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Fiscal 2021 Budget Could Be a Bear If Murphy, Sweeney Stick to Their Guns

Governor and top Dem seem more interested in rehearsing old battles than planning for a budget that will include a $4.5 billion contribution to public-worker pension system — and that’s just one challenge

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Credit: Creative Commons

While Gov. Phil Murphy figured out a way to balance the latest state budget by making last-minute spending cuts and putting some appropriations in reserve, that task will only get harder next year as costs continue to rise amid an increasingly uncertain revenue outlook.

High on the list of rising costs will be another big increase in funding for the public-worker pension system. A record $3.8 billion contribution was just written into the fiscal year 2020 budget.

The contribution for the FY2021 budget is scheduled to be around $4.5 billion, and at the moment there’s no plan in place to cover that hefty increase.

Things also won’t be getting any easier on the revenue side of the ledger as 2021 will be the first fiscal year in which a reduction of the top-end rate for the corporate-business tax — one of the state’s biggest sources of tax revenue — will be in effect for a full 12 months. The tax surcharge was enacted just last year, but its sunset provision will begin to take effect within a matter of months. It’s unclear how much that will impact future tax collections.

Warning: recession ahead

Those looming fiscal challenges also don’t take into account the significant impact that a recession could have on the state budget. Economists have begun warning such a downturn is likely coming within the next few years.

The good news is Murphy and his fellow Democrats who control the Legislature have already begun to talk about the need to have a plan for the future. But they’re also already quarrelling over what it should be, with Murphy favoring increased taxes and Senate President Steve Sweeney (D-Gloucester) pushing a series of public-worker benefits cuts. Their feud is likely to come to a head once the focus shifts to the FY2021 spending plan.

The new budget that Murphy signed into law on Sunday represented victories for both Murphy and lawmakers as it increased total spending by more than $1 billion, to $38.7 billion. Much of the spending increases were for shared priorities, including a more than $600 million boost in the state pension contribution. Higher spending on K-12 education and mass transit and a padding of budget reserves were also among the items that survived the governor’s line-item veto pen. But the boosted spending in FY2020 won’t be enough to cover several new increases that are already planned for FY2021. They include the state pension contribution, which is due to rise to roughly $4.5 billion next year. Ignoring that scheduled increase is not an option as it would likely lead to a credit-rating downgrade; the state pension funds are deep in the hole thanks to continued underpayment of the full contribution calculated by actuaries, which has continued during Murphy’s tenure.

In fact, a recent report on pension-funding from The Pew Charitable Trusts showed the full extent of the damage.

Ignore actuaries at your own risk

“Kentucky, New Jersey, and Illinois have the worst-funded retirement systems in the nation in part because policymakers did not consistently set aside the amount their own actuaries said was necessary to cover the cost of promised benefits to retirees,” the report said.

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But right now, there’s no specific plan that’s been put in place by the governor and lawmakers to cover the next increase in pension funding that will be required in the 2021 fiscal year, as the state tries to get up to 80 percent of the total calculated by actuaries. Making matters worse are the required annual payments for pension bonds that were issued by former Gov. Christie Whitman in 1997 that are now rising to near $500 million.

On the revenue side of the ledger, a well-performing corporate-business tax that helped generate robust tax collections in FY2019 is also projected to decline in the coming years, in part because a temporary surcharge on companies earning more than $1 million will begin to be phased out. The first change in the top-end corporate-tax rate is looming on January 1, 2020, when it will drop from 11.5 percent to 10.5 percent. Under current law, the reduction will remain in effect for all of the 2021 fiscal year.

Meanwhile, the state’s fiscal position is also not getting much help from a widely expanding economic base during the ongoing recovery from the Great Recession. In fact, during recent appearances before lawmakers, Treasurer Elizabeth Maher Muoio said the Murphy administration is expecting less than 1 percent growth in baseline revenues in FY2020.

Those are some of the reasons behind Murphy’s repeated calls for the establishment of a permanent millionaires tax. Under a plan that was never put up for a vote in either house of the Legislature this year, Murphy sought to apply the 10.75 percent income-tax rate that’s currently levied on earnings over $5 million to all earnings over $1 million.

Murphy’s administration estimated the millionaires tax would have raised more than $500 million in recurring revenue, and he promised to continue making it a top priority as he addressed supporters during a rally in Trenton that was held after he officially signed the FY2020 budget on Sunday afternoon.

‘The long haul’

“I’m in the fight for the long haul. It doesn’t end today or next week or next month,” Murphy said.

“The need for us to get off the financial roller coaster is more important than ever,” he went on to say. “The need for us to save for tomorrow is more important than ever.”

But Sweeney, the longtime Senate leader, has also been pointing to the potential for a recession as a reason to get serious about the spending reforms that he’s proposed. They including creating a new, hybrid retirement system that thousands of new public workers and those with less than five years of service would be required to join. The retirement-benefits change could save the state more than $560 million annually over 30 years, Sweeney estimates, and he is also seeking other savings by shifting public employees into healthcare plans that require them to cover more of the cost of coverage.

Sweeney — who opposes the millionaires tax despite supporting it in the past — is also threatening to go around Murphy by putting the proposed reforms directly before voters in a referendum that’s scheduled for fall 2020.

“We’re at that point right now where we have to fix New Jersey,” Sweeney told reporters on Sunday.

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