Opinion: Next week is a critical one for New Jersey’s fiscal future

Richard F. Keevey | June 18, 2021 | Opinion, Budget
As the budget details are hashed out, policymakers must not squander the state’s revenue windfall. And they should take widespread public input
Credit: Amanda Brown
Richard F. Keevey

There are some alleged sightings that truly challenge the imagination, such as the Loch Ness monster, flying saucers, four-leaf clovers, and so on. Most unimaginable to many is the New Jersey state government awash in cash. Who would have ever thought? It is important that policymakers not squander this richness, but rather spend it carefully, creatively, thoughtfully and with widespread public input.

These current riches developed primarily for three reasons: 1) because the recent federal American Rescue Plan provided approximately $6.5 billion to the state; 2) the (unnecessary) state bond sale added over $4 billion to state coffers and, 3) state tax collections were and continue to be far more than the Murphy administration originally and currently forecast.

These funds are in addition to federal CARES Act monies ($3.5 billion) provided earlier in the current 2021 state fiscal year for a wide range of state services. Furthermore, significant funding was provided to the state for Medicaid costs and public transit.

Local governments, including school districts, also directly received COVID-19 federal funds totaling more than $3.5 billion, which lessens the pressure on the state government to provide assistance.

Current situation

The state budget for the 2022 fiscal year that begins July 1 is currently before the Legislature, which will formulate the Appropriations Act of 2022 and send it to Gov. Phil Murphy for his signature before June 30. As originally submitted, the governor proposed a state spending plan for fiscal year 2022 of $44.8 billion, an adjusted increase of 11% over current-year spending.

The total surplus as originally projected was $5 billion for the current year, including a rainy day fund of $1.4 billion — and $1.2 billion for fiscal year 2022 (but no money in the rainy day fund).

But things have changed significantly. These proposed budget numbers included the $4.3 billion from the bond sale, but they do not include: 1) the $6.5 billion from the federal government; 2) the sizable additional tax collections in the current year — now estimated at $4 billion and, 3) most likely a significantly upward projection of $1 billion in revenues for next year. According to my count that is $11.5 billion.

Key questions

Several key questions on both process and substance are spawned by this emerging situation, especially surrounding what will happen with the $6.5 billion federal funds which the state has already received but has not appropriated. Of course, all state funds should be used carefully and wisely with an eye toward the future, but my focus is on the size of the federal aid — and how it should be best used.

Will the governor submit a separate proposal to the Legislature for how the federal dollars should be spent?

If not, does the Legislature have a plan to amend the governor’s proposed budget to include the federal funds?

Will the — presumably non-recurring — federal funds be used to augment and expand current state spending programs or to begin entirely new programs?

Should all the federal money be in the Appropriations Act to begin the 2022 fiscal year, or should it be deferred for future consideration?

Will the federal monies be used primarily for state spending programs? Alternatively, will the federal assistance be used to address the myriad needs of the business community and the nonprofit community, or to provide direct aid to individual citizens in need of assistance?

I could go on and list many additional sub-issues, but the principal question is how best to utilize this federal largesse, given that this may be a once-in-a-lifetime situation.

The best way forward

When I first considered this question of the best way forward, I focused primarily on the state government’s spending options. However, after discussions with several colleagues, it became evident that my view was much too narrow. The last 18 months, starting with the COVID-19 outbreak early in 2020, have impacted large segments of our state and individual communities and have laid bare lots of problem areas that need to be addressed.

Indeed, in my view, this is the principal reason the state government should set aside time and provide an opportunity for input on the budget from all segments — businesses, local governments, nonprofit groups, the higher education sector, individuals, etc. Public input and discussion are critical, and the long-run best interest of the state would not be well-served by a series of backroom decisions. This observation alone suggests that the $6.5 billion in federal funds should not be a part of the Appropriations Act for fiscal year 2022 but delayed until extensive public input is received.

There is no shortage of needs in the state that could benefit from the $6.5 billion in federal aid, and I am confident that many other needs may not yet be on my radar screen. A key point to note is that the presentation of needs and any resulting discussions must be carefully crafted. Any requested program must be carefully analyzed and not approved just because it is promoted by a “favorite player,” e.g., an influential legislator, local official or lobbyist. Rather, the state government must take pains to understand the exact need, its overall importance relative to other needs, and its implications for future budgets. One-time spending needs would likely be better than ongoing programs, but not necessarily in all cases. While the dire needs of specific individuals and communities should certainly be considered and prioritized, the state should also weigh heavily those uses of the federal funds that enhance the long-term strength of the state’s economy. I have listed below several known current needs.

For each of these projects or programs (in no priority order), a detailed explanation as to why it is needed and a full understanding of the dimension of the problem must be developed. The list of 11 below is meant simply to give some sense as to the types of needs that have been identified over time. For each item, a cost-benefit analysis is needed, and the distributional implications — i.e., who benefits and who pays, by level of income — considered.

  • Repayment to the Unemployment Insurance Fund to limit or avoid future employer tax increases, which if not addressed will automatically increase by almost $2 billion over the next two years;
  • Targeted rent relief, impacting both landlords and tenants most in need;
  • Payments to small business as they reopen, especially to help defray deferred rent and utility expenses;
  • Technology improvements for state systems; many are so antiquated that they adversely limit service delivery, efficiency, and outcomes;
  • Energy issues, including utility-bill payment delinquencies;
  • School construction requirements related to state Supreme Court decisions;
  • Additional K-12 school aid to address the underfunding of the school formulae;
  • Further contributions to the underfunded state pension systems;
  • State or local capital needs — water, sewer, lead pipe removal, etc.
  • Improvements to existing state programs and/or services (health care; child support, etc.) that directly benefit low-income families/households;
  • Increase the rainy day fund.

Final thoughts

Another key point that state policymakers must understand is that how the $6.5 billion in federal funding is used will likely significantly impact future budgets. For example, perhaps the state will use some of the money to expand or initiate new programs. If so, what are the impacts on subsequent budgets? To address this issue, the Legislature must require the administration to submit a “Current Service Budget” projection — which shows the fiscal impacts of policies currently in place and/or under consideration — for the next three to five years. Projecting estimated revenue and spending for future years is always important, but it becomes more critical when dealing with a large one-time revenue source.

One conclusion is for sure. The demands on the state’s budget, residents, and economy have been significant during this period of pandemic and recession, and decisions going forward should not be made unilaterally by the governor or the Legislature. Prior annual budget decisions and deliberations have always included, and benefited significantly, from public hearings and public input.

Given the statewide impact of COVID-19, it is critical that the state continue to receive input and perspectives. To do otherwise would be poor policymaking and likely result in poor choices being made. The soundness of future state budgets, the state’s economy, and the quality of life for the state’s residents are contingent on the informed policy decisions that will be made, shortly. Let’s try to get it right.

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