This time last year, the economic impact of an emerging global pandemic was ravaging New Jersey’s state finances, forcing lawmakers to take the virtually unprecedented step of delaying the end of the state’s fiscal year.
Property-tax relief was shelved, public workers were furloughed and education aid was held flat, all in an effort to right the fiscal ship.
New Jersey suffered two credit-rating downgrades and Gov. Phil Murphy and lawmakers ultimately decided to borrow billions of dollars amid concerns that a potentially catastrophic budget freefall was looming.
“I have been clear since March that we are facing an unprecedented public health crisis that would soon be followed by a similarly unprecedented fiscal crisis,” Murphy said during a May 22, 2020, media briefing.
An unexpected turnaround
Of course, much has changed since then.
Just a year later, the state’s fiscal outlook has enjoyed a remarkable reversal. Revenue collections are now soaring above projections, huge surpluses are building and a major spending hike is in the works for the next fiscal year.
What exactly happened to bring about this turn in the state’s fiscal fortunes, as told by Department of Treasury officials and nonpartisan legislative fiscal analysts during recent budget hearings, involves a number of factors, but decisions that were made in both Trenton and Washington, D.C., in response to the health crisis played a big role.
Perhaps the most important factor has been the significant intervention — some would say spending spree — by the federal government over the past year, which has provided stimulus payments and other aid that has helped drive consumer spending here and across the country. That, in turn, has lifted New Jersey sales-tax proceeds throughout much of the pandemic, and the sales tax is already one of the largest sources of revenue for the state budget.
“That’s the hero of our revenues,” Treasurer Elizabeth Maher Muoio told lawmakers while discussing the sales tax and the pandemic’s broader impact on the budget during a recent hearing.
“The stimulus payments have had a definite effect on our revenues,” she said.
Other economic drivers
But it hasn’t just been the sales tax that’s been humming along despite the ongoing health crisis. Among the other standouts are the proceeds from the realty-transfer tax. A recent change in how some small businesses and other passthrough entities can now pay their state taxes has also produced a significant, one-time windfall that was not expected this time last year, the officials said in their testimony.
What it all means for the budget going forward is that instead of readying a long list of budget cuts, or what were called “de-appropriations” last year, Murphy and lawmakers are now advancing a series of supplemental spending bills, including one to boost aid for New Jersey businesses.
They are also preparing to send out new tax rebates to thousands of residents as part of an annual budget that will be finalized over the next few weeks in the run-up to the July 1 start of the next fiscal year.
And that’s all before the state allocates the more than $6 billion in new COVID-19 relief from the American Rescue Plan Act that was signed into law earlier this year by President Joe Biden. Muoio told lawmakers last week that Treasury has just received those funds; that has prompted a major debate over how best to use them, and also who gets the final say, the governor or lawmakers.
Good news on income-tax front
The income tax is the largest source of revenue for the state budget, and it was a source of major concern at the onset of the pandemic a year ago as job losses began to pile up in New Jersey.
While unemployment remains a concern, the latest state job numbers indicate more than 50% of the jobs that were lost to the pandemic last year have been recovered. State income-tax revenues are still below the totals from two years ago, but the Murphy administration felt confident enough to increase the projection for the income tax for the current fiscal year by more than $260 million in February.
Another nearly $1 billion increase is forecast right now for fiscal year 2022, which begins on July 1.
There were also tax increases that were enacted at the state level last year — including on millionaires and top-earning businesses who’ve generally fared well during the health crisis — that are expected to deliver a boost to the state’s bottom line. With final state income tax and corporate business-tax payments still being counted after the governor agreed to push back this year’s tax deadlines by about a month due to the pandemic, those tallies could also impact forecasts for the coming fiscal year.
Meanwhile, the forecast for the sales tax for the current fiscal year was also increased by the Murphy administration in February, by more than $750 million, as the federal aid continued to flow into New Jersey.
Muoio just told lawmakers the new round of forecast revisions her department is preparing to release in June will also include another sales-tax estimate that is likely to push the forecast up “by at least several hundred million in FY2021 alone.”
“All in all, the revenue outlook for the remainder of the current fiscal year and going into (fiscal year 2022) is positive and improving,” Muoio told lawmakers.
In his own remarks to lawmakers, David Drescher, the Office of Legislative Service’s section chief for Revenue, Finance and Appropriations, also highlighted broader economic trends that have been influenced by the pandemic and New Jersey’s initial recovery as he discussed the latest revenue figures.
Reopening the economy
“Some of this growth is due to the temporary effect of federal stimulus checks, but some part of it likely reflects a longer-lasting effect from the reopening of the economy,” Drescher said.
Last year, the OLS analysts were not as pessimistic about the state’s fiscal outlook as Treasury was, and this year, their forecasts have also been more sanguine. The OLS analysts are due to offer up their own new round of forecasts next month.
“Most of the revenues that we track are performing roughly in line with expectations, but initial expectations are that our revised forecasts will increase notably in June,” Drescher said.
Meanwhile, even New Jersey’s pension system — which is a perennial concern for state fiscal policymakers — appears to be another source of good news right now, thanks largely to booming investment returns. And state Lottery proceeds that are dedicated to funding worker pension costs have also soared during the pandemic, providing even more cash for the pension funds.
“Thanks to advanced planning and compliance with COVID protocols for the safety of both employees and vendors, the Lottery team has continued to seamlessly operate throughout the pandemic, conducting over 750 midday and evening draws since April 1, 2020,” Muoio said.
It’s not all good news
Still, that’s not to say everything to do with state finances has a rosy outlook right now, even amid the recent string of positive developments.
For starters, the pension system is still saddled with a huge unfunded liability, and that problem will require significant spending on pension contributions for many years to come to get fully turned around.
Murphy’s budget proposal for the 2022 fiscal year also calls for spending down a significant share of the state’s budget reserves in just one year to help fund a more than 10% year-over-year increase in spending. It would also leave the budget’s “rainy day” fund completely dry.
Some lawmakers have raised concerns about the potential for tax hikes or major cutbacks that could be looming in the future to avoid a fiscal cliff once the surplus is spent down and the federal money runs out. There are also fears the state will not be well-prepared for the next economic downturn due to the spending down of a large share of reserves in the near-term.
With the federal aid windfall now in hand, Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen) listed some items he believes should a top priority for the governor and lawmakers. They included paying down bonded debt, continued investment in the pension system, and “putting away some money into surplus for a looming fiscal cliff.”
“The word ‘spend’ concerns me a little bit,” Sarlo told Muoio as she appeared before lawmakers.
“The last thing I want to see is a bunch of new programs and spending initiatives that we may not be able to sustain,” he said.