This is a short piece because the path is clear to me. I have written several articles and testified before the Senate Budget and Appropriations Committee on this same theme: Do not issue bonds to balance the New Jersey state budget. It is bad public policy and it will create much deeper budget problems in the future. And, it is not necessary.
The governor convinced the New Jersey Supreme Court that he needed authority to issue up to $9.9 billion in bonds because of revenue shortages caused by the coronavirus pandemic. The court approved his request.
But, in his recent budget presentation to the Legislature the gap between requested spending and revised revenue is now $5 billion. The governor’s proposal: Increase taxes by $1 billion and sell bonds for $4 billion.
The state sold bonds to fund the pension system almost 24 years ago. We are still paying debt service on these bonds. In the budget for fiscal year 2020, the debt service payment is $472 million for those bonds and we have four more years to go at $507 million per year. Such actions were wrong then and they are wrong now.
The independent Office of Legislative Services analyzed the governor’s revenue projections and argues that they are understated by $1.4 billion. If these revenue estimates are accurate, the budget problem is now $3.7 billion — not $9.9 billion and not even $4 billion.
What to do instead of borrowing
There are several ways to deal with a shortfall of this magnitude without issuing bonds. I suggest the following:
- Reduce projected spending by 3% ($1.2 billion), including the deletion of $40 million for “baby bonds”; the increase of $70 million for pre-school education; $16 million for “favored parks and community centers” in five municipalities; $60 million for a new grant program for water infrastructure (bond funds and federal grants are the usual funding method for capital projects); and the $100 million for interest on the proposed bond sale.
- Defer $2 billion of the $4.9 billion proposed to be paid into the pension systems. This option would have little or no adverse short-term budget implication and it can be corrected in future years when the state’s economy recovers.
- Eliminate $500 million of existing so-called tax expenditures (i.e. tax deductions, credits and preferential tax rates). There are over $31 billion of these provisions currently in the tax code that benefit only a select group of corporations and taxpayers. Surely, some of these tax breaks have outlived their usefulness. Budgeting is about setting priorities and not all these tax expenditures have a higher priority than the current needs. In an era of reduced spending it makes no sense to ignore limiting, if not eliminating, some of these ongoing tax benefits. This is an option that arguably could provide significantly greater revenue if necessary.
- Retain the projected surplus of $2.2 billion as a safety valve in case revenue estimates are not fully realized.
Furthermore, immediately work to alter the tax code impacting New Jersey residents who usually commute to jobs in New York but now do most of their work from home. New Jersey residents now pay over $4 billion to New York. Working from home — once infrequent — is now the norm and is likely to continue well after the pandemic ends. New Jersey is entitled to this revenue, estimated to range from $500 million to $1 billion.
A better way
It is plausible that Congress and the president will ultimately conclude that state and local governments need more assistance from the federal government. We most likely will not know this decision before Oct. 1 when the state budget must be adopted. But, if any monies are allocated it would be in addition to the $4 billion in bond proceeds in the proposed budget. This is not a good situation since the total amount of funds may encourage additional spending that is not warranted given current economic and fiscal conditions.
I have argued in the past that some tax increases or broadening of the tax base might be necessary. For example, returning the sales tax rate to 7% would generate upward of $700 million. However, that is not necessary to address the current budget shortfall, even if in the long run (especially if the pandemic is prolonged) some tax increases prove necessary and appropriate to maintain critical programs and achieve long-run investments.
I am confident the governor and the Legislature can arrive at a better budget resolution than selling bonds. It will require cooperation by both branches of government — and both political parties — and a willingness to forgo the traditional political gamesmanship that results because some group did not obtain all they wanted.
In sum, issuing bonds to support the state’s operating budget is not appropriate and flies in the face of long-held best budgeting practices. Moreover, there are numerous viable alternatives that would address the shortfall and limit many long-term adverse budget implications — serving both the short-term and long-term best interest of the state’s residents and economy.