It is budget balancing time across the land and, as is typical, New Jersey has unique challenges. The proposed budget is about $39.7 billion of Available Revenues and $38.6 billion of appropriations. The targeted Undesignated Fund Balance at Fiscal Year End 2020 is $1.16 billion or about 3% of estimated appropriations. This level of balance is a respectable one for a state and the amount is forecasted to be an increase from estimated the level at fiscal 2019.
Given the overall fiscal integrity is intact in the near term, exactly what are the challenges? New Jersey’s pension woes are well known. Having attended a conference last week that was sponsored by the Garden State Initiative, Senate President Steve Sweeney spoke about the $151.5 billion pension liability and the immediate need to take action to prevent additional fiscal strain. The recommended pension contribution is scheduled to increase this year by $545.6 million to $3.8 billion. The pension payment will continue to escalate rapidly over the next five years to a relatively unsustainable level. Creating a new tier for new hires will not be sufficient to create savings of any magnitude. The basic benefits for present plan members are difficult to alter, if at all. COLAs may be granted at levels closer to inflation or below, but the basic award remains intact.
Sen. Sweeney’s study group is known as the Path to Progress, which includes these guidelines:
- Pension & Benefit Reform
- Education Reform at the Administrative Level
- County & Municipal Government Reform and Shared Services
- State and Local Government Tax Structure
- Leveraging Assets to Stabilize the Pension System
Many of these areas have been explored before, but there is some fresh thinking here. Concerning the last entry, the Lottery has already been used to support the pension system. Perhaps, there are more unencumbered assets that may be tapped. The key is the assets must be truly unencumbered or may easily be shifted to that status with some more minor intervention.
A more immediate emphasis has been on the administration’s $1.1 billion of savings proposed for the FY 2020. A full $800 million of it is to be derived from public employee health benefits. It is generally accepted wisdom in the industry that health benefits are easier to adjust, especially when there is union cooperation, to maintain an acceptable level of coverage over time. The full amount to be spent on employee health approximated the size of the pension payment and the proposed level of savings is quite significant. Sen. Sweeney has proposed switching from a “platinum” plan to a “gold” level. The employee representatives clearly have to agree in principle that the resulting coverage maintains a relatively high benefit level.
The discretionary part of the budget that may be more easily trimmed is relatively modest. The $14.49 billion for education spending represents an increase over the prior year. Citizens are most interested in bolstering education spending and would possibly reject cuts. The $6.2 billion Human Services proposed budget is also largely mandated by law and is not easily modified. A welcomed change is that the proposed spending for NJ Transit is to increase by $100 million to $407 million. A well-functioning transit system reduces congestion and assists in improving air quality. The unknown factor is what will happen with the Gateway Project. We know the clock is counting down on when the tunnel scenario will need to be addressed from a funding standpoint. Capital construction included in the proposed budget approximates $1.69 billion, a moderate amount.
Debt service being paid out of the Department of Treasury of $374.5 million only approximates 1% of appropriations. The Total Debt Service Appropriation of $4.145 billion is also manageable if one considers all of the independent revenue streams in support of that debt.
Debt in New Jersey is not the challenge. The General long-term debt of $1.795 billion not counting the Transportation Trust Fund debt and other liabilities is quite manageable.
Among the budget proposals that are garnering more attention is the proposed Millionaire’s tax. The fact is, New Jersey residents are already heavily taxed in comparison to the rest of the nation. Given the change in the SALT deduction and with the average property tax burden across most of the state of around $15,000 per year, we understand and appreciate the need to provide some relief to the middle class. I am just not certain that this tax is the best way to go about the goal. We know that the highest earners pay a disproportionate amount of the tax burden. Given many Boomers are either at or approaching retirement age, we are concerned about the potential for an exodus while fully realizing that this occurrence often does not materialize. Now that the state had reported income tax collections above estimates by $349 million based on strong collections at tax time, perhaps the Millionaire’s tax could be set aside. As painful as it is, I would prefer to see even more attention directed to the appropriation side of the accounts.
I applaud the efforts that have been made to date by the leadership to trim spending where possible and practical. These efforts will not be lost on rating agencies or buyers of the state’s paper. Given the relative dearth of New Jersey paper coming to market versus last year, there is every reason to hold the conviction that the spread for the state’s paper will remain tight to the AAA scale. We believe that if more of the efforts are made to bring about some of the changes proposed in the Path to Progress that ratings will improve over time.
