by Richard F. Keevey
The fiscal future of New Jersey is grim. For two decades the state has struggled to balance its budget. In the early 1990s it was rated AAA by each rating agency; it is now the second lowest in the country. According to a recent study by the Pew Charitable Trust the pension system is the worse in the country. The state’s budget gap is at least $ 4 billion, driven by two legally required programs, employee retirement costs and school aid.
Many budget watchers suggest the gap is bigger (perhaps $7 billion) if one counts underfunding of municipal aid, transportation maintenance, homestead rebates, senior freeze, infrastructure, and a host of other demands.
Enter the new governor. What has he inherited? What does he do? Does he address the legally required programs; does he initiate new programs; does he raise taxes? Instead of requesting new programs and large tax increases it would have been perhaps better to have couched the situation as follows:
“NJ is facing large funding gaps for existing programs — at least two of which are legally required; a revenue problem exists, exacerbated by large tax cuts two years ago — without related spending cuts. Our priority must be to address these existing problems. Yes, we have new initiatives worthy of funding but must wait until we stabilize our fiscal situation. We must layout a multi-year plan to address these issues. We must work together.”
The budget process is in its last few weeks. The current battle is between the governor’s proposal and differing views in the Legislature — principally concerning tax increases, allocation of school aid, and new spending. The governor’s team indicates they were not aware things were so bad; new programs are necessary; and $1.7 billion in new revenues is needed.
Let’s review some facts:
None of the fiscal information was a surprise. Budget information was available previously and during the campaign. Certainly the governor’s Office of Management and Budget and the Legislature’s Budget and Finance Office were fully aware of the problems.
The spending increase is $2.2 billion — not the $1.5 billion currently discussed. Why? Because $700 million in certain cuts were assumed, including some very doubtful reductions that most likely will require funding before the Appropriations Act is finalized, including homestead rebates, legal fees, addiction services, and snow removal, which will further exacerbate the problem.
The major increases in the budget proposal are for: retiree benefits ($807M); formula-driven K-12 school aid ($284M); Medicaid ($244M); NJ Transit ($241M); other education programs ($360M, including $57M for pre-school and $50M for community college tuition aid); and $264M for items such as debt service, community grants and capital.
Noteworthy: the total increase for K-12 education, including retirement benefits, is actually $932 million — the single largest increase. K-12 education aid is $15 billion and by far the single largest item in the $37.4 billion budget proposal.
Revenue estimates for existing taxes and revenues are reasonable as both the executive and legislative branches have similar estimates, each developed separately. However, it is absolutely critical to understand that $1.3 billion in taxes were reduced in 2016 creating the major gap today. Specifically, the sales tax rate was reduced; the estate tax was eliminated; and new credits were added to the income tax.
So what to do? I suggest five actions:
• Remove new initiatives from the budget — we cannot presently afford them.
• Increase revenue by an agreed amount to minimally address existing commitments — and most important, have a responsible surplus, plus a Rainy Day fund. A credible budget cannot be adopted without additional revenue.
• Redo the current K-12 school formula. During the past years the formula was significantly adjusted such that the Supreme Court’s approved formula is not valid. Some school districts receive more money than needed and some less. If the formula were fully funded it would require $1 billion more — the state cannot afford that level. For FY 2019 certain adjustments must be made, but for the future an entirely new formula is worth considering.
• Re-examine the recommendations of Governor Christie’s Pension and Health Benefits Commission. Few would argue retirement costs, including pension and health benefits, are the state’s largest fiscal albatross. We either fund these obligations or reduce the benefits. The state must stop pushing this issue down the road; it is bad public policy and is the root of our bad credit. Such costs will soon consume 30 percent of the budget. The existing tax structure — even with the taxes proposed by the governor — can’t fund these benefits.
• Approve a minimalist Appropriations Act for FY 2019 — and agree to form a Bipartisan Spend and Revenue Commission or an Executive-Legislative Task Force to develop a budget plan for the next three years so that everyone knows the future impact of decisions. Failure to follow this disciple led to many of the current and past problems. The current budget proposal can’t withstand this test. A consensus must be reached on what programs are needed and what revenues are required.
New Jersey’s budget problems did not develop overnight; the new governor inherited them. So take six months to develop a carefully structured consensus plan, including needed revenue; and propose new items that are necessary for economic growth and requisite human services. If not done properly we will be back again next year with the same issues. New Jersey needs a new budget strategy for today and the future — budgets are best grounded in realism no less than idealism. It is time for a realistic multi-year plan.
Richard F. Keevey is the former New Jersey budget director and comptroller — appointed by two governors from each political party. He held presidential appointments as CFO at HUD — with Senate confirmation — and deputy undersecretary of defense. He is currently a senior policy fellow at Bloustein School of Planning and Policy and a lecturer at the Woodrow Wilson School, Princeton University.
A version of this article previously appeared in NJSpotlight — www.njspotlight.com.