Coming off a year marked by credit-rating downgrades and major revenue losses triggered by the pandemic, managing the state budget will likely not get any easier for Gov. Phil Murphy and lawmakers this year.
For starters, the deadline for releasing a new state budget plan is the end of next month, and many of the same fiscal challenges caused by the coronavirus health crisis last year remain key concerns at the start of 2021.
There are also other, longstanding state budget issues that will also have to be addressed amid the ongoing health crisis. They include the public-employee pension system’s still large, unfunded liability and other long-term debt obligations.
But also putting pressure on the budget are major funding commitments from more recent policy decisions made by Murphy and fellow Democrats who control the state Legislature on the eve of this year’s gubernatorial and legislative elections. That includes a promise to create a costly new state tax-relief program in 2021 at the same time Murphy and the Legislature must close a large structural deficit they created in an emergency borrowing deal that bypassed voter approval.
Here’s a closer look at some of the key state budget issues for 2021.
COVID impact: New Jersey’s unemployment rate was hovering above 10% in November, more than double the rate measured in November 2019, demonstrating the pandemic’s significant economic impact. State revenue collections were off last year’s pace through the end of November 2020 by 5%, despite getting a small boost from recently enacted tax hikes, including a true millionaires tax established by Murphy and lawmakers last year.
The recent authorization of a second round of federal stimulus aid could help boost state tax collections in the near term, but it took New Jersey years to recover all of the revenue and jobs lost during the 2007-2009 Great Recession. How the current second wave of the pandemic plays out in New Jersey before the widespread availability of vaccines remains a key concern for the fiscal policymakers who will be drafting a budget for the 2022 fiscal year.
One-shot revenue: To help sustain state finances last year despite the revenue losses, the Murphy administration issued roughly $4 billion in emergency debt without voter approval in November. The borrowed money is helping to pay for things like aid to K-12 schools and tuition assistance for college and university students through the end of June. But the borrowed money is also a one-time, or one-shot, source of revenue that creates a structural gap heading into the 2022 fiscal year that will have to be offset with other revenue or major cuts.
On a $40 billion annual budget, the money generated by the emergency borrowing is equal to roughly 10% of total annual spending. The last time New Jersey’s budget was sustained with that much one-shot revenue was during the Great Recession, and worker pension contributions were shorted and state budget reserves were left dangerously thin in the wake. This time around, the state could get a revenue boost from the recently enacted legislation that restructured Horizon Blue Cross Blue Shield of New Jersey. But that would only offset a small portion of the $4 billion during the 2022 fiscal year.
Pension funding: New Jersey’s public-worker pension system remains among the nation’s worst-funded, and to chip away at the problem Murphy has been regularly ramping up the state’s annual pension contributions. The payment plan Murphy is following was established by Republican predecessor Chris Christie, but it’s been during Murphy’s tenure that the largest increases in raw dollars are coming due. For example, for the current fiscal year, which ends June 30, the Murphy administration is expecting to put $4.7 billion into the pension system, which would be nearly $1 billion more than the prior year’s required payment.
So far, the Murphy administration has been able to stick to the pension-funding ramp-up schedule despite the budget challenges posed by the pandemic. But another significant increase comes due in fiscal year 2022, and major Wall Street credit-rating firms have already signaled they will be watching closely. Two of the rating firms gave New Jersey downgrades last year as the overall budget was strained by the pandemic.
Surplus: After heading into the recession triggered by the pandemic with modest budget reserves compared to overall spending, Murphy and lawmakers were forced to “de-appropriate” hundreds of millions of dollars from last year’s budget to help keep it balanced as revenues fell way short of projections. Property-tax relief for seniors and disabled homeowners was among last year’s budget casualties.
In response, Murphy and lawmakers worked to increase the budget reserves or surplus for the current fiscal year to a total of $2.5 billion. Spending down reserves amid a time of crisis makes sense, but Murphy and lawmakers may be tempted to draw revenue from the surplus during the recovery phase to prevent making more difficult budget decisions. However, doing so could put the budget right back into the same vulnerable place it was in last year, prior to the health crisis.
Tax relief/tax breaks: As they struck a deal to enact the millionaires tax last year, Murphy and lawmakers also agreed to establish an entirely new tax-relief program in 2021. While details have been limited so far, they said they plan to send out checks worth up to $500 to many New Jersey families later this year. Initial cost estimates for the new program were in the neighborhood of $300 million, an expense that would have to be covered during the 2022 fiscal year if the governor and lawmakers live up to last year’s promise.
Before 2020 came to a close, Murphy and lawmakers also worked together to overhaul a number of state corporate tax-incentive programs that were allowed to lapse the year before. Supporters maintain the tax breaks that would be provided for things like brownfield redevelopment and historic preservation under a wide-ranging incentive bill that Murphy is expected to sign at any moment will provide the state with a much-needed net economic benefit. But the legislation itself, which would go into effect immediately, will require up to $14 billion in pledged tax expenditures to be covered over the long-term, with no specific source of funding set aside to pay for them.