Record spending, but how to pay for it?

Those questions top latest legislative hearing on Murphy budget plan
Credit: (NJGOV)
April 7, 2021: Treasurer Elizabeth Maher Muoio spoke before members of the Assembly Budget Committee.

Lawmakers dug deeper into Gov. Phil Murphy’s latest state spending proposals as budget hearings continued Wednesday, questioning which areas could see big increases and how an overall record-high budget will be funded.

A nearly $45 billion spending plan proposed by Murphy for the fiscal year beginning July 1 calls for holding the line on taxes while at the same time increasing spending in several key areas as the state continues to try to recover from the ongoing coronavirus pandemic.

The spending increases Murphy wants include a boost in aid to K-12 schools and small businesses and to fund a new income-tax rebate for thousands of middle-class families.

While the state’s fiscal outlook has brightened significantly since the worst days of the health crisis, state Treasurer Elizabeth Maher Muoio told members of the Assembly Budget Committee the Murphy administration remains concerned about job losses and an unemployment rate that is still higher than it was a year ago despite recent improvement.

“People are still clearly struggling,” Muoio said as she explained the governor’s broader plan to “invest our way out of the current crisis.”

“We are making critical investments in the people and programs who need it most, to get the state back on its feet and build a more resilient post-COVID future for New Jersey,” she said.

Republicans balk at amount of spending planned

But Republicans on the committee raised concerns about the amount of spending the governor has proposed, as well as his plan to fund a roughly 10% year-over-year spending increase largely by drawing down significant budget reserves in a single fiscal year.

The administration’s decision to borrow nearly $4 billion without voter approval last year in response to projected revenue losses that never fully materialized was contentious, as it was during hearings held Tuesday with members of the Senate.

“We did things that we didn’t need to do, that the taxpayers are going to be paying for, for many, many years, and the bonding was just one of them,” Assemblyman Hal Wirths (R-Sussex) told the treasurer during a question-and-answer session.

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This year’s budget hearings with Muoio and other administration officials come as the state is still wrestling with the pandemic more than a year after the first COVID-19 infections were detected in New Jersey.

But the hearings also come at a time when Murphy, a first-term Democrat, is seeking reelection and as all 120 state legislative seats will also be on the November ballot.

Political undercurrents in election year

Those political undercurrents were evident during Wednesday’s hearings as the treasurer, and staff from the nonpartisan Office of Legislatives Services who focus on budget and tax issues, fielded a flurry of questions from lawmakers during separate appearances.

Many of the majority Democrats highlighted Murphy’s budget proposals, including a plan to fully fund the state’s annual public pension contribution for the first time in 25 years. They also defended the decision to issue bonds without voter approval in November in response to what at the time was projected to be a more than $4 billion shortfall.

“We could look back all we want. We didn’t know — who knew? — what was going to (happen),” said Assemblyman John McKeon (D-Essex). “All of the uncertainty was such that what we knew was that we needed this money, and we have it.”

But Wirths and other Republicans questioned the sustainability of Murphy’s spending proposals since his budget calls for using some $4 billion in budget reserves to support annual spending instead of relying on more sustainable, recurring revenues. They also noted the governor’s budget would leave New Jersey with a smaller percentage of budget reserves for the next economic downturn than is generally recommended by state fiscal-policy experts.

Let’s not get ‘too giddy’

“I don’t want us to be too giddy this year,” said Assemblywoman Nancy Munoz (R-Union). “We do have to look ahead.”

Meanwhile, there were also questions about the sustainability of the full pension payment Murphy has promised to make during the 2022 fiscal year, which begins on July 1. The total cost of that payment is $6.4 billion, and it is fully covered under Murphy’s proposed spending plan.

But Treasury officials have also indicated they expect the size of what actuaries would consider to be a full payment will be a moving target after fiscal year 2022 due to several factors. They include a planned slight reduction of the assumed rate of return for pension-fund investments and an ongoing review of longevity that factors into the long-term actuarial assessments for the pension system. Taken together, these will likely mean a full state pension payment will get costlier for the budget over time, including as less revenue is expected to be drawn from investments while retirees are expected to draw down more benefits collectively because they are living longer.

Muoio stopped short of laying out a specific plan for how full pension payments will be covered beyond the 2022 fiscal year when asked during Wednesday’s hearing about pension funding and other long-term costs.

But she told lawmakers she believed the full payments “will be manageable going forward.” There was also more talk of how best to use the next batch of COVID-19 relief funds New Jersey will receive from the federal government thanks to the recently enacted American Rescue Plan Act. While the state is awaiting final guidance from the U.S. Treasury, it is now expecting to receive more than $6 billion in direct, flexible aid, on top of the $2.4 billion sent to the state by the federal government last year.

Lawmakers want a bigger say

New Jersey was already ranked as one of the nation’s most-indebted states before it issued the emergency bonds last year, and several lawmakers from both parties expressed interest in using the federal dollars to help the state pay down debt.

Some also suggested that lawmakers should play a bigger role in deciding how federal aid is distributed than occurred last year when the state received $2.4 billion in initial relief funds. The issue came up during Tuesday’s hearings before members of the Senate.

“I think the governor has said he looks forward to working with his partners in the Legislature, to look to how this money will be spent moving forward,” Muoio said.

The budget hearings are set to resume Thursday in the Senate. The governor and lawmakers have until July 1 to reach an agreement on the next state spending plan.

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