Opinion: The COVID-19 Crisis’ Impact on NJ’s Finances — Questions for the Governor

An open letter to Gov. Phil Murphy
Andrew Sidamon-Eristoff

Dear Gov. Murphy:

Now is not the time for partisan politics. As our elected leader during an unprecedented time of crisis, you deserve the goodwill and cooperation of all New Jerseyans, regardless of party affiliation. Yet that does not suspend the obligation of those of us who do not share your partisan political priorities, but who do share your commitment to doing what’s right for our state, to offer constructive feedback where appropriate, as is fundamental to our democracy. In that spirit of “loyal opposition,” I ask that you consider the following requests regarding the impact of the COVID-19 crisis on state finances.

Please update the state’s financial information: We can’t solve a problem without first knowing its full extent. Yet, two weeks after you acknowledged that New Jersey’s tax collections were “falling off the cliff,” your administration has yet to follow other states in updating its revenues, creating an information vacuum that leaves far too much room for ill-informed speculation. Similarly, you have not disclosed with specificity the impact of the coronavirus crisis on the state budget: how much extra are we spending, and where are we spending it?

Combined with the unnecessary delay in conforming to extended federal tax deadlines, the absence of timely financial information is fueling a growing sense of confusion and disarray at the state level. Unfortunately, the lack of transparency undermines your credibility in seeking federal assistance or building a bipartisan consensus around the need to cut state spending and/or increase state revenues.

Please tell the state’s budget stakeholders the truth: Regardless of whether we receive billions more in unrestricted federal aid, you must realize by now that you will have no choice but to pare back your proposed 2021 budget’s planned increases, such as those for municipal and school aid. The sooner our stakeholders receive the official news, the sooner they can revise their own proposed budgets and the less disruption to local taxpayers and important citizen services. Withholding the inevitable truth is not doing anyone any favors and will only make things worse.

Please get serious about controlling spending: Citing the gathering fiscal crisis, your administration initially “froze” $920 million of fiscal 2020 budget appropriations. That might sound like a lot, but it’s only just over 2% of total adjusted appropriations for the year — hardly a major belt-tightening in the face of an unprecedented fiscal crisis.

Please explain how you set priorities: For example, at a time when the state’s cash position is under severe stress, why did you decide to make paying a $684 million quarterly contribution toward our long-term pension obligations a higher priority than $142 million in property-tax relief? Did you consider and reject layoffs and/or Corzine-style furlough programs?

It’s time to get serious about state spending. Once again, the sooner you take meaningful action, the less disruptive and harmful the impact will be.

Please explain your cash management strategy: I understand that you negotiated an extension of the state’s outstanding $1.5 billion cash-flow loan originally due at the end of June, converting what had been a floating rate note at roughly 0.75% when converted into a fixed rate note at 4%. I further understand that the anticipated extension made it possible for your administration to make a quarterly pension contribution on March 31. Please explain why this expensive extension was financially preferable to deferring the March 31 and subsequent quarterly pension payments to the end of the fiscal year, which would have freed up enough cash to retire the original note on schedule.

Please explain why extending the state fiscal year is a good idea: At your insistence, the Legislature agreed to extend the current state fiscal year by three months. Aside from palliative assurances that this delay will accommodate tax-filing delays, you have done little to explain, precisely, the benefits and risks of this extraordinary fiscal maneuver.

If extending is such a great idea, why is New Jersey the only state doing it? Are you positive that this extension is in fact constitutional?  What are the risks to the state if the issue is litigated?

In the absence of clear answers to these and other questions, forgive me for being tempted to assume that this move was more about buying time and avoiding difficult decisions than affirmative fiscal management.

Please explain why borrowing to support operating expenses is a good idea: As your administration’s bond disclosure update of April 17 noted, you have asked the Legislature to approve a COVID-19 Emergency Bond Act authorizing as much as $5 billion in general obligation (GO) bonds and an unspecified amount under the Federal Reserve’s new 24-month Municipal Liquidity Facility (MLF) to support the state’s operating expenses, including making public-employee pension contributions on the schedule established under your predecessor. You also announced your intention to use some of the proceeds of the GO bonds and/or amounts borrowed under the MLF to retire the state’s outstanding cash-flow loan (see above).

I understand; our state is in crisis. But before we commit the cardinal financial sin of borrowing for operating expenses you need to explain why borrowing to make pension contributions specifically makes financial sense. What makes this different from New Jersey’s previous, controversial experience with pension-obligation bonds? Is it fair to stick future generations of New Jersey taxpayers with this tab? Since the obvious alternative of reducing or skipping pension contributions is financially equivalent to taking on more long-term debt, have you done the analysis to determine whether the proposed bonding is in fact a more efficient (i.e., less expensive) method of financing the state’s pension obligations?

What happens if the Legislature does not approve your proposed bond act? Will you use MLF proceeds to retire the cash-flow loan anyway? What happens when the MLF proceeds must be repaid in 24 months?

Will you consider some benefits reforms in exchange for help from federal taxpayers? With due respect to Sen. Mitch McConnell, I agree that state bankruptcy is a red-state herring. But the controversy begs a serious question. You have said that New Jersey desperately needs more federal assistance to meet its pension obligations; OK, but in the spirit of compromise and shared sacrifice, would you be willing to entertain some cost-savings reforms to New Jersey’s public-employee benefits in exchange? Why should federal taxpayers support New Jersey public-employee benefits that are more generous than federal employee benefits, not to mention those in the private sector? If you’re looking for ideas that reflect your thinking and values, may I suggest that you revisit some of your own proposals as chairman of Acting Gov. Richard Codey’s 2005 Benefits Review Task Force?

Please back up your criticisms of federal assistance with facts: You have complained loudly that New Jersey may have to “return” the bulk of $1.6 billion it has received from the Coronavirus Relief Fund under the Coronavirus Aid, Relief, and Economic Security (CARES) Act because the U.S. Treasury has issued guidance that is too restrictive. With respect, that’s just not true.

First, as the guidance accurately reflects, the Coronavirus Relief Fund was created to assist states and localities with new expenses incurred due to the public-health emergency, not to support previously budgeted programs. That makes sense. Why should federal taxpayers backstop New Jersey’s budget choices from June 2019? Besides, given the scope of the health crisis in New Jersey, it defies logic that we have not incurred $1.6 billion of qualified, unbudgeted expenses.

Second, the Coronavirus Relief Fund is only one facet of the CARES Act, under which New Jersey and its instrumentalities will receive more than $7 billion in various forms of aid. By any standard, that’s a lot of money. Yes, we may still need more federal assistance, but misrepresenting facts or motives will not help us win friends in Washington.

Please don’t be afraid to reach out for help: It’s OK to reach outside of one’s immediate circle or comfort zone for help, especially in times of crisis. You have a strong professional staff, and New Jersey boasts a wealth of public financial-management experience from previous administrations of both parties.  Please use these resources.

Again, you deserve every New Jerseyan’s goodwill and cooperation as you strive to lead our wounded state through these difficult times. I hope you will receive this in good faith, as intended, and that you will be open to alternative ideas and perspectives in meeting the challenges ahead.