As a general rule, the New Jersey Constitution prohibits borrowing to finance the state operating budget, except in situations of emergency. The New Jersey Supreme Court ruled on Aug. 12 that it is permissible for the state to sell bonds to use as a revenue item to balance the budget because of the coronavirus emergency. I never imagined that they would opine in that manner, and it was not even close — a unanimous 7-0 decision. I was surprised by the court ruling, but, who am I to question the legality of their decision?
However, as a concerned citizen and a former budget director for New Jersey, I would urge the governor and the Legislature to review very carefully the real need. The approved borrowing amount of $9.9 billion was such because the Murphy administration had argued the revenue shortfall could be that large. Ultimately, the Legislature must still approve the actual sale of bonds and the amount(s). They need to make a better decision.
For several reasons, I would suggest the Legislature not approve any bond sale until they are satisfied that such action is absolutely necessary. In my view, it is not necessary and would be a poor decision.
- First, any use of bond funds is, by definition, one-time. What does the state do in the following years to support the current level of spending — sell more bonds? That is, if we borrow to support a desired level of spending for the fiscal year 2021 budget, how do we support that level of spending in subsequent years if state revenues do not significantly rebound?
- The proposed amount to be borrowed is not justified. The revenue data presented to the court was not the most current, and it overstated the revenue shortfall based on the most recent and more reliable estimates. The shortfall is not even close to $9.9 billion. Issuing bonds would simply increase the amount of revenue available and enhance the likely amount of spending in the budget at a time when more spending discipline is needed.
- I do not have a crystal ball, nor do I have all of the raw tax collection data available to the Department of Treasury, but based on revenue collections to date and who is paying the taxes, a more reasonable analysis suggests a much-improved revenue environment for the state, given that revenue yields have improved significantly over the last several months/weeks.
- Consider the following:
- The state currently has an approved budget for the three-month period ending Sept. 30, 2020, of $7.7 billion with a projected ending surplus of $1.8 billion.
- Let’s assume the administration desires to spend at the level recommended in the budget submitted in February for the full year ending June 30, 2021 ($40.8 billion, which was an increase of $891 million over the current year and $4 billion over the prior year spending levels). So, if NO change was made to this funding level — which is hard to justify in this environment — then the budget for the next nine months would be $33.1 billion.
- So, what will the revenue estimates be for the nine-month period of the new 2021 fiscal year (Oct. 2020 to June 2021)? Based on reported tax collections through July and making some macro assumptions on the economy, I estimate a collection of approximately $28.7 billion. Is this a firm number? Of course not. Could it be higher or lower? Absolutely. But, I would argue that it is a reasonable estimate.
- Based on these projections, the revenue shortfall would be $4.4 billion, plus a planned surplus of $1.8 billion. (A lower surplus of $1.3 billion would yield a shortfall below $4 billion.) But, I would not lower the surplus below $1.8 billion.
So, we need to address a revenue shortfall problem of approximately $4 billion — not $9.9 billion.
NJ has faced similar budget issues
Do we still have a problem? Yes, but no different than very similar budget problems faced by three different governors in 1983, 1990 and 2008. They did not resort to borrowing to cover their shortfall. Instead, they responsibly reduced spending and/or increased taxes or both.
Also, no spending cuts or, importantly, no federal funds are included in the above analysis.
Solving the problem without borrowing
The state has several more viable options that produce much less onerous long-run adverse outcomes and would solve the problem without borrowing, including:
- Reduce spending from the amount proposed in February 2020 by 3%, yielding $1.2 billion.
- Defer some part — e.g. $2 billion of the $4.9 billion — of the proposed pension payment until the economy improves and state revenues return to “normal.”
- Examine the $30 billion of so-called tax expenditures — deductions, credits and preferential tax rates — currently in the tax code that benefit only a select group of corporations and taxpayers. Surely, some of these tax breaks were ill-conceived and/or have outlived their usefulness and should be eliminated, reduced or — even better — simply suspended for several years until the crisis is solved. As a minimum, $500 million to $1 billion of revenue could easily be achieved and would apply only to a small number of residents.
- Increase taxes. For example, an increase in the top tax rate for incomes over $1 million would raise $500 million to $700 million; a return of the sales-tax rate to the full 7% from the reduced rate of 6.625% would yield approximately $700 million. Restructure the estate tax with a potential yield of $400 million to $600 million.
- Work to alter the tax code to tax New Jersey residents who usually work in New York but now do most work from home. These New Jersey residents now pay over $4 billion to New York.
- Assuming that another COVID-19 relief bill will soon be forthcoming from Washington, it could produce a significant number. This could mitigate some of the actions suggested above.
The bottom line — DO NOT sell bonds to balance the annual budget when better options are available — options that will not cost the state interest payments every year ($50 million per year for each $1 billion of debt for up to 30 years) or require unpleasant actions in the future when the state can’t repeat the one-time bond sales authorized by the New Jersey Supreme Court. Better to bite the bullet now.
In short, discretion — the better part of valor — is knowing when to keep your credit card in your pocket, and how much is appropriate to borrow since that bill will ultimately come due. This is equally true for the state as it is for individual households.