Pew Study: Echoes of Great Recession Still Heard In Trenton, Other States

John Reitmeyer | June 5, 2019 | Budget
Analysis of government spending shows that, in many categories, New Jersey and other states have yet to attain pre-downturn levels

frozen money cold cash
It’s been 10 years since the Great Recession came to an end, but New Jersey and many other states across the country are still feeling its effects, according to a new, independent analysis of state financial data. Indeed, the downturn’s lingering impact is roiling the latest budget talks in Trenton.

The long-term influence of the Great Recession on state governments was analyzed in a comprehensive new report called the “Lost Decade” that was released yesterday by The Pew Charitable Trusts.

The report evaluated a number of budget categories as it concluded the states “collectively or in significant numbers, still haven’t completely shaken off the effects of the downturn.”

In some cases, New Jersey fits in with the broader trend tracked by Pew, including by being among the dozens of states where spending on higher education has fallen short of the pre-recession funding levels. But the Garden State also cuts against other national trends, including by devoting more resources to K-12 education now than before the recession hit 10 years ago.

The Pew report was released to coincide with the official end in June 2009 of the nation’s worst economic crisis since the Great Depression. And the new research highlights enduring issues currently under debate in Trenton. For example, the report identifies New Jersey as a national outlier for leaving its “rainy-day” budget-reserve fund completely dry after the recession ended, and Gov. Phil Murphy and Democratic legislative leaders have still not reached an agreement on replenishing the depleted account in the budget for the fiscal year that begins next month.

Downturn had big impact in NJ

The Great Recession officially began in 2007, and it hit the Garden State especially hard. In fact, an earlier Pew report listed New Jersey among a handful of states where, as of last fall, inflation-adjusted revenues had yet to surpass pre-recession levels.

The authors of the latest Pew study estimate that states as a whole lost $283 billion in tax revenue between 2008 and 2018. New Jersey is included in the group of 23 states where total spending still lags.

“To balance their books, states relied on a mix of tax increases, budget cuts, and savings. But cuts in some state programs haven’t been restored,” the report said.

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One area that took a big hit was state funding for higher education, and New Jersey is one of 40 states where the per-student spending on things like aid to public colleges and universities and financial assistance for students and their families was lower in fiscal 2018 compared to fiscal 2008. Collectively, state support for higher education was down an inflation-adjusted 13 percent across the country, according to Pew.

State aid for local governments is also still down in more than half of the states compared to before the recession hit, according to Pew. And while the inflation-adjusted national average is just under 1 percent, the drop for New Jersey totaled nearly 8 percent.

The Pew report notes that in many places state aid is a major source of revenue for local governments, and the new findings bolster alarms that have been sounded in recent years by local officials in New Jersey as they’ve warned that continued flat state aid is putting more pressure on property taxes or leading to reductions in services at the local level. They’ve also lamented the loss of a cap on arbitration awards for police officers and firefighters that was put in place as one of several cost-control measures enacted by former Republican Gov. Chris Christie. The arbitration cap was allowed to expire during Murphy’s tenure.

“Cutbacks in state aid put a strain on local budgets and exposed cities and other localities to greater risk of financial problems,” the report said.

Rainy-day account remains dry

New Jersey was also identified as a national outlier for not putting even a single dollar back into its rainy-day budget-reserve fund. Only Kansas and Montana were in similar predicaments as of fiscal 2018.

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To remedy that problem, Murphy, a first-term Democrat, announced last month that his administration would be depositing more than $300 million into the rainy-day account, thanks to projections that revenues will exceed expectations by the time fiscal 2019 closes at the end of June. But the governor is facing resistance from leading Democrats who’ve suggested that the money could be better spent in other areas, especially as Murphy is also calling for a higher tax on earnings between $1 million and $5 million that many lawmakers oppose. They’ve also suggested a more than $1 billon balance that’s been built up as surplus in the General Fund obviates the need for a separate reserve fund.

Meanwhile, one area where the Pew report shows New Jersey is leading its peers is in funding for K-12 education — up 8 percent here compared to inflation-adjusted, pre-recession levels. By contrast, per-pupil funding for public education is down in 29 other states.

In his budget proposal, Murphy is calling for an increase of more than $200 million in K-12 spending. But some lawmakers have pushed for even more, including Senate President Steve Sweeney (D-Gloucester), who wants an additional $50 million spent on special-education aid.

It remains to be seen whether Murphy, Sweeney and Assembly Speaker Craig Coughlin (D-Middlesex) will be able to resolve all of their differences once budget negotiations begin in earnest over the next several weeks. A new, balanced spending plan must be in place on July 1 to avoid a government shutdown, like the one that was narrowly averted under similar circumstances last year.