Just how much New Jersey will borrow to prop up the next state budget remains uncertain, but some important details about how new debt would be issued — and paid back by taxpayers — are beginning to emerge.
According to budget documents and recent testimony during hearings before lawmakers, Gov. Phil Murphy’s administration is planning to use a 10-year repayment schedule for a total of $4 billion in new debt to help fund a nine-month budget he put forward last month.
Annual interest on the bonds could be around 2%, and repayment would begin almost immediately at a cost of about $400 million annually in a full budget year, Department of Treasury officials told lawmakers last week.
They also made a commitment to refrain from back-loading debt or using balloon payments, something that prior administrations have done to reduce short-term pain, even when it has driven up the total cost for future generations.
“The structure that we’re talking about is a relatively short-term, a 10-year term, and level pay, not back-ending it in any way,” said Michael Kanef, director of the state’s Office of Public Finance, during a recent Assembly Budget Committee hearing.
Behind closed doors?
The new details about the proposed borrowing suggest the Murphy administration is taking a restrained approach, at least initially, as it attempts to use the emergency borrowing law enacted by the governor earlier this summer in response to the coronavirus pandemic. But there are brewing concerns that the final decisions on borrowing will be made entirely behind closed doors. The new law that allows the borrowing does not explicitly spell out a procedure for public oversight of the panel of lawmakers who will have final say.
The borrowing law gives preliminary authorization for up to $9.9 billion in new debt to be issued without voter approval. It also allows for repayment of the bonds to take up to 35 years, and requires a sales-tax hike or statewide property assessments to be enacted if the bonds can’t be repaid with general budget revenues.
While Republicans and business-lobbying groups have been critical of using any borrowing to fund deficit spending, there has been some small praise for the administration’s current plan to at least pay down the debt within a decade.
“If you’re saying you’re going to do it in 10 years, I still think it’s wrong, but it’s a lot better than doing it in 35,” said Assemblyman Harold Wirths (R-Sussex) in response to the testimony from Kanef and other administration officials.
Murphy, a first-term Democrat who’s up for reelection next year, has put forward a $32.4 billion budget plan to cover state spending between Oct. 1 and June 30.
To help support an increase in year-over-year spending as general revenues are expected to decline during the ongoing pandemic, Murphy is seeking about $1 billion in new revenue from proposed tax hikes. These include higher rates on boat and cigarette sales, as well as on top-earning businesses and individuals earning over $1 million and up to $5 million annually.
But Murphy’s budget also calls for $4 billion in borrowing, which is roughly 10% of total annual spending. The state Constitution generally prohibits deficit spending, but it allows for exceptions such as helping the state respond to a war or major emergency.
Four lawmakers with big power over borrowing
While lawmakers gave their preliminary authorization for emergency borrowing in the law enacted earlier this summer, it still requires the Murphy administration to secure a final sign-off from a special panel of four lawmakers before any bonds can be issued.
The members of that committee are Senate President Steve Sweeney (D-Gloucester); Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen); Assembly Speaker Craig Coughlin (D-Middlesex); and Assembly Budget Committee Chair Eliana Pintor-Marin (D-Essex).
Sarlo told reporters last week that the revenue forecast for the next nine months will be one of the key issues for lawmakers as they consider the budget and any emergency borrowing. Final decisions on the tax hikes and how the state uses all its federal coronavirus-relief dollars will also be part of the calculus for lawmakers leading up to the Oct. 1 budget deadline.
Last week, the revenue forecast for the next nine months emerged as perhaps the biggest hurdle lawmakers and the administration will have to be overcome. A forecast released by the nonpartisan Office of Legislative Services was far more optimistic than assumptions included in Murphy’s budget plan..
The difference of nearly $1.4 billion between the two forecasts is the largest gap ever between the respective agencies at this point in the budget-approval process, officials said. The state Constitution gives lawmakers the authority to write an appropriations bill, but the governor holds final say on revenues. However, thanks to the borrowing law, the four-member panel now has some say on revenues, at least when it comes to borrowing.
“I don’t think the borrowing number can be determined until you reconcile the difference on the revenue projections,” Sarlo told reporters last week.
Oversight, diversity concerns
If bridging the gap on revenues goes down to the wire, that would mean bigger decisions about the budget and borrowing could also be made at the last minute, and with very little public oversight. Lawmakers already faced criticism this year after deciding not to hold any hearings to take testimony from the public on Murphy’s proposed budget.
In addition to worries that the panel charged with approving the emergency borrowing does not have to take any action in public, several Black lawmakers have raised concerns about the panel’s lack of racial diversity, underscoring racial equity and social justice issues that have become prominent in recent months amid the pandemic.
For their part, Republicans don’t hold majorities in either house of the Legislature and they will have no direct say in the borrowing review process. If they had their way, there would be no borrowing or tax hikes in the state’s the next budget.
Instead, GOP members of the Senate Budget and Appropriations Committee are calling for, among other fiscal moves, using a more optimistic revenue forecast instead of relying on the administration’s projections for the next nine months.
The GOP senators would also hold the state pension contribution effectively flat instead of following the Murphy administration’s plan for a record, $4.9 billion annual payment in fiscal year 2021. They say operating with a smaller budget reserve or surplus than Murphy is calling for would save more money under the GOP plan to balance the budget.
“We could dramatically decrease our need for borrowing (and) dramatically decrease our need for increased taxes,” said Sen. Declan O’Scanlon (R-Monmouth) during a Senate hearing last week.
The pension debate
But Treasury officials have pushed back against those suggestions. They’ve argued the types of measures proposed by the GOP could end up hurting the state’s finances more over the long term while also leaving it exposed to a new round of revenue losses if a second wave of the pandemic occurs.
Shorting the pension payment would also add to what is already a huge unfunded pension liability that has been built up by years of making only partial annual payments, or none at all in some years. In fact, Treasury officials said the bulk of the planned pension payment for the 2021 fiscal year will go to paying down the accrued unfunded liability, with only $750 million needed for covering what’s known as the “normal cost” for current employees. The added pension debt would also amortize at a roughly 7% annual rate due to the retirement funds’ current assumed rate of return, the officials said. By contrast, the state could borrow at an interest rate of around 2%, thanks in part to the role being played by a special municipal lending program the Federal Reserve is administering through the end of 2020.
“The opportunity to access the capital markets today, with very, very low rates, is beneficial to the state,” Kanef said during the Senate hearing.
But Treasury officials did concede during the Assembly hearing that borrowing $4 billion, even with low interest costs, would significantly increase the state’s reliance on so-called “one-shot,” non-recurring revenues.
That would create a big hole heading into the next budget and have the potential to bring on a credit-rating downgrade since New Jersey already has a reputation for running big structural budget deficits.
Major Wall Street credit-rating agencies put a “negative” label on the state’s credit outlook in recent months; any downgrade would only add to the borrowing costs that taxpayers ultimately would have to cover.
Recent commentary on Murphy’s budget plan by analysts from S&P Global Ratings underscored their concerns.
“Our review of the final enacted budget will particularly focus on the ultimate size of the structural budget deficit and how it might persist into future fiscal years,” the S&P commentary said. “We will also be evaluating the state’s liability structure in light of the adopted budget’s amount of new bonding.”