New Jersey’s longstanding tradition of spending more than the state collects in revenue each year is exposed as a national outlier in a new analysis of the budgeting practices that all 50 states have used over the last 15 years.
The comprehensive review by the nonpartisan Pew Charitable Trusts places New Jersey dead last among the states when it comes to maintaining fiscal balance, which is raising enough revenue on an annual basis to cover expenses for the same given year.
Only Illinois came close to matching New Jersey’s poor fiscal performance going back to 2003. The Pew analysis also shows the Garden State’s worst year of overspending just occurred during the 2017 fiscal year, even as many other states were cleaning up their acts during the ongoing recovery from the Great Recession.
The Pew analysis is just the latest loud warning sign for New Jersey, which already has one of the worst credit ratings of any U.S. state, behind only Illinois. It also comes just a few years after former Republican Gov. Chris Christie convinced Democratic legislative leaders to enact a series of tax cuts without reducing any spending, and as Gov. Phil Murphy, a first-term Democrat, has clashed with legislative leaders from his own party over undoing some of those tax cuts.
It remains to be seen what, if anything, will change in the wake of Pew’s findings. Senate President Steve Sweeney (D-Gloucester) has been calling for a new round of public-employee benefit cuts to slash state costs, but they have not been endorsed by Murphy, who still favors higher taxes.
Alaska, NJ’s polar opposite
Between the 2003 and 2017 fiscal years, Pew determined that the median amount of revenue raised by the states, including taxes and federal grants, was equal to 102.1 percent of their total expenses. That means the typical state maintained fiscal balance over the 15 years.
But Pew found that 10 states operated with an aggregate negative fiscal balance over the 15-year period, with the largest gaps appearing in New Jersey, 91.3 percent; Illinois, 93.8 percent; and Massachusetts, 96.1 percent. Among the top-performing states over the same period were Alaska, 135.9 percent; Wyoming, 126.1 percent; and North Dakota, 120.8 percent.
The analysis spanned the years of the Great Recession, and the median number of years that states operated with a fiscal imbalance was three. Montana was the only state to come through the 15-year period without a deficit in any given year, while New Jersey and Illinois were the only two states to experience a deficit in every year that Pew looked at. They were also the only states where the aggregate shortfalls were over 5 percent.
To conduct the state-by-state review fairly, Pew compared audited financial statements from all 50 states instead of their annual budgets, giving researchers the ability to account for the fiscal stunts that states often use to obscure deficit spending.
“Zooming out from a narrow focus on annual or biennial budgets offers a big-picture look at whether state governments have lived within their means, or whether higher revenue or lower expenses may be necessary to bring a state into fiscal balance,” the analysis said.
Worst deficit was in 2017 fiscal year
Pew’s research revealed that New Jersey’s worst deficit occurred during the 2017 fiscal year, when just 84 percent of the revenues that were needed to cover annual spending were collected. The state’s second-worst performance was in fiscal 2009, which was amid the recession, when revenues totaled 84.7 percent spending.
Although New Jersey’s post-recession tax collections have expanded, the fiscal 2017 imbalance that was tracked by Pew occurred after Christie and lawmakers agreed in 2016 to reduce several major sources of revenue. They cut the sales tax, from 7 percent to 6.625 percent, and phased out the estate tax, among other changes. But they also hiked overall spending during fiscal 2017 as contributions to the public-employee pension system were increased and Christie prioritized new funding for anti-addiction programs amid the building opioid crisis.
While Pew’s findings cast the handling of state finances during Christie’s tenure in a negative light, it remains to be seen whether Murphy will be able to work with lawmakers to make any improvements. Earlier this year, Murphy convinced legislative leaders to hike the state income-tax rate on earnings over $5 million, and to increase the top-end corporate-tax rate on businesses with more than $1 million in annual profits. This was done to support increased spending on public education, mass transit and the pension system, which remains one of the nation’s worst-funded state retirement plans.
But lawmakers resisted Murphy’s call to restore the 7 percent sales tax and to hike the personal-income tax on earnings over $1 million, even while accepting the governor’s major spending priorities — and tacking on some of their own to the appropriations bill that Murphy ultimately signed into law in early July.
The Pew analysis explained why states should generally strive to maintain fiscal balance, comparing them to the average American family that on occasion can absorb a year where household income falls short of expenses.
“But chronic shortfalls — as with New Jersey and Illinois each year since at least fiscal 2002 — are one indication of a more serious structural deficit in which revenue will continue to fall short of spending absent policy changes,” the analysis said. “Without offsetting surpluses, long-running imbalances can create an unsustainable fiscal situation.”