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Explainer: Where Governor, Lawmakers Differ on Budgeting for a Downturn

Murphy and legislators don’t see eye-to-eye on how much money state should hold in reserve for economic headwinds

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A key area where Gov. Phil Murphy and lawmakers remain at odds in the final days before a new state budget must be enacted is over how the state should prepare for the next recession.

Two different funds — both part of the state budget — actually serve this purpose. But those reserve funds don’t operate in the same way and that difference is at the heart of the ongoing disagreement between Murphy and lawmakers.

What are the two funds? One is the Surplus Revenue Fund — more commonly referred to as the rainy-day fund. This account is supposed to be replenished during times of economic expansion to ensure the state has enough money socked away to help absorb the big swings in revenue that come during recessions. New Jersey’s rainy-day fund has been neglected for over a decade after it ran dry during the Great Recession, and Murphy, a Democrat, wants a $317 million deposit in it as part of his fiscal year 2020 spending plan.

The other account at issue is the Fund Balance — more commonly referred to as simply the surplus. This account is used as a cushion to ensure the budget doesn’t run on too narrow a margin on a year-to-year basis. That helps the state absorb unforeseen expenses or drops in revenue that could derail a given year’s entire budget. The Legislature, which is controlled by Democrats, anticipates a surplus of $1.41 billion in the FY2020 spending bill it sent to Murphy last week. Meanwhile, Murphy budgeted for a surplus of $1.15 billion in the spending request he sent to lawmakers in March.

What’s the key difference between these funds? While both funds were set up to help keep the state prepared for fluctuations in revenues and projected spending, the surplus is generally an unrestricted account. That means the revenue that’s kept in it can be used to pay for pretty much anything, and at any time. By contrast, the monies deposited into the rainy-day fund can by law only be used when there is a significant drop-off in revenue or some other type of budget emergency. State law also calls for revenue to be automatically deposited into the rainy-day fund when certain conditions arise, including unforeseen surges in tax collections. But no such law exists to direct funding into the surplus.

Why is this disagreement important? Keeping money on the side gives governors and lawmakers vital peace of mind because there are always going to be ups and downs in spending and revenue as the 12-month fiscal year progresses. Maintaining robust reserves, including a rainy-day fund, is also a key issue for the Wall Street credit-rating firms that grade New Jersey’s debt every time the state wants to sell bonds to finance long-term investments in things likes roads and schools. Investors can charge the state higher interest rates when the ratings firms flag inadequate budget reserves, and those higher costs are typically passed along to taxpayers.

Another important factor relates to policy changes that lawmakers have passed in recent years as part of a push to get more funding into the public-worker pension system. Those changes, which include shifting to a quarterly pension-payment schedule and dedicating roughly $1 billion in annual state Lottery revenue to the retirement funds, have made it harder for lawmakers to raid money from the pension payment whenever there are revenue shortfalls. Such raids last occurred in 2014 and 2015 when former Republican Gov. Chris Christie was in office. While that’s been good for the pension system — which is another top concern for credit-rating firms — it means there’s no other big pot of money available to backstop the rainy-day fund and the surplus.

What do other states do? Whether it’s building up the rainy-day fund or the surplus, New Jersey has been a national outlier when it comes to budget reserves. A recent analysis by The Pew Charitable Trusts found that as of fiscal year 2018, New Jersey was keeping only enough funds aside in reserves to cover about eight days’ worth of state operating expenses. That was well below the 50-state median of 40.4 days. Another Pew analysis found that New Jersey also remains one of only three states that continue to have no money set aside in a rainy-day fund even as economists have been predicting another recession is right around the corner.

How can this disagreement be resolved? It’s hard to say but, at the end of the day, Murphy will likely have the final say thanks to routine language in the annual budget. That section of the budget supersedes the rainy-day fund law. And it allows for transfers from the rainy-day fund to the General Fund to occur, which is what lawmakers are seeking to do in FY2020 to boost the surplus. But any transfer is also “subject to the approval” of Treasury officials.

It’s also worth noting that there really is only a comparatively small difference — less than $100 million — between the combined revenues that Murphy has booked for both the rainy-day fund and the surplus, and the amount that lawmakers want to put entirely into the surplus.

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