New Jersey’s rainy-day budget account ran completely dry during the Great Recession, and the state only recently saw its fiscal health improve to the point where it can resume making new deposits that will build up the fund’s balance.
Cash infusions represent a big step forward, but a new report from a nonpartisan fiscal watchdog highlights how New Jersey officials could do more to ensure the reserve fund — which is supposed to help the state weather economic downturns with little pain — isn’t in the same predicament when the next big recession hits.
Issued by the Volcker Alliance, an organization launched in 2013 by former Federal Reserve Board Chairman Paul A. Volcker that promotes sustainable government-budgeting practices, the report identifies policies that are working well in other states. They include establishing specific rules to ensure rainy-day funds are replenished quickly in the wake of a downturn, and setting up tight restrictions on when funds can be withdrawn.
Using past revenue volatility when setting goals for rainy-day savings is another key recommendation made in the report, which the Volcker Alliance billed as a “call to action” for states like New Jersey that are still operating with only modest budget reserves.
“States that fail to maintain adequate reserves may face credit-rating downgrades and the uncertainty of implementing fiscal policies with little or no cushion for emergencies,” the report said. “Those alone are ample reasons to maintain healthy reserves to cope with the rainy days, months, and years that inevitably occur.”
First deposit in roughly 10 years
In New Jersey, the rainy-day fund is one of two available to governors and lawmakers to help the state prepare for swings in revenue like those that occur during a recession. The other is the Fund Balance, more commonly referred to as simply the surplus.
In the wake of the Great Recession, the rainy-day fund — formally known as the Surplus Revenue Fund — went completely broke, and the surplus was left with as little as $300 million in some years as revenues only slowly recovered following the downturn. (A series of tax cuts that were enacted during former Republican Gov. Chris Christie’s tenure also influenced the revenue stream.)
The lack of a robust fiscal backstop put pressure on the budget in other places, with property-tax relief programs and the public-worker pension funding among the recession’s many casualties.
But New Jersey’s revenue collections have been improving in recent years, and late last month Gov. Phil Murphy, a Democrat, enacted a spending plan for fiscal year 2020 that allowed for a $401 million rainy-day fund deposit, the first in roughly a decade.
Under state law, such deposits must occur when tax collections outpace forecasts by a wide margin, as they did in FY2019. But fine print written into the annual budget has allowed prior administrations to evade the requirement. Lawmakers have also showed a preference for putting money into the surplus, which is not restricted and can be used for any purpose at any time. By law, withdrawals from the rainy-day fund can occur only during serious economic downturns or emergencies.
Modeling best practices in place elsewhere
One of the best practices highlighted in the Volcker Alliance report is in place in Florida to ensure officials follow a predetermined replenishment schedule any time rainy-day fund revenues are used during a recession. The Florida policy requires repayments to occur in the third fiscal year following any withdrawal.
In Rhode Island, governors and lawmakers are only allowed to appropriate 97 percent of the state’s revenues in a given year, leaving the remainder for budget reserves, according to the report. That policy helps to build up reserves coming out of a recession. And in North Carolina, the rainy-day fund can only be drawn down if there’s a supermajority vote in the Legislature permitting each withdrawal, according to the report.
Some states also link the size of their budget reserves to overall revenue volatility, including Minnesota, which has a policy in place that requires state officials to consider potential fluctuations in tax revenues when determining whether reserves are adequately stocked on a year-to-year basis.
William Glasgall, director of state and local initiatives for the Volcker Alliance, said during a recent interview with NJ Spotlight that revenue volatility is a key issue for New Jersey policymakers to consider. Glasgall noted the revenue stream in New Jersey, like nearby Connecticut, is heavily influenced by the income tax, which tends to rise and fall with the health of the stock market and corporate earnings. While it may be hard to predict when the next downturn will occur, he suggested policymakers can incorporate the depth of prior drop-offs when budgeting current reserves.
“Volatility is really number one,” Glasgall said. “That’s probably the biggest thing.”
Adding to the fiscal challenges for New Jersey has been the state’s huge unfunded public-worker pension and health-benefits liabilities. For example, the pension system is one of the nation’s worst-funded public retirement plans thanks to receiving only partial or no funding at all from the state over the last two decades. That practice has earned New Jersey a “D-,” the lowest grade the Volcker Alliance issues, in the organization’s most recent evaluation of the state’s benefits-funding practices. By contrast, the state has a “B” grade in the category of budget reserves.
Some lawmakers have questioned the Murphy administration for making the recent rainy-day fund deposit even as the state has been trying in recent years to ramp up to full pension funding.
“This is more of a political argument than an economic argument,” Glasgall said. “I’m not sure there’s any right answer.”