Opinion: Selling Bonds to Balance New Jersey’s Budget Is a Big Mistake

Richard F. Keevey | July 16, 2020 | Opinion, Budget
The agreement between Gov. Phil Murphy and legislators to allow nearly $10 billion in emergency state borrowing is bad public policy with ruinous long-term consequences
Credit: Amanda Brown
Richard F. Keevey

It is a mistake for the governor and the Legislature to sell bonds to balance the fiscal year 2021 budget. Not only is it prohibited by the New Jersey Constitution but, more important, it is bad public policy and will ruin the state’s finances for years.

New Jersey passed a three-month extension to the FY2020 budget which now ends Sept. 30, 2020. In approving this unusual extension, billions of dollars were deferred that were scheduled to be paid during this three-month period. Instead, these payments will be part of the yet to be introduced nine-month FY2021 budget.

Last week the governor and the Legislature reached an agreement to issue as much as $9.9 billion in bonds to be used as a revenue item to balance the budget — it will most likely be approved shortly. The good news is there is a provision that would require a four-person select committee of the Legislature to approve the sale before the governor can sell the bonds. The bad news is they might do so.

No doubt New Jersey — as do all states — faces significant revenue shortfalls. The governor estimates approximately $8 billion, albeit recent independent reviews suggest it could be less. In any case, the Lance v. McGreevy state Supreme Court decision of 2004 determined that borrowed funds cannot be used to balance the annual budget.

More important, it is bad financial policy. By definition, the amount is a one-time revenue source. What does the state do the following year — sell more bonds? Furthermore, this creates a “triple whammy,” since any federal aid will likely be one-time and debt service of at least $350 million will be annually required.

Some argue that revenues and taxes will return to normal levels to cover these one-time items. This is not possible. After a much less disastrous 2007-2009 recession it took New Jersey six years to return to prior revenue levels.

The governor has made numerous and difficult budget cuts to date; more are possible. But, extensive reductions to programs such as Medicaid and state police operations are neither desirable nor would they close the budget gap. Those who argue for such options do not understand the impact on critical services and such rhetoric misleads the public.

There are other choices

But, other difficult but doable options are available.

First, though, additional federal assistance hopefully will be soon approved for all states. Depending on the amount of that assistance, there will be less need for extensive unpleasant actions by the state — but some actions will still be necessary.

Second, the planned appropriations ($3.7 billion) to the pension system for FY2021 should be deferred. This is never a good option, especially for a state that has consistently underfunded this. But, better to defer pension payments and put funding back on track later than sell bonds.

The state should also consider leveraging or securitizing several state-owned assets and transfer the assets to the pension fund. Just as important, now is the time to change the pension system. Such changes should not impact current retirees or those currently vested but be applicable to new employees. This would help address the long-range pension problems.

Finally, some level of taxes will need to be increased — most likely sales and income taxes. Always politically difficult but sometimes the best choice. Better to bite the bullet now than to invite fiscal struggles for years thereafter.

This action should certainly include an examination of over $30 billion of tax credits, deductions and preferential tax rates currently in the tax code benefiting select corporations and individuals. Surely, some of these tax breaks were ill-conceived and/or have outlived their usefulness and should be eliminated, reduced, or perhaps several of the exemptions should be suspended for several budget cycles until the crisis is solved.

One such action could be to tax New Jersey residents who usually work in New York but now do most of their work at home. Currently, these residents pay over $4 billion in taxes to New York. New Jersey can legitimately recapture some of these revenues.

These are difficult times for our country and for state and local governments. New Jersey and all states must be mindful of both the short- and long-term implications of its budget decisions. Borrowing for operating purposes is the wrong decision.