New Jersey is sitting on a huge budget surplus thanks to a surge in tax revenue, but a new report from a group of fiscal-policy experts suggests circumstances could quickly change and leave lawmakers facing a much different scenario.
The report released Wednesday by experts assembled by Rowan University’s Steve Sweeney Center for Public Policy cites long-range revenue and spending forecasts and underscores earlier calls for the state to maintain a robust budget surplus — even as lawmakers may be tempted to use the state’s growing tax collections to go on a spending spree.
The state’s spending needs are likely to outpace revenue growth except under the most optimistic scenario, which is the least likely option the experts say will occur, according to the report’s long-range forecasts.
“Over $8 billion in surplus would be needed just to cover the projected revenue shortfall caused by a mild recession,” the report warns as it details what could occur under the most pessimistic scenario.
The report’s release and focus on the big picture for the budget comes at a key moment for lawmakers. They must send to Gov. Phil Murphy a spending bill for the 2023 fiscal year, which begins July 1.
In recent weeks, as revenue projections have been revised upward to account for the surging revenues, there’s been no shortage of ideas coming out for how to use the surplus, with little attention being paid to the long-term impact of such proposals.
Spending down the surplus
But spending down too much of a surplus that is estimated to hit nearly $11 billion by the end of the current fiscal year would be a mistake, said former Senate President Steve Sweeney, who chaired the working group assembled by the Rowan policy center that bears his name.
“I’m not saying the Legislature shouldn’t spend, and won’t spend, but don’t go crazy is what we’re saying,” Sweeney said during a news conference in the State House.
“Everyone wants to spend right now because they see (the surplus) there and they don’t see tomorrow,” he said.
Over the last two years, New Jersey has seen major revenue surges despite the COVID-19 pandemic, which initially triggered a budget shortfall of more than $1 billion. As a result of the surges, the Murphy administration has significantly revised revenue forecasts, adding billions of dollars to the state’s surplus in just the last few weeks.
Under the administration’s latest projections, the state is now on course to end the current fiscal year with a surplus of $10.7 billion. The size of the budget reserves would grow to $11.9 billion by the end of the 2023 fiscal year, when the state is projected to spend just under $50 billion, according to budget documents.
But where Murphy and legislative leaders ultimately land when it comes to annual spending and the size of any remaining surplus remains to be seen.
In recent weeks, lawmakers have been calling for spending on everything from major tax rebates to increased debt payments. And they are also likely to add millions of dollars in spending for their own pet projects and other legislative priorities, last-minute appropriations that are often referred to as “Christmas-tree items” inside the State House.
Issues could arise as early as 2024 fiscal year
Under the long-range forecasts detailed in the report released Wednesday, a gap between revenues and expenditures could materialize as early as the 2024 fiscal year.
Moreover, there is an 80 percent probability that state revenue collections between the 2024 and 2027 fiscal years will fall at least $10.5 billion short of the revenue that will be needed just to maintain current services. And the worst-case scenario suggests that gap could grow to over $20 billion.
Meanwhile, the group of experts, which includes a former state chief economist, treasurer, comptroller and leading economists from Rowan and Rutgers universities, among others, determined the most optimistic scenario — where revenue growth would easily outpace the state’s long-term spending needs — has an only 20 percent chance of occurring.
To compile the long-range forecasts, the fiscal-policy experts took into account factors like energy costs, supply chain issues and ongoing Federal Reserve intervention in response to rising inflation, according to the report.
They also factored in the impact of the pending sunset of a special state-tax surcharge levied on New Jersey’s top-earning businesses. And on the spending side of the ledger, the group accounted for planned increases tied to the state’s current K-12 school-funding laws, the pending loss of federal aid that has sustained New Jersey Transit throughout the pandemic, and Murphy’s recent proposal to phase in a series of spending increases on direct property-tax relief credits.
Projections last done a decade ago
Given the chances of a looming fiscal cliff, Sweeney — who led the Senate for over a decade until he lost a reelection bid last year — said during the news conference he wished he had had access to such expert projections when he was in office. The last time such an exercise was performed for New Jersey was over a decade ago, according to the report.
And if lawmakers want to dismiss the group’s findings, Sweeney warned they could be facing a nightmare political scenario as early as next year.
“Guess what? If they spend it all . . . they’re walking into an election year, knowing they’re going to be cutting programs or burning more surplus not to cut programs,” Sweeney said.
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