Revenue losses triggered by the coronavirus pandemic brought on a flurry of state budget cuts last year, leaving some seniors without property-tax relief, schools without promised aid increases and public workers on furlough.
The COVID-19 pandemic and its economic shocks were unexpected. But those budget cuts and others could have been avoided, at least in part, if New Jersey had done a better job in previous years of socking away enough revenue in an account whose purpose, according to statute, includes “meeting the costs of any emergency.”
Early on during Gov. Phil Murphy’s tenure, his administration identified budget reserves as a concern and went out of its way to make the first deposit to the state’s emergency account — commonly referred to as the “rainy day” fund — after that account was completely drained during the 2007-2009 Great Recession.
Those funds, totaling more than $400 million, helped to offset at least some of the revenue losses that came last year amid the health crisis.
Around the time of the deposit in 2019, Treasurer Elizabeth Maher Muoio used the phrase “lock box” as she stressed the need to replenish the rainy day fund. And Murphy himself accused lawmakers of being “short sighted” when they unsuccessfully proposed leaving it empty.
But this year, with the balance of the rainy day fund projected to hit $1.4 billion amid an improving overall fiscal outlook for New Jersey, Murphy appears poised for what many see as a big policy reversal.
‘Let’s hope it doesn’t rain’
The nearly $45 billion budget he has proposed for the fiscal year that begins on July 1 calls for drawing down the rainy day fund’s entire balance in a single fiscal year.
This time around, it’s lawmakers who are asking some of the questions about how this account is being handled.
“Let’s hope it doesn’t rain,” said Sen. Troy Singleton (D-Burlington) after nonpartisan fiscal analysts confirmed during a recent legislative budget hearing that the balance of the account would be depleted during the next fiscal year.
To be sure, New Jersey is still wrestling with a public health emergency more than a year after the first COVID-19 infections were detected in the state. Unemployment also remains higher than it was before the pandemic began and many businesses are still struggling for survival.
Murphy, a first-term Democrat who faces reelection in November, has repeatedly said the state needs to spend money to ensure a robust pandemic recovery. And after the planned draining of the rainy day fund — which is officially called the Surplus Revenue Fund — Murphy’s budget proposal still calls for leaving a little over $2 billion in another reserve account.
However, the state is now in line to receive more than $6 billion in federal aid under the recently enacted American Rescue Plan Act to help combat the pandemic and its effects.
The federal funds will be on top of the nearly $4 billion the Murphy administration borrowed on an emergency basis last year to ensure it could respond to the pandemic amid projected revenue losses that have not fully materialized.
Strong revenue projections
Moreover, the latest state revenue reports indicate healthy year-over-year growth is occurring this year despite the pandemic; baseline revenues are also projected to rise during the 2022 fiscal year, the treasurer told lawmakers during the recent budget hearings.
Those developments led some Republicans to accuse Murphy of overstating New Jersey’s financial problems during the health crisis, all to ensure he would have ample reserves on hand to spend during the election year.
“Instead of helping people and businesses when they were desperate for assistance over the past year, Gov. Murphy sat on a mountain of hoarded cash that he kept in reserve to spend in his election-year budget,” said Sen. Declan O’Scanlon (R-Monmouth).
Asked about the grounds for proposing a draining of the “lock box” at a time when the state’s finances appear to be in good shape, Treasury spokeswoman Jennifer Sciortino said New Jersey is “still fully in the throes of the pandemic, both from a public health perspective and an economic perspective.”
“Very few would argue that this is NOT a rainy day right now so the anticipated transfer of Surplus Revenue Funds into the General Fund was determined to be both prudent and warranted,” Sciortino said.
“While we are projecting to end Fiscal Year 2021 on stable footing, that does not mean Fiscal Year 2022 will be without challenges,” she said. “We have yet to recover roughly half the jobs that were lost last spring, which means there will be a need for sustained assistance for those who have been hit hardest by the pandemic.”
Sciortino also noted Murphy’s budget proposal does not include any funds from the latest federal COVID-19 relief package because the budget was drafted and presented to lawmakers before final adoption of that law.
Ways to save for state emergencies
New Jersey’s fiscal policies generally provide two different tools that lawmakers and governors can use to stash revenue in reserve for economic downturns and emergencies. One of those tools is the Undesignated Fund Balance, commonly referred to as the “surplus.” The other is the Surplus Revenue Fund, or the rainy day fund.
Both accounts fall under the category of “budget reserves,” but there is a key difference in how they are supposed to operate.
Funds left in the surplus are unrestricted and can generally be used for any purpose. But under a law enacted in 1990 by then-Democratic Gov. James Florio, the rainy day fund is supposed to operate as a lock box, with some exceptions.
According to the statute, whenever tax collections that support the general fund outperform budget projections, a portion of those funds should generally flow directly into the rainy day fund. The use of those funds is also supposed to be restricted so that ample resources are available for times of emergency or when the state is facing a revenue shortfall.
However, governors and lawmakers have frequently failed to replenish the emergency account, and language is often inserted into the annual appropriations act to override the intent of the original law. That’s allowed because the appropriations act serves the state Constitution’s balanced-budget requirement, thus trumping any individual state law.
Sciortino said the Murphy administration is planning to “transfer” the entire $1.4 billion projected balance of the rainy day fund into the general fund during the 2022 fiscal year using budget language.
Questioning the Murphy approach
Those funds will help balance the governor’s $44.8 billion spending plan for the 2022 fiscal year at a time when taxes are expected to generate $40.8 billion, according to budget documents.
The administration is also planning to use another roughly $2.7 billion from the undesignated surplus to cover proposed fiscal year 2022 spending. Doing so would leave about $2.2 billion in that account to carry over as surplus for the start of the 2023 fiscal year.
Richard Keevey, who served as budget director under Florio, is among those who’ve questioned why Murphy is proposing to drain the rainy day account, including when he could instead leave less funding in the undesignated surplus.
“Why is the governor using money from the rainy day fund when it should be kept in the rainy day fund?” asked Keevey, who is now a university lecturer and regular NJ Spotlight News columnist on fiscal issues.
“Furthermore, he’s doing it by superseding the statute with appropriations language,” Keevey said.
A recent report issued by New Jersey Policy Perspective, a liberal Trenton-based think tank, also raised the issue of the rainy day fund. The report highlighted six reforms that could be enacted to “de-politicize and more effectively shape New Jersey’s budget,” including strengthening the current statutory language governing the rainy day fund.
“New Jersey can’t allow reserves to be treated like a slush fund or a second-tier obligation,” the report said.
The best practice?
During recent legislative budget hearings, lawmakers and fiscal analysts from the nonpartisan Office of Legislative Services discussed best practices for maintaining budget reserves. The analysts suggested a good goal for states is to have in reserve about 10% of projected annual spending, which would equal about $4.5 billion for fiscal year 2022 based on Murphy’s broader spending proposals, or double the amount the governor is currently earmarking for reserves. It’s now up to lawmakers to draft a spending bill before a July 1 deadline, and as budget hearings continue, it remains to be seen whether they will propose any change in fund balances.
Murphy himself stressed to lawmakers in 2019, when the issue of reserves was a subject of debate, that the state had $2.6 billion in reserves before the Great Recession and went on to face nearly $5 billion in revenue losses.
Asked for a comment on his current plan to maintain a $2.2 billion surplus, Sciortino said Murphy has “made building a healthier surplus a central priority in each of his proposed budgets.”
“Our proposed ending surplus, during the midst of a once-in-a-lifetime pandemic, is more than five times the surplus we inherited from the previous administration and more than double the next-highest proposed ending surplus,” she said.