Conservative group offers NJ fiscal fix

Hold taxes, cut benefits, report says. Murphy team calls it GOP talking points

Holding the line on taxes and reducing spending on benefits for public workers are among the policy recommendations in a new report on New Jersey’s fiscal health issued by a conservative think tank.

The report from the Morristown-based Garden State Initiative also echoes some concerns about New Jersey’s finances that have been raised in recent months by Wall Street credit-rating agencies after the state adopted a new annual budget that increased year-over-year spending by nearly 15%.

The concerns raised by the Wall Street analysts and those who crafted the report include the continued use of one-time sources of revenue to support annual spending, thus creating a structural budget gap.

“Rather than plugging budgets with one-shots and gimmicks as is the current practice and as it has been for decades, New Jersey would find itself in better condition to move forward and grow in a sustainable manner,” according to the think tank’s report released Wednesday.

Report gets Republican raves

The report drew immediate praise from former Republican Gov. Tom Kean, who said it details significant fiscal problems that “can no longer be ignored.”

“New Jersey can’t continue on the path it’s now on,” Kean said during an afternoon news conference organized by the think tank.

Long-term liabilities persist. New Jersey still carries among lowest credit ratings of any state

But officials from Gov. Phil Murphy’s administration responded to the report by defending the current governor’s record on budget issues and also characterizing the findings as “standard GOP talking points.”

Earlier this year, Murphy and fellow Democrats who control the Legislature enacted a budget that boosted spending to an unprecedented high amid the ongoing coronavirus pandemic. The spending increase was funded, in part, with surplus generated from record-high tax receipts collected during the prior fiscal year. Last year they also agreed to borrow about $4 billion and use that to bolster state spending.

Among other areas, the latest budget hiked allocations for public-worker pensions, K-12 education aid and state-funded tax-relief programs, such as the Homestead benefit and the Earned Income Tax Credit.

But in recent months, Wall Street credit-rating agencies have raised concerns about New Jersey’s lingering long-term liabilities and structural deficits created by the reliance on one-time sources of revenue such as the spending down of surplus. And despite a series of recent outlook revisions from the rating agencies, New Jersey’s credit rating remains lower in the eyes of two major Wall Street rating agencies today than before Murphy took office in early 2018

Beware of complacency

The authors of the new Garden State Initiative report — New York University associate professor Thad Calabrese and Harvard University senior fellow Thomas Healey — warned Murphy and lawmakers not to become complacent even as New Jersey’s short-term fiscal outlook has been boosted by the recent debt issue and the arrival of more than $6 billion in federal pandemic aid.

Their report also notes New Jersey still has significant pension debt thanks to years of underfunding its annual actuarial-required contributions under a practice that was only halted earlier this year amid the recent revenue windfall.

“Pension liabilities are growing faster than the state’s economy, and it is this economy that ultimately supports these systems,” the report said.

The final votes came less than 48 hours after the bill was posted on Legislature’s website

The report calls for the adoption of a series of new worker-benefit policy changes, including raising the retirement age and forcing workers to contribute more toward their pensions.

The last time such benefit changes were enacted in New Jersey was in 2011, during the tenure of former Republican Gov. Chris Christie. Regina Egea, the president of Garden State Initiative, served as Christie’s chief of staff from 2015 to 2016.

In the section devoted to the concerns about the state’s reliance on one-shot sources of revenue, the report cited research on state budgeting practices compiled by the nonpartisan Volcker Alliance that gave New Jersey a “D” letter grade in the category of “budget maneuvers.”

“New Jersey has relied upon these for so long that changing this behavior will require real reforms to spending and political leadership to get there,” the report said.

While addressing taxes, the report argues New Jersey is “at the limit of its ability to extract additional revenues from residents and businesses.”

The latest state budget didn’t include any broad-based tax hikes and instead funded numerous new tax cuts, including wider exclusions for retirement income for seniors, larger Homestead property-tax relief benefits and a new, up to $500 parental income-tax rebate.

However, the latest budget also relied on millions in new revenue generated from several tax increases that were enacted by Murphy and lawmakers the prior year. They include a higher marginal income-tax rate levied on earnings over $1 million and the extension of a surcharge levied on companies with more than $1 million in taxable net income earned in New Jersey.

An old question: Will the rich run?

The report cites studies that indicate these rates – levied only on the highest earning individuals and businesses in New Jersey – rank among the highest in the nation. It also raised concerns about driving out high-income residents since a large share of the budget is disproportionately covered by the income taxes paid by wealthy residents.

“The state’s high tax rate makes it less competitive for businesses and individuals to move in,” the report said.

Among its other recommendations, the report called for more efficient spending on public education, infrastructure maintenance and public-worker health benefits. It also called for performing a deep analysis of the cost of vital services and areas of the budget that are “less critical” to help bring annual spending more in line with annual revenues.

A look behind the numbers shows recent policy changes mean tax breaks for many in a high-tax state

Later Wednesday, Murphy spokesman Darryl Isherwood said in response to the report’s findings that during Murphy’s tenure, which began in early 2018, the state has increased its surplus and fully funded the annual pension contribution for the first time in more than two decades. He also took aim at Christie’s record, saying his administration’s fiscal practices “shredded the state’s bond rating.”

“Despite the once in a lifetime pandemic, which hit New Jersey harder than nearly any other state from both a health and a financial standpoint, New Jersey continues to attract new businesses while also helping those already here rebuild,” Isherwood said.

Jennifer Sciortino, a spokeswoman for the Department of Treasury, said the report “ignores the dramatic about-face that has occurred” in recent years.

“Under (Murphy’s) leadership, we have made steady progress towards strengthening the state’s financial health and course-correcting the dismal fiscal trajectory we inherited,” Sciortino said.

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