The Five Sticky Budget Issues Governor and Lawmakers Must Resolve

John Reitmeyer | May 28, 2019 | Budget
The final countdown to the state’s budget traditionally begins after Memorial Day. Here we are — and here are the five biggest issues Gov. Phil Murphy and legislators must sort out by June 30

L to R: Assembly Speaker Craig Coughlin, Gov. Phil Murphy, Senate President Steve Sweeney
The post-Memorial Day push for a new state budget begins this week in Trenton. This year, there’s added suspense given that Gov. Phil Murphy and lawmakers have yet to work out several difficult issues. The clock is ticking since they have only until June 30 to do so — and to avoid a government shutdown. Here are the five biggest issues they must resolve:

Millionaire’s tax

Murphy, a Democrat, has remained adamant that the Democratic-controlled Legislature needs to raise the income-tax rate on earnings over $1 million; he maintains that’s necessary to raise more revenue to sustain spending. A 10.75 percent wealth surcharge was established last year on income over $5 million; his proposal calls for the surcharge to be applied to all earnings over $1 million.

But Murphy’s proposal has received heavy pushback from Senate President Steve Sweeney (D-Gloucester) and Assembly Speaker Craig Coughlin (D-Middlesex), who are reluctant to raise any taxes even if this policy change would impact just a small slice of the state’s 9 million residents. If they don’t back down, lawmakers will have to remove $536 million in spending from Murphy’s budget proposal for fiscal year 2020 or find other ways of raising revenue to keep spending balanced.

Last year, Murphy and legislative leaders were able to reach a last-minute compromise on tax policies, suggesting there could again be some room to negotiate.

Property-tax relief

Tied to Murphy’s plan for a millionaire’s tax is a proposal to boost spending on direct property-tax relief by $250 million. Like the millionaire’s tax itself, the relief proposal hasn’t been embraced by Sweeney and Coughlin, but they could face pressure from rank-and-file lawmakers since property taxes are routinely identified by New Jersey residents as their top concern.

Adding to the potential appeal of Murphy’s proposal is election-year politics, as all 80 Assembly seats are up for grabs and will be at the top of the November ballot. Meanwhile, lawmakers have also been showing interest in finding other ways to boost property-tax relief, including by increasing funding for existing relief programs, such as for Senior Freeze.

Surplus/rainy day fund

Another big budget priority for Murphy has been a rebuilding of the state’s unrestricted General Fund surplus, which is used to hedge against swings in revenue and is a primary area of focus for Wall Street credit-rating firms. The surplus was allowed to drop to as low as $300 million during the tenure of former Gov. Chris Christie (R), but Murphy’s administration has boosted the surplus to over $1 billion. Still, that equals just a small percentage of total spending, which would grow to near $39 billion under Murphy’s FY2020 proposal.

Meanwhile, a surge in state revenues this fiscal year has also triggered a statutory requirement that another $317 million be deposited into a separate reserve account that’s known as the “rainy day fund.” Once funds are deposited into that account, they can only be tapped in an emergency, and given their reluctance to hike taxes, legislative leaders are considering blocking the rainy-day deposit using budget language.

Benefits reform

A major priority for Sweeney has been spending cuts, and earlier this month he stood alongside several Republicans while introducing a nearly 30-bill package of reform legislation. The bills were inspired by a sweeping report issued nearly a year ago by a group of nonpartisan fiscal-policy experts whom Sweeney asked to come up with creative ways to reduce government costs at all levels in New Jersey. Among the most controversial proposals is a bill that would significantly overhaul pension benefits for many new public workers and those with less than five years of service. Another would change healthcare coverage options for all government workers in the state, including by shifting more of the cost of coverage onto workers by offering so-called gold plans instead of platinum.

But Murphy has close ties to the state’s public-worker unions and has favored negotiating savings only through collective bargaining instead of forcing changes through law. He has also not openly embraced any of the 30 proposals backed by Sweeney. As budget talks advance in June, the governor may be able to reach a broader compromise with Sweeney if he shows a willingness to enact at least some of the reform bills favored by the Senate president, such as a proposal to consolidate the boards that design public-worker healthcare plans.

New Jersey Transit

The governor’s FY2020 budget increases the General Fund subsidy for NJ Transit’s operating budget by $100 million. But the net increase for the cash-strapped transit agency would be only $25 million; that’s because Murphy is also seeking to reverse a series of funding gimmicks that were used in prior years by Christie and lawmakers as the state faced its own big budget problems. Given the complaints that are still being lodged by NJ Transit riders on a daily basis, some lawmakers have made increasing the net funding for the agency a top priority this budget season.

Another major concern is the planned continuance of significant capital-to-operating transfers that handicap NJ Transit’s ability to make long-term improvements. Still, it’s unclear where lawmakers can find more money for NJ Transit that could be anything more than a one-shot infusion. The millionaire’s tax would offer no help since New Jersey’s income-tax revenue is constitutionally dedicated to only funding property-tax relief. Some other options include restoring an estate tax on high earners or mimicking New York’s new tax on luxury real-estate transactions and dedicating the revenues to NJ Transit.