This is the fourth 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.
How large is the New Jersey budget, really?
The Appropriation Act approved for fiscal year 2018 is $34.7 billion. But the state spends a lot more. Two major revenue sources are excluded from the $34.7 billion: programs supported with federal revenue ($15 billion) and programs supported by certain dedicated taxes or fees ($6 billion). When included, the total appropriation in the General Fund is approximately $56 billion.
Budgeteers refer to these dollars as “below-the-line expenditures” or “off budget.” Are these numbers deliberately hidden? Is the state trying to hide certain information? No. The budget document displays all these funds, and the dollars are integrated into all spending decisions.
But if one reads articles about the New Jersey budget, rarely are federal dollars discussed and certainly not expressed as part of the budget. It is not intentionally misleading, but it is a little confusing.
Federal and dedicated funds
It is longstanding practice in New Jersey and some other states to reflect the budget in this manner. Historically, the logic was: “we do not know how much federal aid will be received, so only appropriate and spend the dollars when revenue is received.” But in practice the state spends as if the funds will be received. For example, the federal government provides 50 percent for the total Medicaid program — and the state operates the program fully expecting to receive those dollars.
Further, is this lack of certitude any more suspect then the estimate one makes for the collection of income taxes? In either case, if funds are not received actions are taken to reduce spending.
[related]Program spending supported by $6 billion in “dedicated” revenue — mostly driven by fees and certain taxes — has even less logic for being off budget. For example, the state disburses $788 million to municipalities from a portion of energy taxes, and provides $802 million for charity-care to hospitals and a range of other health programs from a dedicated portion of cigarette taxes and other fees.
The authority to expend these dollars is accomplished by inserting language in the Appropriations Act as follows: “In addition to the funds specifically appropriated … there are hereby appropriated any federal and dedicated funds received …” But these numbers should be part of the “official” budget numbers — after all, the $15 billion in federal aid is the single largest revenue — greater than the income tax — and supports 27 percent of total expenditures.
Other spending items
This $56 billion relates to the General Fund — the spending for the daily operations of the state — and is supported by taxes, fees, and federal aid.
The state government, however, also spends revenues deposited into two hundred (200) additional funds. If one were to examine the state’s “Comprehensive Annual Financial Report (CAFR),” one would discern those 200 funds — generally divided into six broad categories: special funds, agency funds, fiduciary funds (including pension and employee-benefits trust funds), capital project funds, private purpose funds, and component unit funds.
For example, the state holds certain monies in trust and spends them as directed by statute — such as the pension funds where payments are made to retirees. The original source of funding is state and local appropriations, employee contributions and investment earnings.
Other examples are monies collected from employers and held in trust for payment to workers for certain needs, such as unemployment or disability payments.
Special funds are also established for each bond authorization approved by the voters to record revenues received from bond sales and expended for construction projects.
A final category is component units. There are 13 New Jersey authorities, such as the Economic Development Authority and the Higher Education Student Assistance Authority, along with the 10 state colleges and universities. Most authorities receive no state funds, and while the colleges and universities do receive state monies in the state budget, most of their revenue is derived from tuition and other outside sources.
If one includes all these funds, total annual expenditures for fiscal 2018 will be $75 billion.
Should the New Jersey budget be displayed as $56 billion or perhaps $75 billion, rather than $35 billion. The most logical answer is $56 billion, since it represents the total spending of the General Fund and more accurately reflects spending for all state functions. Most states do it. We should as well.
Further, a report by the State Budget Crisis Task Force, co-chaired by Paul Volcker, also recommended this change for New Jersey. In fact, in the past few years the state has included a table in the Budget Summary document summarizing these revenues. The next logical step is to appropriate these funds. It makes total state spending much clearer and accurate.
Will it make the government more efficient and effective? Not necessarily, but it will make it more transparent — and that is important. The annual state budget’ for fiscal 2018 is $56B — not $34.7B.
The remaining $19 billion is appropriately segregated as these funds have been established for dedicated or fiduciary purposes — not for state operations. What’s more, authorities and universities and colleges are not state government, albeit in the macro sense they provide services that effect and improve the lives of our citizens, and that is why such expenditures, for example, are included in the overall “Annual Comprehensive Financial Report” of the state.