With Treasurer Andrew Sidamon-Eristoff’s shocking announcement that New Jersey is facing an $800 million current-year budget gap, he and Gov. Chris Christie now face the daunting task of figuring out how to close such a substantial deficit when most of the state budget -- with the exception of a promised $1.5 billion pension payment -- has already been spent.
The need to close such a large budget shortfall with just two months remaining in the fiscal year gives Christie little choice but to take on Senate President Stephen Sweeney (D-Gloucester) and the Democratic legislative leadership in athat Christie has been talking about for months, but would have preferred to put off until next year.
The battle of wills could pit Christie’s willingness to take unilateral action to reduce state pension payments against Sweeney’s threat to shut down the government if Christie fails to make the pension payments required under legislation he signed into law in 2011.
The plunge in income tax payments by wealthy taxpayers that was this year’s “April surprise” will require not only $800 million in almost immediate cuts in the current Fiscal Year 2014 budget, but also substantial reductions in both projected revenue and spending in the upcoming FY15 budget bill.
“The problem is not next year, it’s this year,” said David Rousseau, a former Democratic state treasurer. “The question is where you find the money to make up such a significant shortfall when you’re so close to the end of the fiscal year.”
With just two months left to go in the fiscal year, most of the $32.6 billion allocated for this year’s budget has already been spent, and Sidamon-Eristoff had to resort to such an array ofto fill an earlier $694 million budget gap in March that for the second time on Christie’s watch. If there were easier spending cuts to make, Sidamon-Eristoff would already have used them then.
Sidamon-Eristoff will comb state accounts for additional cuts, but it will be hard to find big savings in what’s left of the state’s operating budget, and this year’s homestead rebates, municipal aid, and most school aid has already been paid out.
The only large budgeted appropriation that has yet to be spent is the $1.582 billion payment to the pension system that the state is expected to make in the last week of June -- a payment that was alreadyfrom the originally budgeted $1.676 billion as part of Sidamon-Eristoff’s earlier budget cuts.
The simplest solution for the Christie administration would be to create a “one-shot” budget saving by canceling a portion of the pension payment or more likely pushing part of the $1.582 billion payment -- as much as is needed to fill the $800 million gap after Sidamon-Eristoff uses up other available savings -- out of the current fiscal year that ends June 30 and into the following fiscal year.
This would be similar to the one-shot budget savings that Sidamon-Eristoff used to fill an FY2012 budget gap byfrom May 2012 to August 2012, making the rebate payments part of the FY2013 budget.
Just as Christie argued that the three-month delay in rebate checks was relatively inconsequential, he could contend that delaying $600 million, for example, of the pension payment by a couple months each year would have a relatively small impact on the pension system’s overall unfunded liability. As with the homestead rebates, the deferred portion of the pension payment would have to be delayed in future years as well to avoid creating a doubled burden in a future budgets.
Christie has been setting the stage politically for a cut or deferral of the state’s pension payments since January, complaining vociferously in speeches, town hall meetings, and on radio broadcasts thathave been eating up 94 percent of the annual increase in state revenues and preventing the state from investing in K-12 education, colleges, drug treatment, and other needed programs.
Theif Democratic legislative leaders do not force public employee unions to contribute more toward pensions and retiree healthcare. But Senate President Stephen Sweeney (D-Gloucester) and other Democratic legislative leaders have told Christie they expect him to honor his agreement to keep adding some $600 million a year more to the pension system each year until the state reaches the actuarially required funding level of $4.8 billion in FY18.
Yesterday’s announcement that an unexpected drop in April income tax revenues had produced an $800 million FY14 budget gap not only jeopardizes that pension payment schedule for the current budget year, but possibly for future budget years as well.
The $700 million plunge in income tax revenues that makes up most of the deficit is due not to unexpected weakness in the New Jersey economy, but to the fact that the wealthiest New Jerseyans pushed more taxable income than expected into 2012 to avoid an increase in the top federal income tax rate from 35 percent to 39.6 percent that took effect January 1, 2013, which reduced the taxable income for 2013 they would have paid this month.
Ironically, it was that rush of wealthy taxpayers cashing out before the federal tax hikes and cashing in on a bull market that produced an “April surprise” last spring that sent state income taxes soaring $400 million above projections and, which until then had been running well in the red. This year, the drop in expected FY14 budget revenue from $32.6 billion to $31.8 billion will undoubtedly require Sidamon-Eristoff to lower next year’s $34.4 billion revenue forecast by some portion of that $800 million decline, and force additional cuts in the FY15 budget as well.
Sidamon-Eristoff said he would announce the “specific changes” he would be making to the FY15 budget when he testifies before the Assembly and Senate budget committees on May 21 and 22. His announcement of the projected $800 million shortfall, however, left little doubt that he regards it as the executive branch’s prerogative and responsibility to close the current-year budget gap, and that the governor’s powers include cancelling or postponing scheduled appropriations.