In many respects, New Jersey is about to face the opposite of a “perfect (fiscal) storm.” Consider: The state’s pandemic-induced economic downturn is ending and its recovery is well underway; the pandemic-induced state revenue declines were far less than projected; and help from the federal government will likely far exceed both the state’s needs and expectations.
Of course, this good bit of fiscal news comes with many significant ongoing and long-term state problems. As such, the question becomes how will the state deal with this unexpected confluence of good fiscal fortune in addressing those problems?
We can do it in a good way or simply squander the opportunity.
State budget background
The proposed fiscal year 2022 state budget is the most robust spending plan in recent history. The stated increase is 8.8%, but when adjusted for supplemental appropriations (such as spending increases since the fiscal 2021 budget was approved) of $987 million in current year, the nominal spending increase is closer to 11% over the approved fiscal 2021 budget. The actual spending increase is more than $5 billion in nominal terms — an all-time high. Further, and somewhat inexplicably, the estimated revenue for fiscal year 2021 has been revised upward by the New Jersey Department of Treasury by more than $4 billion (and this does not count the over $4 billion in bond sale revenue).
This suggests that, in hindsight, the state did not need to ask the New Jersey Supreme Court for approval to sell bonds for operating purposes (for instance, to offset for anticipated revenue declines) and seems to indicate that the bond sale should have been deferred (and ultimately canceled). Instead, the state proceeded with an expedited, nonrefundable, and noncompetitive negotiated bond sale.
What’s more, with the recent passage of the federal stimulus package (the so-called COVID-19 relief bill), state government will receive approximately $6.5 billion in federal funds. (Note also that many local jurisdictions will receive direct aid under the federal legislation, which can lessen or eliminate the need for state assistance to local schools, counties and municipalities.)
Without belaboring arguments that I made in previous columns (that a bond sale was ill-advised and unnecessary), let’s consider these upcoming sizeable and unexpected riches for the state. That is, let’s consider some longer-term state budgeting strategies so that we can hopefully make sound near-term and better future budgeting decisions.
With this large amount of one-time federal assistance, we need to plan carefully so that we do not add problems to some of the ones we have already created with the proposed fiscal year 2022 state budget. Realistically, it is safe to assume that troubled times lie ahead, so it would be prudent to save now when times are good. Specifically, as the state’s proposed fiscal 2022 budget is currently structured, $1.4 billion will be placed in the state’s rainy-day fund at the end of fiscal year 2021 (a good thing). However, the reserves would then immediately be spent in fiscal 2022 (not a good thing).
New Jersey must strive to avoid the situation where ongoing spending is funded by nonrecurring (one-shot) revenues. Simple math would indicate that the projected gap between recurring revenues and projected spending for fiscal year 2023 (based on the proposed spending pattern) is between $3 billion and $4 billion (including a significant debt-service payment for the unnecessary bond sale). Such a projected budget gap indicates the need for a large tax increase and/or significant spending reductions in future years.
So, what is there to think about given this situation? I suggest that there are several issues that merit further attention and consideration.
The baseline New Jersey state budget of $41+ billion does not include any federal revenues. In fact, the state receives approximately $17 billion in federal funds annually — so, the actual spending of the state approximates $58 billion. This spending portrayal is a long-standing New Jersey budgeting practice and, while the funds are displayed in the budget document, they are considered “off-budget,” and not enumerated by line item in the actual Appropriations Act approved each year by the state Legislature. Rather, the $17 billion is simply appropriated (in other words, approved by the Legislature) by language, without specifics. As a matter of practice, the Legislature provides little input or oversight, principally because almost all federal funds are earmarked (their use specified) by the federal government.
My estimate, based on years of experience in working with the state budget, is that this new $6.5 billion will be much more flexible and can be used for a wide variety of purposes. So, the Legislature must play an active role in working with the governor in the appropriation of these funds. That means no appropriation by a simple language statement.
There are several basic options available to the state in view of the current situation. The federal monies could be frivolously spent on items that are simply nice to do and accomplish no pressing or lasting programmatic need — such as the current proposed budget initiative of paying $500 to families who earn up to $150,000, which will cost an estimated $320 million. Many of these families are slated to receive direct and indirect assistance from the federal COVID-19 relief legislation. As such, this is not now (if it ever was) a pressing need or priority for the state. Alternatively, the state could exercise fiscal discipline and set aside or otherwise “maneuver” most of the federal monies it expects to receive to close or modify the projected budget gap in fiscal year 2023 (and subsequent years).
Now is a perfect time for the governor and the Legislature to take a hard look at where the state budget is going over the next three to five years. The incoming federal money should allow us to plan for the future in a more responsible and coherent manner.
In my view, these additional federal monies will not solve all of New Jersey’s fiscal problems, as we simply have too many! However, the federal largesse will provide the state with more options to address significant and pressing needs, thereby limiting future adverse fiscal consequences that would no doubt prove harmful to the state’s residents, economy and budget.
Where to start
New Jersey does not provide a detailed “current services budget estimate” to show what future budgets, budget gaps and policy options might look like. New Jersey is not alone in this, as most states choose not to tell their residents about the problems that lay before them and what might have to be done in terms of raising taxes or reducing spending.
I can understand why a governor and legislature would be reluctant to do it, mostly because of the potential adverse political implications. Still, providing this kind of truth in budgeting should be done. Moreover, it is relatively easy with existing data and budgeting tools. (Note that even the often-disorganized federal government can project its $5 trillion budget — not counting recent COVID-19 spending — over a 10-year period with a reasonable degree of accuracy. The results are often scary, but they certainly help to lay out the fiscal problems that lie ahead.)
New Jersey’s future fiscal problems will be such that we should now be considering and/or pursing more aggressively policy options, such as school consolidations, pension and post-retirement health insurance reforms, regionalism of police forces and tax reforms (for example, the proper allocation between New Jersey and New York of income earned by interstate commuters and a serious review of the over $32 billion of tax breaks embedded throughout the New Jersey tax code), to name a few.
In terms of the state’s finances now is the time to review, consider, plan and act. It simply takes a little vision and leadership.