Last June, Governor Chris Christie got the budget he wanted. Declaring that the state cannot spend money it doesn’t have, Christie pushed through a $28.374 billion budget -- the smallest in seven years. Christie also vetoed a Democratic bill to temporarily restore higher income tax rates for those making over $500,000. Instead, he cut state aid to school districts and municipalities, slashed property tax rebates and forced transit fare hikes and tuition increases.
For months, Christie and state Treasurer Andrew Sidamon-Eristoff have made it clear that they intend to follow the same script with the upcoming FY12 budget. Dismissing better-than-expected income tax collections through November as an aberration, they have repeatedly warned school and municipal officials not to expect any more money this year.
The FY2011 budget, approved by Democratic legislative leaders cowed by Christie’s poll numbers, helped make "Governor Wrecking Ball" -- as he was dubbed by Star-Ledger columnist Tom Moran -- a national Republican star. Throughout the fall, GOP gubernatorial candidates across the country declared their determination to follow Christie’s lead by cutting spending, ruling out tax increases and taking on the unions.
This year, the political calculus in the budget battle is trickier, and there's more than money at stake. Christie is banking on voter support for another spartan budget, contract concessions from public employee unions, and cuts in pension and healthcare benefits to help Republicans capture the four Senate and eight Assembly seats he needs in next November’s election to gain control of New Jersey state government.
Democrats, meanwhile, have been trying to walk a fine line. They're looking to give Christie enough of what he wants to avoid being regarded as obstructionists by the majority of voters who support cuts in government spending. At the same time, they're trying to position themselves as champions of the middle class, to capitalize on any voter backlash against Christie’s cuts to school aid, municipal aid and property tax rebates.
For Christie, this year’s budget, while probably easier than last year’s, still contains plenty of fuel for heated debates.
Christie’s Treasury Department, which has the last word on certifying revenue, is operating under the assumption that revenue growth will be painfully slow. It ridiculed the non-partisan Office of Legislative Services (OLS) when it projected last summer that tax revenue would rise $1 billion in the next budget. Even that amount, however, would fall far short of the state’s budget needs:
New Jersey is losing $1.03 billion in federal stimulus funding for Medicaid, and Medicaid costs are likely to rise an additional $300 million.
The state is required to put $500 million into the pension fund this year under a new state law signed by Christie last spring, and Christie will need to come up with the money if Democrats keep their promise to pass the pension changes he has proposed.
School districts complaining about last year’s $828 million cut in aid and municipalities bellyaching about their $435 million reduction have been told not to expect any more money.
The property tax rebate program has been slashed from more than $2.242 billion five years ago to less than $300 million -- just enough for a modest property tax credit late this spring -- and Christie has made no commitment for next year.
This will be the first year that Christie will need to keep his campaign promise to fund new transportation construction on a "pay as you go" basis. And even with Turnpike Authority money diverted from the cancellation of the Access to the Region’s Core (ARC) rail tunnel, he may need to find an additional $200 million or so within the budget.
The federal government is demanding that the state repay half of the $271 million in federal funds spent on ARC. It could simply withhold that amount from the state’s federal transportation aid if New Jersey refuses to pay.
The state will have to make up or replace $272 million in non-recurring "one-shot" state revenues.
There is no surplus to tap: The $300.2 million surplus is just over 1 percent of this year's $28.4 billion budget and should actually be increased to come closer to the 2 percent that bond rating houses prefer.
Finally, Robert Grady, Christie’s top economic adviser, told business leaders three weeks ago that the governor is considering proposing cuts in state income tax or corporate tax rates this month, which would add further to the state’s budget gap.
The Treasury Department’s determination to be cautious in its revenue estimates has been underscored by Treasurer Sidamon-Eristoff’s insistence that he will regard last year’s $28.374 billion spending plan as the "baseline" figure for next year’s budget until convinced otherwise.
Receipts from the income tax, the state’s largest revenue source and the one that is dedicated to school aid and other property tax relief programs, have surged in recent months and were running $385 million, or 12.7 percent, ahead of projections through the end of November. Almost all other taxes, however, were running slightly behind projections for the first five months of the fiscal year, and the Treasury Department is taking a wait-and-see approach.
"No one should expect vast differences in the total budget," Treasury spokesman Andy Pratt said, referring to Christie’s upcoming budget message in late February or early March. "Sales tax is down, casino revenue is down, and there is no guarantee that income tax will stay up. We are going to have to wait until April to see if calendar year 2010 was a sign of a growing economy or of tax policy determining when people took income."
More than 50 percent of New Jersey’s state income tax is paid by high-income taxpayers. Sidamon-Eristoff has expressed concern that wealthy "taxpayers may have been trying to shift income from 2011 to 2010 to avoid the potential January 1 increase in federal tax rates" that was only averted by an eleventh-hour deal between President Obama and Senate Republican leaders to extend the Bush tax cuts.
The cause and implications of the surge in income tax receipts won’t be clear until late April, when Treasury has a chance to review both the 2010 income tax returns due April 15 and the first-quarter 2011 income tax filings for those who file quarterly, Treasury officials noted. As a result, more than in most years, the revenue estimates that count will come in May, when the Treasury Department and the OLS file their updated numbers.
Even in May, however, Treasury officials are likely to be conservative in their revenue estimates. "The basic feeling around here is to stay the course. It’s better to be prudent and run a surplus than over budget for money you won’t have and get into a crisis. We’ve had too many years of that," Pratt said.
Any hope that Congress would extend the Medicaid stimulus funding to help bail out struggling state governments probably ended November 2 with the election of a Republican majority to the U.S. House of Representatives. Incoming GOP House leaders immediately warned that states increasingly would have to practice fiscal austerity and fend for themselves.
