New Jersey's fiscal woes may rise with planned borrowing, analysts say

Analysts warn that borrowing included in the revised New Jersey budget, advanced by lawmakers Tuesday, could haunt the state for years.

The Democrat-led state Senate and Assembly budget committees approved a $32.7 billion spending plan along party line votes that, if implemented, would allow up to $4.5 billion of bonding for the shortened nine-month fiscal 2021 budget cycle compared to $4 billion proposed by Gov. Phil Murphy. The budget would also hike spending by nearly $300 million from Murphy’s Aug. 25 proposal.

“It is bad policy and it will be hanging around the state’s neck for years,” said Richard Keevey, an executive in residence at the Bloustein School of Planning at Policy at Rutgers University.

Keevey, budget director under former governors Tom Kean and James Florio, said when they faced budget deficits worse than the current one on a proportional basis, both opted to avoid borrowing and instead raised taxes. While Murphy and legislative leaders struck a deal last week for an income tax hike on millionaires, Keevey said, the revenue impact would be largely muted by plans to provide annual rebates as high as $500 for families earning less than $150,000, analysts said.

State Treasurer Elizabeth Maher Muoio supports the higher borrowing in order to protect against additional revenue losses that could result from a potential second wave of COVID-19, state Department of Treasury spokeswoman Jennifer Sciortino said. Muoio estimated last month that New Jersey faced a $5.6 billion revenue shortfall in fiscal 2021 from February projections, before the COVID-19 pandemic forced the closure of many businesses.

The borrowing approach will burden New Jersey with hundreds of millions in long-term debt service costs, Keevey said, noting the state is still on the hook for bonds its sold 24 years ago to fund the pension system. He advocated a combination of tax increases and budgetary savings, such as deferring $2 billion of the proposed $4.9 billion pension payments.

New Jersey had $44.4 billion of outstanding bond debt as of June 30, 2019, according to the state's latest annual debt report.

Fitch Ratings analyst Doug Offerman said New Jersey’s future debt burden would hinge on the size of the borrowing and how the bonds are structured. The New Jersey COVID-19 Emergency Bond Act, signed by Murphy on July 16, authorized borrowing to sustain operating costs either through the issuance of general obligation bonds with up to 35-year maturities or short-term debt through the U.S. Federal Reserve’s Municipal Liquidity Facility program.

Sciortino said Treasury was still considering borrowing options, including whether to sell tax-exempt or taxable bonds.

“Whatever kind of borrowing they do will set the state up to have to absorb the repayment,” Offerman said. “Part of the open question is how much of a solution to the 2021 problem sets them back in 2022 and beyond.”

New Jersey’s GO bond ratings are second lowest of all U.S. states ahead of only Illinois, due largely to rising pension liabilities. Fitch downgraded New Jersey debt to A-minus from A in April, citing the state’s lack of reserves to combat a severe economic downturn. The Garden State is also rated A3 by Moody's Investors Service, A-minus by S&P Global Ratings and A by Kroll Bond Rating Agency.

The full state Senate and Assembly are slated to vote on the budget Thursday. Murphy would then have until Sept. 30 to sign the fiscal plan or issue a veto.

Any borrowing plan in fiscal 2021 will require approval from four-member legislative commission. The panel includes Senate President Steve Sweeney, D-Gloucester, Assembly Speaker Craig Coughlin, D-Fords, Senate Budget and Appropriations Committee Chair Paul Sarlo, D-Wood Ridge, and Assembly Budget Committee Chair Eliana Pintor Marin, D-Newark.