The state extended the current fiscal year by three months, a very unusual move but permitted under our Constitution. It allows more time to access the revenue impact of the pandemic and develop a strategy for the remainder of this year and next. During this time, the governor must share detailed revenue and expenditure projections with the Legislature so an acceptable consensus can be reached as to the magnitude of the problem.
While other New Jersey governors faced difficult times, the magnitude of this crisis is unprecedented. The challenge must be handled carefully and limit one-time actions that will ruin the state’s finances for years. I can draw on some first-hand experiences.
I envision the governor, the budget director and policy staff developing what-if scenarios. I remember doing these scenarios when Gov. Tom Kean assumed office facing budget shortfalls. Ultimately, the decision was made to reduce spending and increase the income and sales tax.
I remember doing similar scenarios when Gov. James Florio faced a $3 billion shortfall. Again, the decision was budget cuts and increases in the sales and income taxes.
Likewise, Gov. Chris Christie saw revenues drop by $2 billion as he assumed office during the recession of 2007. He reduced expenditures, particularly aid to school districts. In each case, difficult and unpopular decisions but no gimmicks and therefore less negative impact in the future.
Economic and revenue considerations
The nexus of the problem is the level of economic stress, the continuing decrease in all revenue sources and new spending needs associated with fighting the coronavirus. Let’s consider two possible economic scenarios:
- The economy continues to stumble for the next seven-to-10 months — past the end of the fiscal year ending Sept. 30, 2020 and into mid-December.
- The economy continues to stumble until the end of September and starts a “normal” recovery.
Considering each scenario — and maybe several more —estimating revenue will be a difficult task subject to more than normal uncertainty when projecting the future.
Moody’s Analytics developed stress tests and projections of revenue shortfalls for each state; for New Jersey they estimate a shortfall of $9.6 billion to $ 13.2 billion. I think that’s overstated but again certainly possible.
Under the federal Coronavirus Aid, Relief and Economic Security Act (CARES), $2.6 billion was allocated to New Jersey plus an additional $1.5 billion for NJ Transit. Additional funds for Medicaid and local school districts were also provided. A good start, but much more federal aid is necessary.
The governor has suggested the sale of bonds ($5 billion) to cover the shortfalls. In my judgment, that’s a big “no-no” (more on this subject later).
Under any scenario the state must make significant spending reductions — the business of government cannot be business as usual. Unfortunately, all existing programs cannot be continued.
Each budget reduction will have its constituents and objectors. Remember also that approximately 80% of budget expenditures leave state government in the form of grants and aid for local governments, principally for schools. Most of the remaining spending relates to institutional care (prisons, mental hospitals, and so on), transportation, state police and criminal justice. So, reductions will have many negative impacts.
It is difficult to argue that all spending is critical and can be funded simply by borrowing when many citizens will be losing their jobs and businesses closing. I suggest the following:
- Eliminate all new and most expanded programs included in the original budget totaling $1.1 billion, including increases for school aid.
- Immediately inform school districts (they are now preparing their budgets) they should assume the same amount of state aid received in the previous year — not the proposed increase in the budget. Further, they need to develop contingency plans (for example, a 5% to 10% reduction in aid) if even last year’s amount cannot be funded.
- Defer all salary increases for the next 15 months and replace only critical positions.
- Eliminate all programs (in current year) that the governor placed in reserve ($920 million).
- Eliminate the same programs in the next budget, including Homestead Benefit and Senior Freeze.
- Initiate a furlough program through September 30, 2020 for employees not critical for direct state operations. For example, reductions cannot be made for institutional care, police protection and certain staff for programs whose mission must be accomplished. But non-essential employees should be furloughed. The same needs to occur at the local levels of government.
- Include increases for Medicaid. Given the significant layoffs occurring in the general economy, more help with medical bills might be needed.
- Reduce significantly proposed pension contributions for the next fiscal year ($4.6 billion was proposed).
Will this be sufficient? Perhaps, if augmented by a reasonable amount of federal assistance. If not, then additional actions will be necessary, including tax increases. Such increases should be carefully considered and progressive in nature. Certainly, include a review of the state’s tax expenditures — the $30 billion in tax credits and deductions currently in the tax code benefiting certain corporations and people. Surely, some of these tax breaks can be considered unessential.
Selling bonds for operating purposes must be avoided — and according to the Office of Legislative Services (based on a prior New Jersey Supreme Court decision) is unconstitutional. Further, it is bad public policy. By definition, the amount will be a one-time revenue source. What does the state do the following year? This would double the negative impact, since any federal aid will also likely be one-time. Some will argue that revenues will return to normal (pre-COVID-19) levels. Not possible — at least not for many years. Best to bite the bullet for the remainder of this year and next than to struggle for many years thereafter.
The various local governments, including school districts, will also be severely stressed. Each depends on the local property-tax revenue that will decrease, as will state aid. Time to think of options since 74% of all statewide spending occurs at the local levels of government.
The 10,000-pound gorilla is the pension fund. At the end of this virus-induced-disaster, pension funds will be in worse condition. But to borrow $5 billion for a pension payment is even worse. Better to defer pension payments, then slowly put the funding back on track. Just as important, seriously consider leveraging and/or securitizing several state-owned assets and transferring such assets to the pension fund.
Now is the time to alter the pension systems by considering the Path to Progress Report. Accepting its recommendations will reduce long-term costs and not effect current retirees or those already vested. The report also contains recommendations to reduce costs of local schools and municipalities.
These budgetary pains and corresponding economic slowdown will likely be significant and sustained under any scenario. The appropriate adjustments must be on a matching scale, although not necessarily across the board without regard to the distribution of suffering. However, the state should always be mindful of both the short- and long-term implications of the budget adjustments that are made. For example, borrowing for operating purposes would no doubt prove illegal and inappropriate. Moreover, the state has several viable options that, while very painful, will better serve the needs now and into the future.