The Christie administration handled last year’s $1.6 billion cut in federal stimulus spending, of which school aid was the largest portion, in part by reducing state aid by $828 million to local school districts, which then had to make the necessary cuts.
That is not an option with this year’s $1.03 billion reduction in federal stimulus funding for Medicaid, which provides health care for low income people and the disabled. Not only will the state need to make up for the $1.03 billion federal Medicaid loss, but also the cost of the state’s Medicaid program is expected to rise an additional $300 million. The only way to cut any of those costs is to eliminate some of the optional Medicaid benefits that New Jersey provides, but that has not yet been proposed.
Christie last spring signed legislation committing the state to ramp up to full funding of public employee pensions within seven years, beginning with a payment equivalent to one-seventh of that amount in the upcoming budget, which is currently projected to be about $500 million.
That doesn’t mean the pension payment will be made, however. "Everything is on the table," Pratt insisted. "The governor told Democratic legislative leaders, 'If you don’t pass the pension reforms I’ve requested, I will not contribute to a broken system.'"
Senate President Stephen Sweeney (D-Gloucester) and Democratic Assembly Speaker Sheila Oliver (D-Essex), however, appear ready to call Christie’s bluff by passing some of the pension and health benefit cuts he has requested before the governor’s budget message. That would essentially lock Christie into making the $500 million pension contribution -- and potentially force him to introduce a less politically palatable budget heading into the November legislative elections.
While his budget is going through the legislature, Christie also will be negotiating contracts with all of the state worker unions under the same midnight June 30 deadline as is constitutionally set for passage of the budget. Unlike past years, however, the contract negotiations are not likely to add costs to the budget. Christie is more likely to demand concessions that save money for the budget than to offer raises that add to his budget problem, especially with polls consistently showing public support for reductions in government employee pay and/or benefits.
Christie and Sidamon-Eristoff have warned school and municipal officials not to expect any increase in state aid next year. However, Christie could face pressure to increase school aid, municipal aid and property tax relief not only from Democrats, school and municipal officials, and senior citizens groups, but also from at least some of the Republican legislators up for election in November.
Municipal aid cuts forced layoffs of thousands of local government employees, including more than 2,200 police officers representing 11 percent of those employed before Christie took office. School districts made similar cuts in teachers and support personnel.
These cuts occurred despite an average property tax increase of 7 percent in New Jersey last year, according to a recently released Star-Ledger analysis. It will be hard to avert deeper cuts next year when the new 2 percent cap kicks in, even with pension and health care costs exempted.
As a result, GOP legislators may feel pressure from their constituents either to seek increased state aid to hold down property tax hikes or to restore some of the cuts in direct property tax relief.
Christie’s first budget cut the property tax rebate program to less than $300 million in direct property tax credits from the more than $2.2 billion in checks provided five years before, and he has not committed himself to continuing or expanding the program.
While Christie’s direct property tax credit is an improvement in approach over the wasteful practice of mailing out rebate checks, it is equivalent to less than 2 percent of the total property taxes that will be paid by New Jersey taxpayers this year -- a sharp reduction from the 14 percent of total property tax bills that the $2.2 billion rebate program covered five years ago.
Christie’s pledge to fund transportation capital programs on a "pay as you go" basis through the regular budget process got a lot easier to adhere to in November when he cancelled the $8.7 billion ARC passenger rail tunnel under the Hudson River because of projected cost overruns.
Even if New Jersey ends up having to reimburse the federal government some of the $271 million in federal funds wasted on the cancelled tunnel, Christie can now tap $1.25 billion in New Jersey Turnpike Authority funding originally set aside for ARC to refill the state Transportation Trust Fund, which has run out of money for new projects after years of overborrowing.
Christie, whose appointees control the New Jersey Turnpike Authority, can either content himself with the $195 million a year in Turnpike toll revenue that was supposed to go to the tunnel, in which case he would probably have to find another $200 million or so in the budget for transportation construction projects. Or he can access larger amounts by borrowing against the full $1.25 billion in revenue, and spending the sum over the next two or three years. The second option would provide $400 million to $600 million in state spending to go along with $1.6 billion in federal transportation aid.
Christie also can seek to redirect some or all of the $3 billion in Port Authority of New York and New Jersey money set aside for the tunnel to major transportation projects in North Jersey. These would have to fall within the Port District, which stretches roughly 25 miles from the Statue of Liberty.
New Jersey’s transportation capital program will undoubtedly be much smaller than the combined $3.2 billion federal-state spending each of the past five years, but it fits in with Christie’s philosophy of not spending more than the state can afford.
Christie only has to make up $272 million in non-recurring one-time state revenues in this year’s budget, down from $400 million in Democratic Governor Jon Corzine’s last budget. Still, he also has a smaller surplus to work with than previous governors, because the Democratic-controlled legislature covered last-minute spending increases and downward revisions in revenue projections by lowering Christie’s proposed $500 million surplus to just $300.2 million.
Grady, who chairs Christie’s Council of Economic Advisers, indicated at a conference with business owners in Woodbridge in mid-December that the governor might propose cuts in corporate taxes or cuts in upper-income tax brackets as early as this month -- before unveiling his plan to balance the budget.
If Christie does so, it would leave the governor open to a "class war" political attack by Democrats, who advocated extending the income tax surcharge on people earning over $500,000 last spring.
Property taxes, not state income taxes or corporate taxes, continue to top the list of problems in poll after poll of New Jersey residents. Democrats would like nothing better than to be able to run for reelection in November arguing that Christie cut taxes for corporations or the wealthy instead of reducing property taxes for the average voter.