Budget Basics: Where the State Gets Its Money (part 1)

Richard F. Keevey | September 15, 2017 | Budget Basics
A series that details the fundamentals of New Jersey's budget, as well as its current budget woes

Richard F. Keevey
This is the second in a 10-part series outlining New Jersey’s fiscal fundamentals. The goal is to demystify some of the state’s financial challenges, and put them in context of the broader issues New Jersey faces. This series is also intended as a way to underscore the importance of state government in a year that will see a new governor and a new Legislature chosen by voters. Follow this link to see the other stories in this series.

Where does the state spend its money?

The $34.7 billion state budget for fiscal year 2018 (the part supported by state revenue and taxes) is divided into four major parts: state aid, grants-in-aid, capital construction and debt service, and direct state services.

Within these broad categories appropriations are made by major program category (for example, Medicaid, K-12 education, transit subsidies, higher education, state police, and hundreds of other programs and line items). But from a macro viewpoint, the budget can easily be understood by focusing on these four general categories.

Seventy-three percent of all state spending is disbursed in the form of state aid, or grants-in-aid to other entities — not expended for state government operations.

State aid

State aid is funds paid to municipalities, counties, and school districts. The amount in the current year is $14.9 billion — or 43 percent of total spending. The principal intents of state aid are to reduce the amount of taxes that otherwise would come from property tax and to accomplish educational policy goals.

The largest single appropriation in the state budget, and in this category, is aid to local school districts ($13.3 billion.) K-12 education spending is driven by two factors: enrollment and state formulas. The majority of aid is in the form of direct payments to districts (including charter schools) for operations and is disbursed via a formula based principally on the value of the property in the related municipality and the per-capita income of the municipality. The poorer the school district based on these criteria, the more state aid will be allocated to it. This formula is intended to meet the constitutional requirement of providing a thorough and efficient (T&E) education for all children as determined by the State Supreme Court in the Abbott v. Burke decisions.

This appropriation also pays for the school district’s share of pension, retirement health benefits, and Social Security contributions for the teachers in the district. Other types of school aid support services for the disabled and other special-needs students, debt service on local bonds, early childhood education, student transportation, and a myriad of smaller programs.

The state’s spending per pupil consistently ranks among the highest in the nation. In 2016, New Jersey ranked third at $21,127 per student. The national average was $11,709.

The majority of the remaining funds (approximately $1.6 billion) are paid to municipalities and county colleges — again to lessen the need for higher property taxes.


Grants are funds paid to homeowners, organizations, and service providers outside of the state government, but not to local governments. The total amount is $ 10.5 billion — 30 percent of total spending.

The largest program in this category is Medicaid (more than $6 billion), which makes payments to doctors, hospitals, nursing homes, pharmacies, and for a wide range of other health services for people who meet certain income or disability criteria. This $6 billion is matched with a like amount from the federal government, and administered by the state.

Medicaid is the second-largest cost center in the budget and is one of the most generous programs in the nation in terms of services offered and eligibility. In addition to federally mandated services, the state offers an extensive range of optional services. Costs are $8,309 per enrollee — the fourth-highest spending of any state, and almost 50 percent more than the national average ($5,790). The largest single cost center within Medicaid is for the elderly and disabled for nursing home and home- and community-based services.

Universities and colleges receive $2.3 billion, which is allocated to Rutgers University and the other schools in the state system for operations and for financial assistance for students.

Homestead-rebate payments of $147 million are paid to certain homeowners; $200 million is paid to certain seniors as part of the property-tax freeze programs. (Both programs are subject to income requirements.)

Subsidies amounting to $140 million are provided to New Jersey Transit to reduce fares for riders.

A wide range of grants totaling approximately $1.8 billion are paid to nonprofit entities that provide care and assistance for the mentally ill, developmentally disabled, elderly, veterans, children, people with addictions, and a wide variety of other social service programs.

Capital construction and debt service

The majority of the state’s capital construction program is financed by bonds that result in annual interest and principal payments. The total amount appropriated in this category for debt service is $1.9 billion — or 5 percent of the total budget. This $1.9 billion pays the interest and principal on the state’s general obligation (GO) bonds and the Transportation Trust Fund Authority bonds.

An additional principal and interest ($2.1 billion) is paid on bonds referred to as “appropriation Debt” (or contract debt). This debt, unlike GO debt, has not been approved by the voters, and is not backed by the “full faith and credit” of the state. These types of bonds have historically been approved by the Legislature and the governor (except for recent EDA bonds for the State House), and, in practice, the state has assured buyers of the bonds that such debt service will be paid — however, such payments are subject to annual appropriations.

An oddity in the New Jersey budget — not all of the debt-service payments are budgeted in this category. In fact, the total debt service on all bonded debt issued by the state is $4.0 billion (11.5 percent of the budget). The $2.1 billion in debt service for the appropriation debt is spread throughout the budget in its related program areas. For example, the $486 million debt service that liquidates bonds issued by the state for local school construction is budgeted in the education state aid section of the budget.

Direct state services

Direct state services are funds paid for services provided directly by the state government workforce. The total amount is $7.4 billion — or 22 percent of the total budget, principally for salaries and fringe benefits.

The state government workforce is approximately 64,000 full-time employees — of which approximately 30 percent are supported by federal funds and certain dedicated and fee-supported revenue sources.

Some 8,700 work for the Judiciary, including employees who are in the county courts; 480 work for the Legislature. The remaining 55,000 work in the 16 executive departments of the state.

The largest workforces are located in five departments: corrections, human services, children and family services, law and public safety, and transportation. The principal services performed by the state workforce include operation and staffing of the state’s 25 correctional, mental health, developmentally disabled, and veterans facilities; state troopers; motor vehicle operations; transportation; children and family services’ case workers; housing inspectors; tax collectors and other financial administrators; environmental protection scientists and inspectors; economic development and labor specialists; and public health professionals and support staff.

Over the past 11 years the workforce was reduced by approximately 15,000 employees, principally as the result of closing a major state prison and six facilities for the developmentally disabled and for mental health patients. Many of the developmentally disabled patients and clients with mental health issues that meet certain standards have been transferred to community-based settings and such costs are now reflected as grants to nonprofit organizations that operate these facilities. Other major reductions, such as in the departments of transportation, environmental protection, and law and public safety have been achieved by an aggressive policy of not backfilling positions when employees retire and major restructuring of services. Only in the department of Children and Family Services has staffing been increased — a slight increase of 70 people.

Three of the largest cost items ($3.8 billion) associated with the workforce are health benefits for all current and retired state employees; pension contributions for retirees and employees projected to be retired; and the state’s share of annual Social Security contributions.

The total amount budgeted in the current year for all benefits — including the amount the pension systems will receive from the recent transfer of the Lottery revenue, and including the amounts budgeted in the state-aid section for teachers — is $7.3 billion, or 21 percent of total state spending.

Smaller amounts are expended for material and supplies, travel, food for clients in institutions, maintenance, utilities, and information technology.

In summary, the expenditures of the state government can be viewed as follows:


Fiscal Year 2018 Appropriations (in billions of dollars)*

State aid                              $14.9
Grants-in-aid                          $10.5
Direct state services                   $7.4
Debt service and capital                $1.9
Total                                 $34.7

* In FY 2018 approximately $1 billion in Lottery revenues were moved out of the budget to the pension funds as part of the state’s pension contribution; in a similar vein, $1 billion in pension appropriations were reduced compared with the budget originally proposed by the governor.