Opinion: This planning tool could help NJ weather looming fiscal storm

Richard F. Keevey | April 8, 2021 | Opinion, Budget
A big budget surplus masks potential problems; a current-services projection would help officials sort things out
Credit: Amanda Brown
Richard F. Keevey

As I noted in a recent article, New Jersey is in the best overall fiscal shape it has experienced in quite some time. However, these good times are not likely to last. As such, the state should be mindful of its current budget decisions, and especially their long-term fiscal implications. This caution applies to both spending and tax/revenue policy decisions. But there’s an important policy tool for identifying any potentially adverse long-term impacts of current tax and spending policies as well as policy changes currently under consideration.

A current-services budget projection shows the future — i.e., over the next three to five years — implications of budget decisions made today, given likely future demographic trends, inflation, and potential changes in the economy. Current-services projections are especially useful in that many fiscal policies are back-loaded, with the lion’s share of impacts occurring in outlying years. If a current-services projection is implemented as a part of the state’s budgeting process, less volatile and more informed policy decisions will be the likely result, boding well for the state’s residents, businesses, economy, and future state budgets.

The current situation

The governor’s proposed 12-month budget for the fiscal year beginning July 1, 2021 (FY 2022) is presently before the Legislature. During the next three months, the budget committees of the state Assembly and Senate will review the spending recommendations with each of the cabinet officers. The professional staff of the nonpartisan Office of Legislative Services (OLS) will assist the committees with analyses of the proposals and most importantly by analyzing the governor’s revenue estimates.

There is little to no drama this year in that there is no doubt the state will have a balanced budget with a sizeable surplus — primarily because the state unnecessarily recently sold nearly $4 billion in bonds for operating purposes. As presently structured, the state will end the current fiscal year with a surplus (including both the year-end surplus and the state’s Rainy Day Fund) of $6.3 billion. However, all good things must come to an end, and the expected FY21 surplus is expected to decline to $2.1 billion by the end of FY2022.

An even more sobering set of numbers is the proposed FY2022 spending level of $44.8 billion, but with a base revenue of only $40.8 billion — a projected gap of some $4 billion. Moreover, there are several one-time revenues reflected in these numbers that will not be repeated, which will make the projected gap even greater with subsequent state budgets.

However, another silver lining (i.e., a revenue windfall) has just appeared. The federal American Rescue Act will provide an estimated $6.4 billion in revenue, which the state can use pretty much as it wishes over the next several years. As such, a long list of desired spending items will likely be considered; some are good ideas while others are not so good in my view.

As I have previously noted, now is the time to think carefully about how best to use this new-found money, particularly with a multibillion-dollar gap facing the state next year.

The state needs to prepare a current-services projection for the next three to five years to better understand the future implications of both spending and tax/revenue choices currently under consideration.

Three components

A current-services budget projection provides policymakers with multiyear budget projections and information about likely future revenues and program costs, based on current statutes, contracts, commitments and economic and demographic trends.

Ideally, the projections would have three major components:

  • Revenue forecasts, given current state tax and nontax revenue policies;
  • Projections of baseline spending (what will it cost to continue existing programs given demographic trends and inflation);
  • Future cost implications for any spending expansion and/or tax policy changes being considered.

The baseline spending element, for example, would indicate how Medicaid spending will be affected as the state’s population reflects a larger proportion of elderly and children and the inevitable medical-cost inflation or caseload changes. Costs for current policies would also include monies to fund fully the constitutionally required K-12 school formula, state pension obligations, and the Homestead Rebate program. Similarly, future costs implications would reflect policies being initiated this year, such as the expansion of free tuition for certain college students.

Equally important, and perhaps most challenging, are projections of the future flow of revenues. Those projections would reflect any phaseout of state taxes, or any tax-rate changes already enacted by the Legislature. No doubt such projections would have to include multiple scenarios regarding the state of the economy, and changes beyond the control of the state (such as interest rates).

What’s needed

Sometimes policymakers are a bit naive when it comes to revenue/tax projections, always assuming a constantly expanding economy. However, we know that is not always possible. So, multiple projections incorporating alternative economic assumptions are necessary in producing a current-services projection for the state. A useful projection for spending would include at least four columns for each program line-item, over a three- to five-year period:

  • Current appropriation level;
  • Projected amount for base budget needs (i.e., assuming no spending or tax policy changes, while adjusting for changes in population, inflation, and interest rate changes);
  • Future implications of any expanded and/or new proposals currently under consideration; and
  • A total long-term recommendation.

This type of budget presentation would improve the state budget process in four major ways:

  • It would provide an assessment of the state’s future spending needs compared to the current year;
  • It would allow legislators and the public to understand the likely consequences for service and programs;
  • It would provide a neutral and consistent way to evaluate base needs versus proposed policy changes;
  • And it would improve efficiency as it would force policymakers to examine the long-term implications of proposed new programs, program changes, and tax/revenue policy changes.

Some thoughts

The state faces no current budget shortfall problems as we have the largest projected surplus in the history of the state. However, under the most plausible future scenarios, that budget surplus will decrease soon and significantly. More importantly, the projected gap for future years, in my opinion, will raise the prospect of large tax increases and/or large program reductions as sizeable future budget shortfalls loom.

One cannot increase the current spending base by using a one-time bond revenue and not face significant and potentially sizeable future problems. (Recall that we currently are supporting $44.8 billion of spending with a revenue base of $40.8 billion).

Would a New Jersey current-services projection be hard to produce? Maybe yes and maybe no. Other states do such an exercise. The federal Congressional Budget Office (CBO) prepares such projections twice a year. Are the numbers always accurate? Pretty much so. Do they capture the nature of the federal budget gap? Yes.

Does Congress always consider the CBO current-services projections in developing federal budget policies? No! However, the major difference between New Jersey and the federal government is that the feds can legally run operating deficits (and print money!), while New Jersey cannot.

Based on my previous experiences as the state budget director, I am confident that the state’s Office of Management and Budget already has the necessary information or something similar and the expertise needed to produce a current-services projection, and has internally already made such projections. Are the governor, the Legislature and the public aware of the availability of such information? Likely not. Should they be? Yes.

So, now is the time to initiate this current-services projections process and formally integrate it as an ongoing part of the state’s budgeting process.

Conclusion

The state has a welcomed $6.5 billion surplus. Now is not the time to spend this money foolishly. We need to carefully plan the next three to five years and make a series of good decisions, including the use of federal funds from the American Rescue Act of 2021. A current-services projection would enable the state to identify future budget problems of both in-place policies and policy changes currently under consideration.

Armed with that information. New Jersey policymakers can make more informed budgetary decisions and avoid introducing much of the volatility associated with making sharp, abrupt, and significant year-to-year changes. And that would create a better and more stable economic environment for the state’s residents, businesses, and even future state budgets.

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