During testimony before lawmakers Tuesday, Gov. Phil Murphy’s treasurer repeatedly defended a decision to issue nearly $4 billion in debt without voter signoff last year in response to the coronavirus pandemic.
New Jersey’s fiscal outlook has seen a major turnaround in recent months thanks to a flood of federal aid and rebounding revenue collections. Where once it predicted a fiscal emergency, Murphy’s administration is now forecasting a surplus of more than $6 billion.
But that surplus and that rise in tax revenues were not evident in November when the emergency bonds were issued, Treasurer Elizabeth Maher Muoio told lawmakers on the first day of hearings for the governor’s spending proposal for the coming fiscal year.
At that time, the state was entering a second surge of COVID-19 cases and a period of “great economic uncertainty,” Muoio said to members of the Senate Budget and Appropriations Committee.
“We couldn’t simply say, as some are now suggesting, ‘let’s wait until later in the fiscal year to make the decision to borrow,’” she said.
But Republicans countered during a subsequent question-and-answer session by pointing to other forecasts that suggested a better outlook was building. One GOP senator called the decision to borrow a “dramatic overreaction.”
Another said Treasury officials made it impossible for Murphy, a first-term Democrat now seeking reelection, to live up to a promise to pay down the debt early if the state’s fortunes improved because the bonds were ultimately issued as “noncallable.”
“Well, I’m glad you don’t work for me,” said Sen. Sam Thompson (R-Middlesex) during one of the more contentious moments of the hearing.
A tense hearing
The emergency borrowing — and the accuracy of the administration’s revenue forecasts that supported it — were among several hot topics of discussion during Tuesday’s hearing.
Others included the latest revenue estimates from the nonpartisan Office of Legislative Services and the potential that a significant “fiscal cliff” may yet have to be confronted once the borrowed money and federal aid runs out.
“That time may not be too far away,” said Thomas Koenig, the OLS’ budget and finance officer.
After cutting about a billion in spending during the early days of the pandemic last year, the Murphy administration was forecasting a revenue shortfall of more than $4 billion when it issued general obligation bonds without voter approval.
The state Constitution puts tight controls on annual spending and borrowing, but the pitch for the emergency debt was based on a rarely used clause that loosens those restrictions during times of war or major emergency.
Republicans objected at the time, saying the projected shortfalls were being overestimated by the Murphy administration. But Democratic majorities in the Assembly and Senate went along with the Democratic administration and signed off on the borrowing.
During Tuesday’s hearing, several GOP senators reminded Muoio of the predictions Republicans had made last year. They also found vindication in comments Koenig made Tuesday prior to the treasurer’s appearance, when he said the borrowing has proven to be “not essential” to balancing the state budget “from today’s vantage point.”
“The administration kept pitching, contrary to everything we were hearing, that we had this problem that was completely going to blow New Jersey into bankruptcy,” said Sen. Declan O’Scanlon (R-Monmouth).
“Is there not some scintilla of regret that we [went ahead with the debt plan] within the administration and now have this obligation that one way or another we have to deal with?” he asked Muoio.
“We stand by the decision to borrow,” Muoio said in response. “We were looking at the certified revenues at the time.”
During her testimony, Muoio also took pains to put the decision within the context of what was happening at the time, which included the financial picture as well as the rising numbers of COVID-19 cases.
“So, yes, while New Jersey, like the rest of the nation, suffered extraordinarily from the health tolls of the COVID-19 crisis, we did better than anyone expected economically,” the treasurer said.
“Imagine, though, how disastrous it would have been if we had somehow postponed borrowing and the opposite panned out. Imagine if, like the first wave, the economic ramifications of the second wave had mirrored the surge in cases,” she said.
Bonds cannot be prepaid
Other Treasury officials also defended the decision to issue noncallable bonds that must be repaid with interest over a full 12-year term. Murphy and the treasurer herself had suggested, before lawmakers approved the bond issue, that the state could always pay the debt off early if its fortunes improved.
Structuring the bonds as they were issued yielded a true interest cost of less than 2%, the Treasury officials said — much better than what the state typically gets when issuing long-term debt. They also suggested if the governor and lawmakers decide to focus on debt defeasance, New Jersey can save millions by retiring other, higher-interest bonds.
“We’ve got to commit to doing that,” said Sen. Steve Oroho (R-Sussex) in response.
With New Jersey now preparing to receive more than $6 billion under the $1.9 trillion American Rescue Plan, committee Chair Paul Sarlo (D-Bergen) also said paying down debt should be a top priority for the administration and lawmakers going forward. New Jersey was already ranked as one of the nation’s most-indebted states even before the emergency bonds were issued last year.
“New Jersey’s long-term debt has a history of being a fiscal albatross,” Sarlo said. “If we have an opportunity to do something about it, we should do it.”
Fiscal picture continues to improve
Meanwhile, lawmakers also delved into the latest revenue estimates from the nonpartisan OLS. They show an even brighter outlook may be building before the current fiscal year closes at the end of June compared to updated forecasts the Murphy administration put forward in late February.
Moreover, between the final few months of the current fiscal year and the full 12 months of the 2022 fiscal year, which begins on July 1, the OLS estimates indicate roughly $550 million in additional revenue will be collected compared to the governor’s forecasts for the same period.
“We expect some preexisting revenue streams to perform better as a result of stimulus checks, extended unemployment insurance coverage and benefits, extension of the Paycheck Protection Program, and other measures in the federal law,” said David Drescher, OLS section chief for revenue, finance and appropriations.
“The governor’s forecast predated those events, and thus may not account for them,” he said.
Up for reelection in November, Murphy is proposing a record $44.8 billion budget for the coming fiscal year. It calls for no new taxes or tax increases, but would also spend down roughly $4 billion in budget reserves in a single fiscal year.
Hearings on Murphy’s budget proposals are set to resume Wednesday.