Even before Gov. Phil Murphy officially signed a budget for the fiscal year that began this month, New Jersey’s treasurer said her agency was gearing up to work on the state’s next annual spending plan, one that others have indicated could have some big challenges.

Such long-term budget deliberation is a matter of routine, with the administration’s leadership and staff starting early with discussions about the latest salary projections and other key financial issues.

But it could become especially critical for Murphy and lawmakers this coming year, as many fiscal-policy experts and economists are warning a new set of difficult fiscal questions will likely have to be confronted.

For starters, the next state budget will be the first to absorb the loss of a full year’s worth of revenue from the pending expiration of a special tax surcharge that has been levied for the last several years on the profits of top-earning businesses. That alone is $1 billion in fiscal year 2025, which begins July 1, 2024.

At the same time, state law will require a number of new spending hikes during the 2025 fiscal year, including another big year-over-year increase in spending on K-12 public schools. This year, more than $830 million was added to the school-aid line item, pushing the grand total close to $11 billion.

Meanwhile, the state’s Transportation Trust Fund will also be up for renewal by the time fiscal 2025 comes around. And that’s also when New Jersey Transit’s long-range budget forecasts begin to project operating deficits that threaten to upend the Murphy administration’s long-running streak of maintaining stable rider fares.

How to pay for big property-tax relief

Amid these challenges, the state will also be aiming to come up with hundreds of millions of dollars in revenue for “StayNJ,” a new senior property-tax relief program that top Democratic legislative leaders have promised to launch by early 2026.

When the senior property-tax relief initiative was announced last month, Murphy said he was “bullish” on the state economy.

But long-range forecasts released just a week earlier by a bipartisan group of top state fiscal policy experts assembled by Rowan University’s Steve Sweeney Center for Public Policy indicate trouble may be brewing. In fact, state government could be facing its own operating deficits as early as the 2025 fiscal year under the latest spending and revenue trends, according to the group’s latest report.

“New Jersey faces a looming fiscal crisis, with state revenues projected to fall $3 billion to $4 billion short annually of the amount needed to continue state programs and state aid at current service levels from Fiscal Year 2025 to Fiscal Year 2029,” the group said in a report issued last month.

Record-breaking budget

The new annual budget enacted by Murphy and lawmakers late last month totaled a record-high $54.3 billion, according to the final budget documents.

Included in that sum was more than $1 billion in new spending added to Murphy’s own budget proposal by majority Democrats in the days before their appropriations bill won approval in the Assembly and Senate. It was subsequently signed into law by Murphy, a term-limited Democrat, during a June 30 ceremony attended by Treasurer Elizabeth Maher Muoio and top Democratic legislative leaders.

In all, the fiscal year 2024 budget hiked year-over-year spending by more than $3.5 billion, representing a more than 7% increase that easily topped the rate of annual inflation for the nation as a whole.

New Jersey is ‘facing a fiscal timebomb for the future.’ — State Assemblyman Gerry Scharfenberger (R-Monmouth)

The sustainability of the spending increase — which came in the face of reduced revenue forecasts issued by the administration in May — was flagged as a concern by Republicans who currently hold minorities in the Assembly and Senate.

State Assemblyman Gerry Scharfenberger (R-Monmouth) warned the state is “facing a fiscal timebomb for the future” as he highlighted the structural imbalance during budget debates late last month.

Reserves at the ready

But helping to hedge against any risks that may develop over the course of the 2024 fiscal year is more than $8 billion that’s been left in reserve. That’s a significant sum for a state that was forced to make emergency spending cuts to offset revenue losses experienced just a few years ago at the onset of the COVID-19 pandemic.

Maintaining robust budget reserves was also identified as a key policy priority in the new law enacted by Murphy that lays the groundwork for “StayNJ.” In fact, funding for the proposed program, which aims to halve property-tax bills for many senior homeowners, but not until 2026 at the earliest, cannot come at the expense of shorting budget reserves, according to the law.

Also listed as superseding priorities is spending on K-12 public schools, which is due to increase once again during the 2025 fiscal year under current school-funding law. Maintaining full annual public-worker pension contributions also falls under this category.

Progressive policy activists have also been raising concerns about NJ Transit’s finances.

For his part, Murphy has been touting another full fiscal year that will see NJ Transit, which receives an annual subsidy from the state budget, maintain stable fares for bus and rail customers.

But as the statewide mass-transit agency struggles to regain ridership losses suffered during the pandemic, Murphy administration officials have warned fare hikes will be back on the table after the 2024 fiscal year comes to a close.

In response, transportation advocates have already begun to raise concerns about the impact that could have on New Jersey’s Black and brown communities.

According to NJ Transit budget documents, operating deficits are projected to eventually grow to $1 billion under current ridership forecasts, meaning the agency’s budget deficits “cannot be made up from commuters” alone, warned the bipartisan fiscal-policy experts at the Sweeney Center in their recent report.

They’re assuming the budget subsidy for NJ Transit will soon have to be increased significantly, up to $500 million annually from the current $140 million, to help keep NJ Transit on solid fiscal footing.

Doing without special tax surcharge

Progressive policy activists have also been raising concerns about NJ Transit’s finances, including as they’ve called on Murphy and lawmakers to leave in place the special tax surcharge that’s been levied on businesses earning more than $1 million annually for the past several years in New Jersey.

According to Treasury forecasts, the pending expiration of the surcharge at the end of the 2023 calendar year will reduce state revenues by nearly $325 million during the 2024 fiscal year, and by $1 billion during the 2025 fiscal year.

The corporation-business tax is one of several revenue sources that support the budget’s General Fund, which, in turn, serves as a source of revenue for the annual subsidy for NJ Transit, among many other line items.

“Allowing the (surcharge) to expire benefits a handful of wealthy corporations at the expense of the vast majority of New Jerseyans,” said Liz Glynn, director of organizing for the New Jersey Citizen Action advocacy group.

“This could eventually lead to significant cuts in programs involving healthcare, education, the environment, transportation and many other initiatives that help ensure working families in our state can thrive and prosper,” Glynn said.