What a difference a decade makes.
Ten years ago, New Jersey’s governor at the time, Chris Christie, used his line-item veto powers to keep total state spending under $30 billion after lawmakers sought to increase the budget by nearly $1 billion.
But last week, current Gov. Phil Murphy signed a new state budget that included all the Legislature’s proposed add-ons, pushing total spending to a record high of $46.4 billion.
Christie’s budget cuts came as New Jersey was still struggling to recover from the 2007-2009 Great Recession, and as the two-term Republican was attempting to shift the focus in Trenton to fiscal discipline and lower taxes.
This year, the spending additions just approved by Murphy, a first-term Democrat who faces reelection in the fall, followed an unexpected uptick in revenue that occurred despite the ongoing coronavirus pandemic.
Spending is up by how much?
The budget for the 2022 fiscal year increases year-over-year spending by roughly $6 billion. Helping to support that big increase was an unexpected tax windfall that left the state flush with cash at the end of June. A big borrowing issue that lawmakers approved last year after the Murphy administration projected the pandemic would trigger huge revenue losses — which never materialized — has also boosted the state’s coffers.
Several taxes were also increased last year in response to the health crisis, including on millionaires and top-earning businesses, and the new budget also calls for spending down budget reserves as a one-time source of revenue.
In all, the size of the state budget has now increased by more than 30% since Murphy took office in early 2018. Since Christie’s budget cuts were enacted a decade ago, total spending has increased by more than 50%.
Where has the money come from?
Total revenues have increased by more than 20% since the beginning of the 2018 fiscal year, according to Department of Treasury budget documents.
Proceeds from the state income tax — which is the budget’s largest source of revenue — were up more than $3 billion through the end of the 2021 fiscal year, according to the documents. That comes after Murphy and lawmakers increased taxes on the state’s wealthiest residents, in both 2018 and 2020. The first increase hiked the income-tax rate levied on earnings over $5 million, and the second did the same for all earnings over $1 million.
The next largest source of revenue for the annual budget, the state sales tax, is up by roughly$1.5 billion since Christie’s last budget in 2017, the documents show. That increase has come without a rate hike that Murphy previously sought from the Democratic-controlled Legislature. But New Jersey did begin collecting taxes from online retailers under a new law enacted in 2018.
Proceeds from New Jersey’s corporate-business tax are also up by more than $2 billion during Murphy’s tenure, after the governor and lawmakers agreed to hike the rate levied on the profits of New Jersey’s top-earning businesses.
Meanwhile, also helping to stuff the state’s coffers with cash over the last year has been the nearly $4 billion borrowed last year when the Murphy administration was projecting the state would suffer significant revenue losses due to the pandemic.
A change in state tax policy intended to give the owners of so-called pass-through entities and other partnerships a way to avoid a limit on the federal write-off for state and local taxes enacted by former President Trump has also generated a significant one-time windfall, according to Treasury officials.
Where has spending increased?
On the spending side of the ledger, one area that’s seen a huge increase in funding is the state’s contributions into New Jersey’s long neglected public-worker pension system.
By contrast, in Christie’s last budget the pension contribution was $2.5 billion, or just half of what actuaries would have considered to be a full payment that year. During Christie’s two terms, a combined nearly $9 billion was deposited in the pension funds, while more than $11.5 billion will have been contributed by Murphy and lawmakers during just the 2021 and 2022 fiscal years.
Total state funding of K-12 education has also risen significantly during Murphy’s tenure, from about $14 billion in Christie’s last budget to more than $18 billion in the fiscal year 2022 spending plan. This includes increases in funding for so-called direct formula aid to school districts, which the latest budget boosted by nearly $580 million year-over-year.
The total for state-funded direct property-tax relief programs like Senior Freeze and the Homestead Benefit is also up, from nearly $900 million during Christie’s last year in office to over $1.2 billion in the latest budget. That includes a newly approved nearly $80 million increase in funding for the Homestead program. The increase will be used to halt the long-standing practice of using outdated property-tax bills from 2006 as the baseline for calculating Homestead benefits. As a result, the average annual individual Homestead benefit will increase by at least $130.
Meanwhile, the latest state budget is also devoting more than $300 million for an entirely new state tax-rebate program that will result in checks of up to $500 being mailed this summer to more than 750,000 New Jersey families who meet the program’s income and dependent qualifications.
The new budget also underwrites several other tax-policy changes, including a further expansion of the Earned Income Tax Credit for low-wage workers and a widening of income tax exclusions for retirees that were last increased during Christie’s tenure.
Murphy has also created new programs that provide free tuition for county college students and some students at four-year colleges, and the new budget also establishes new incentives aimed at helping families earning less than $75,000 annually save for college.
What about state debt?
Treasury’s latest annual report on borrowing issued earlier this year indicated the state’s total for bonded debt was just over $44 billion at the end of the 2020 fiscal year, up nearly 14% from a decade ago.
That borrowing issue has left taxpayers funding principal and interest payments into the 2030s because the so-called COVID-19 bonds were structured in a way that prevents them from being retired early — something that’s been widely criticized by Republican lawmakers, who serve in the minority in both houses.
Also established along with the adoption of the new budget last week was the New Jersey Debt Defeasance and Prevention Fund.
That fund, stuffed with a $3.7 billion appropriation, earmarks $2.5 billion for retiring existing debt that likely has a higher interest rate than the roughly 2% the state was charged for last year’s COVID-19 borrowing issue. The remaining $1.2 billion is earmarked for funding planned capital projects on a pay-as-you-go basis instead of new bonds having to be issued.
Murphy inherited budget reserves of about $600 million from Christie, while the new budget for the 2022 fiscal year calls for a closing surplus of $2.356 billion. To be sure, the overall budget is now much bigger than it was when Christie was in office, but today’s budget reserves also equal a larger percentage of planned spending. That should leave the state better prepared for any unexpected revenue losses during the next economic downturn.
However, even with a recent windfall of tax revenue, the new budget drained the state’s rainy-day fund, an account that is supposed to be replenished during times when the state’s general fund is flush with cash.