The fiscal future of New Jersey is bleak. The state has struggled to balance its budget for two decades. In the early 1990s it was rated AAA by each rating agency; it now has the second-lowest rating in the country. According to the Pew Charitable Trusts, its pension system is the. The state’s budget gap is at least $4 billion — related to two legally required programs, employee retirement and school aid.
Other budget watchers argue the gap is bigger (perhaps $7 billion) if we count underfunding of other key programs, such as municipal aid, transportation maintenance, homestead rebates, senior freeze, infrastructure, and a host of other demands.
Enter the new governor. What has he inherited? What does he do? Does he address the legally required programs; does he initiate new programs; does he raise taxes?
Instead of asking for large tax increases and requesting new programs, perhaps it would be better to have couched the budget situation in these terms:
“NJ is facing large funding gaps for existing programs — at least two of which are legally required. A revenue problem exists, exacerbated by large tax cuts two years ago, without related spending cuts. Our priority must be to address these existing problems. Yes, we have new initiatives worthy of funding but must wait until we stabilize our fiscal situation. We must lay out a multiyear plan to address these issues. We must work together.”
The budget process is in its last month. The current battle is between the governor’s proposal and differing views in the Legislature — principally concerning large tax increases, allocation of school aid, and new spending. The governor’s team indicates that they were not aware things were so bad: New programs are necessary and $ 1.7 billion in new revenues is needed.
Let’s review some facts:
None of the fiscal information is a surprise. Relevant budget data was available previously and during the campaign. Certainly, the governor’s Office of Management and Budget and the Legislature’s Budget and Finance Office were aware of the problems.
The real spending increase is $2.2 billion, not the $1.5 billion that is currently discussed. Why? — because $700 million in cuts are assumed, including some very doubtful items that most likely will require funding before the Appropriations Act is finalized, further exacerbating the problem. These including homestead rebates, legal fees, addiction services, snow removal, and undefined salary and “operational” savings.
The major increases are:
$654 million — pension contributions for state employees and teachers;
$284 million — formula-driven school aid;
$274 million — other K-12 education programs, including $57.6 million for preschool;
$244 million — Medicaid;
$241 million — New Jersey transit;
$153 million — health benefits for state employees and teachers;
$85 million — higher education, including $50 million for community college tuition aid;
$265 million — miscellaneous others, including debt service, community grants, and capital construction.
Particularly noteworthy: The total increase for K-12 education, including retirement benefits, is actually $932 million — the single largest gain. Education aid is $15 billion and by far is the single largest item in the $37.4 billion budget proposal.
Revenue estimates for existing revenues are reasonable, as both the executive and the legislative branches have similar and responsible estimates — each developed separately. However, it is absolutely critical to realize that $1.3 billion in taxes were reduced in 2016, creating the major gap today. Specifically, the sales tax rate was reduced; the estate tax was eliminated; and new credits were added to the income tax.
So, what to do? I suggest six actions:
Remove new initiatives from the budget: We cannot presently afford them.
Increase revenue by an agreed amount to minimally address existing obligations — and have a responsible surplus, plus a rainy day fund. A credible budget cannot be adopted without additional revenue.
Approve a “minimalist” Appropriations Act for fiscal year 2019 and agree to form a bipartisan “Spend and Revenue Commission” or an “Executive-Legislative Task Force.” This group would develop a budget plan for the following three years. It is imperative to reach a consensus on what programs are needed and what revenues are required.
Redo the current school-aid formula. During past years the formula was significantly adjusted, so much so that the state Supreme Court’s approved formula is no longer valid. Some school districts receive more money than needed and some less. If the formula were fully funded it would require $1 billion more — the state cannot afford that level. For fiscal 2019, certain adjustments are necessary, but for the long run an entirely new formula is well worth considering.
Examine again the recommendations of Gov. Chris Christie’s Pension and Health Benefits Commission. Few would argue retirement costs, including pension and health benefits, are the state’s largest fiscal albatross. We either need to fund these obligations or reduce the benefits. The state must stop pushing this issue down the road; it is bad public policy and the root of our bad credit. Such costs will soon consume 30 percent of the budget. The existing tax structure — even with the taxes proposed by the governor — cannot fund these benefits.
Finally, develop an honest three-year revenue and spending plan so everyone knows the impact on future budgets. Failure to follow this discipline led to many of our current and past problems. The current budget proposal does not withstand this test: We will have the same problem next year and for the foreseeable future unless we step back and reevaluate.
New Jersey’s budget problems did not develop overnight. The new governor inherited them. So, take six months to develop a carefully structured consensus plan, including revenue options to address existing needs, and propose the new items necessary for economic growth and requisite human services. New Jersey needs a new budget strategy for today and the future — budgets are best grounded in realism no less than idealism. It is time for a realistic multiyear plan.