Credit: (AP Photo/Matt Rourke)

The need to maintain robust budget reserves was one of the major lessons for public officials highlighted earlier this year in an independent report that exhaustively scrutinized New Jersey’s response to the COVID-19 pandemic.

With “relatively less reserves available at the start of the pandemic than other states,” the report noted New Jersey had to slash spending and borrow billions of dollars to keep the annual budget afloat as revenue plummeted during the early months of the global health crisis.

“If states had enough surplus reserve funds available, they had less need to utilize other budget strategies, such as steeper cuts or greater borrowing,” according to the more than 900-page report.

Late last month the new annual budget was put in place for the fiscal year that began July 1, but whether New Jersey has fully heeded the fiscal lessons of the pandemic remains an ongoing subject of debate.

For their part, Republicans have been faulting Gov. Phil Murphy and majority Democrats for enacting a budget that spends down some $2 billion in surplus to help support a record-high level of annual spending.

Warning about a ‘fiscal cliff’

Doing so has left a steep “fiscal cliff” that will eventually need to be reckoned with, possibly with new tax hikes, according to GOP lawmakers.

“Democrats have been warned about this fiscal cliff they are driving toward,” said Assemblyman Rob Clifton (R-Monmouth) earlier this month.

“They cannot act surprised when they find themselves at cliff’s bottom in a couple years,” Clifton said.

Murphy and other Democrats have responded to such criticism by pointing to the more than $6 billion that remains set aside in reserve for the next time the state is facing a major economic downturn.

And during a news conference late last month, Murphy also said New Jersey is “still in a fragile, post-COVID phase” as he justified drawing down the surplus to support annual spending expected to outpace tax collections during the 2025 fiscal year.

“We are doing this deliberately. We want to jump-start, and make sure that, the economy gets back on its feet as fast, as it can,” Murphy said.

In all, the annual budget Murphy enacted in late June totals nearly $57 billion.

Where NJ’s increased spending is going

Among other areas, the budget hikes annual spending on public education, public-worker pensions and direct property-tax relief.

But even as overall spending creeps closer to $60 billion, an opening surplus of $8.25 billion will be reduced to $6.125 billion by the end of the 2025 fiscal year, according to an updated budget sheet obtained by NJ Spotlight News through an open public records law request.

Moreover, the size of the surplus at the end of fiscal year 2025 is projected to drop to about 10% of planned annual spending, after hitting 15% of adjusted appropriations at the end of the 2024 fiscal year, according to an NJ Spotlight News analysis of the latest budget figures.

For some national context, state Treasurer Elizabeth Maher Muoio told lawmakers during budget committee hearings earlier this year that the national average for state surpluses was closer to 23% during the 2024 fiscal year.

“While surplus is another typically non-splashy headline item, it is nonetheless a critically important tool with respect to fiscal preparedness,” Muoio said at the time.

Precise advice on how to prepare

Meanwhile, the independent report on New Jersey’s response to the COVID-19 pandemic also detailed the benefits of a specific method of savings — the maintenance of a separate “rainy-day” fund — that other states use to get the best results.

“To be appropriately prepared for the next emergency, New Jersey must build the necessary reserves in the Rainy-Day fund,” according to the report.

According to fiscal policy experts, state rainy day funds often operate with specific rules related to when deposits are made and when balances can be drawn down.

In New Jersey, deposits are, by law, supposed to be made into the state’s “Surplus Revenue Fund,” often informally called the rainy day fund, in years when tax revenues that support the budget’s General Fund exceed certified forecasts.

This way, the rainy day fund’s balance can be tapped during times of emergency or when the state is facing a revenue shortfall and contemplating tax hikes, according to the law.

NJ’s old habits

But over the years, governors and lawmakers from both major parties have frequently written language into the annual budget to allow for any balances in the Surplus Revenue Fund to be transferred into the General Fund.

This year, that language appeared on page 372 of the final spending bill that lawmakers approved and Murphy signed into law in late June.

Looking ahead, the report on the state’s response to the COVID-19 pandemic recommended policymakers also look at “depository rules for unexpected or above-average State revenue that could be automatically routed to a Rainy-Day or emergency reserve fund.”

Pew found that between 2007 and 2021, New Jersey’s total annual expenses exceeded annual tax collections during 14 of the 15 fiscal years.

“This action would strengthen reserve funds and discourage over-investing based on one-time revenue increases that would likely not continue,” the report said.

But even before the issuance of that report, the Murphy administration itself had extolled the benefits of replenishing the Surplus Revenue Fund, which is still described as a “restricted reserve fund” in Office of Management and Budget financial policies.

That came in 2019, after state tax revenues exceeded that year’s forecasts, allowing the Murphy administration to make the first deposit into the Surplus Revenue Fund since it was fully drained during the 2007-2009 Great Recession.

“Everyone is taught the importance of saving for a rainy day, but unfortunately it has been far too long since New Jersey’s rainy-day fund has seen any deposits,” Muoio said at the time.

Defending the Murphy approach

Asked about this year’s handling of the Surplus Revenue Fund, Treasury spokeswoman Danielle Currie noted the budget’s general surplus remains $6.125 billion, a sum that “far exceeds the average surplus of any previous administration.

“This is a reflection of how the Murphy Administration continues to prioritize the importance of having a robust surplus in the event of an economic downturn,” Currie said.

Meanwhile, when it comes to the makeup of the budget as a whole, updated “fiscal balance” data published by experts from The Pew Charitable Trusts earlier this year highlighted New Jersey’s long-standing tendency to spend more on an annual basis than the state collects in tax receipts — the concern Republicans have been raising about this year’s budget.

Pew found that between 2007 and 2021, New Jersey’s total annual expenses exceeded annual tax collections during 14 of the 15 fiscal years. That left New Jersey alongside Illinois as the states with the largest 15-year deficits.

“States can withstand periodic deficits without endangering their fiscal health over the long run, but chronic shortfalls are one indication of a more entrenched structural deficit in which, without policy action to correct the imbalance, revenue will continue to fall short of spending,” the Pew report said.