The latest round of legislative budget hearings concluded Tuesday with more talk of a tightening state revenue outlook that could make it much harder for lawmakers to draft the typical election-year spending bill.
An increased potential for significant economic damage caused by a prolonged political stalemate in Washington, D.C. over lifting the federal debt ceiling is adding more uncertainty as the state budget-approval process shifts to the negotiation phase in Trenton.
How it all plays out between Gov. Phil Murphy and fellow Democrats who control the Legislature in the run-up to the July 1 start of the next fiscal year remains to be seen.
But everything from property-tax relief for seniors to taxes paid by the highest-earning businesses operating in New Jersey, and even the state’s recently improved credit rating, could be hanging in the balance over the next several weeks.
“It is now in the Legislature’s hands,” said state Treasurer Elizabeth Maher Muoio as she answered questions about the administration’s latest budget plans during an appearance Tuesday before the Senate Budget and Appropriations Committee.
Revenue projection drops $1 billion
Last week Muoio informed lawmakers for the first time that the administration’s latest revenue projection for the 2024 fiscal year is now $1 billion lower than was originally forecast in February.
She also conceded during questioning by members of the Assembly Budget Committee last week that Murphy’s revised budget for the next fiscal year calls for the state to now spend more than it is expecting to take in — a potential red flag for Wall Street credit-rating firms.
The new revenue outlook means a budget surplus that at one point was projected to soar above $10 billion is now forecast to fall short of $8 billion, according to the latest budget documents.
The effect of a default could be ‘drastic’ for the state budget, state Treasurer Elizabeth Maher Muoio said.
And that’s before factoring in any potential economic fallout from the ongoing political acrimony in the nation’s capital, where House Republicans are using the threat of a historic debt default by the federal government as negotiating leverage to force Democratic President Joe Biden to agree to major federal spending cuts. The federal government could run out of cash as early as June 1, federal officials have warned, if no deal is reached.
Here’s why the debt-ceiling battle is a wild card in NJ budgeting
Speaking to state lawmakers in Trenton on Tuesday, Muoio said the effect of a default could be “drastic” for the state budget, which is heavily reliant on revenue generated by the state income tax. Among other consequences, economists have warned a default could roil financial markets and trigger a surge in unemployment, both of which would further cut into state income-tax collections, Muoio said.
“With the stock market, U.S. credit ratings abroad — it would be a dire situation for us revenue-wise, especially on the (income tax) end,” Muoio said.
Impact of federal debt fight
The potential for a federal default was also included in another warning to lawmakers, as Oscar Mendez, revenue and economic policy analyst for the nonpartisan Office of Legislative Services, offered his own words of caution during the budget hearing.
“The state’s fiscal horizon is not free of downside risks whose effects are difficult to account for at this stage, such as the stability of the banking sector, the effects of a weakening U.S. dollar, the ongoing debt-ceiling negotiations, or disruptions to the established geopolitical order,” Mendez said.
Around this time last year, after the state saw a major surge in revenues in the final stages of the fiscal year, lawmakers added millions of dollars in new spending as they drafted the annual appropriations bill.
‘Debt is debt, whether it happens to be at the state level (or) at the local level. Taxpayers are paying for it. — Sen Steve Oroho (R-Sussex)
This year, with all 120 legislative seats on the November ballot, lawmakers — including those running in competitive districts — were likely hoping for a repeat.
Despite the administration’s lowered revenue projections for the 2024 fiscal year, Assembly Speaker Craig Coughlin (D-Middlesex) has suggested in recent days that he would like to see a major new commitment to senior property-tax relief in the new budget through a plan he’s dubbed “StayNJ.”
Coughlin’s office did not provide any draft legislation for his relief plan when contacted by NJ Spotlight News, and his public suggestions have triggered concerns in some circles about the potential cost.
Property taxes: A Republican plan
Senate Republicans on Tuesday announced their plan to beef up local property-tax relief by redirecting billions of dollars earmarked by Murphy for state debt relief to municipal and county governments to pay down debt or finance new capital projects on a “pay-as-you-go basis.”
“That, to me, would be direct property-tax relief,” said Sen. Steve Oroho (R-Sussex).
“Debt is debt, whether it happens to be at the state level (or) at the local level,” he said. “Taxpayers are paying for it.”
Treasury officials declined to comment Tuesday about the proposals floated in recent days by both Coughlin and the Senate GOP.
New Jersey accumulated the largest gap between its revenue and annual bills, taking in enough to cover just 91.9% of its expenses—the smallest percentage of any state.’ — The Pew Charitable Trusts
Right now, the Murphy administration’s own revised budget plan would see the state continue to earmark more than $2 billion for its own debt-relief initiatives, while leaving another $7.5 billion in reserve for the start of the new fiscal year.
Funding for K-12 public school aid would also increase as proposed under Murphy’s budget plan, as would the size of the state’s child tax credit.
A surcharge levied on the top-earning businesses operating in New Jersey would be allowed to expire, or “sunset,” by the end of the calendar year, something Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen) discussed briefly on Tuesday.
“You’ve all heard me say publicly that the sunset should remain in place,” Sarlo said.
Credit rating
Last month, Murphy publicly relished in a series of credit-rating increases the state was issued in response to recent efforts to build up surplus, pay down debt and fully fund outstanding public-worker pension obligations.
For years, New Jersey struggled with fiscal discipline, often operating with annual bills that cost more than the amount of revenue that was collected annually. According to a recent 50-state “fiscal balance” analysis conducted by The Pew Charitable Trusts, New Jersey was one of only nine states that carried a “negative fiscal balance” between 2006 and 2020.
“New Jersey accumulated the largest gap between its revenue and annual bills, taking in enough to cover just 91.9% of its expenses—the smallest percentage of any state,” the Pew analysis said.
In a review of New Jersey’s finances issued last month, Moody’s Investors Service listed several things that could lead analysts to reverse course and downgrade the state’s credit rating.
Among them was a “depletion of (the) state’s available balances, leading to reduction in liquidity, without a clear path to rebuilding it.”
Reduced pension contributions and a “reliance on non-recurring actions to address substantial budget deficits” were among the other factors the Moody’s analysts cautioned could lead to a downgrade.
