” like the tax cuts.
The Moody’s outline, meanwhile, also suggests the prescriptions for New Jersey’s fiscal challenges that Democratic and Republican gubernatorial candidates have been offering up in recent weeks in advance of next month’s primary elections will be insufficient. The Democrats have been favoring tax hikes, including on millionaires, to fill budget gaps; and the Republicans have been pointing to spending cuts, like reducing public-employee health benefits, as a solution. But the Moody’s report suggests it will realistically take a combination of both approaches.
“A mixture of slightly stronger economic growth, tax increases and structural spending cuts would close the deficit and make the rising fixed costs affordable,” the report said.
Revenue collections $527 million short
Christie’s administration announced last week that revenue collections for the current fiscal year were projected to come up $527 million short of earlier estimates, prompting a host of budget adjustments to bring spending into balance before the fiscal year closes at the end of June. Among other changes, the state is holding back payments to municipalities that cover this month’s Homestead property tax relief credits.
The fiscal year 2017 shortfall was just the latest to occur during Christie’s two terms in office; five of the seven spending plans that Christie has authored have needed last-minute adjustments to remain in balance, something that is required by the state constitution.
But the Christie administration has decided not to downgrade its projections for the upcoming 2018 fiscal year. Instead, the official revenue forecast was boosted last week by nearly $200 million, with the administration expecting a series of new tax-collection initiatives to help the state meet its targets. By contrast, a forecast compiled by the nonpartisan Office of Legislative Services for FY2018 was less optimistic, coming in $230 million lower than the Christie administration’s.
Christie’s growth projections are helping the state cover a planned increase in the state pension contribution, from $1.86 billion in the current fiscal year to $2.5 billion in FY2018. That continues a planned 10-year ramp-up to the full pension contribution that’s calculated by actuaries on an annual basis even though Christie once promised he would fully fund the pension obligation by the time he left office in early 2018.
The rosy tax forecast for FY2018 — overall revenue growth will top $1 billion under Christie’s latest estimates — also comes as the next phases in a series of state tax cuts that were enacted last year will take hold in 2018. They include a reduction of the sales tax to 6.625 percent and the full phase-out of the estate tax. The OLS analysts have projected those tax cuts will cost $1.4 billion by FY2022, but Christie and other Republican officials say they will also generate economic growth that will ultimately benefit the state budget and taxpayers.
Moody’s predicts $3.6B budget gap by 2023
But after looking at the last five years’ worth of revenue growth in New Jersey, as well as expected pension-system investment returns, Moody’s is predicting a budget gap of $3.6 billion by FY2023.
“In order to ‘breakeven,’ or balance rising pension contributions and a minimal level of operating expenditure growth, average annual base growth would have to accelerate to 4.2 percent in order to generate 3.7 percent net revenue growth on average through fiscal 2023,” the report said. “In comparison, the state’s five-year historic average base revenue growth is 2.8 percent.”
Willem Rijksen, a spokesman for the state Department of Treasury, faulted Moody’s — which has lowered the state’s debt grade four different times during Christie’s tenure —for not recognizing the role tax cuts could play in keeping “people, businesses and capital in this State.”
“Moody’s yet again assumes, against all common sense, that people don’t respond to incentives,” Rijksen said.
With the second-term Republican due to leave office in early 2018 under the state constitution’s term limits, it will ultimately be up to the next governor to figure out what to do if Christie’s latest projections end up being faulty.
The Moody’s report recommends a “multipronged” approach to addressing the projected budget deficit, something that would incorporate some of the ideas being raised by both the Democratic and Republican candidates running for governor this year. That’s because raising taxes — including hiking the rate on income over $1 million, which is something the Democratic frontrunner, Phil Murphy, and several of his opponents have been calling for — wouldn’t close the projected budget deficit on its own. Reducing public-employee health benefits, which is something the leading Republican candidates, Kim Guadagno and Jack Ciattarelli, have said is necessary, would also not provide enough savings to fill the gap.
But Moody’s said a “mixture of stronger economic growth, tax increases and structural spending cuts” would be likely to “close the deficit.”
“Options for new revenues include a ‘millionaires’ tax,’ similar to what has been implemented by previous administrations and more recently discussed by various candidates for the 2017 gubernatorial election,” the report said. “A $1.3 billion budget cut could be realized through healthcare policy changes.”
But even with those changes, risk for the state budget wouldn’t be completely eliminated. “Revenue growth could be quickly derailed by a national economic slowdown or continued fragility in New Jersey’s recovery,” the report warned.