Gov. Phil Murphy is proposing a state budget that calls for increased spending in several key areas, including K-12 public schools, mass transit, direct property-tax relief benefits and public-worker pension funds.

The overall $58 billion fiscal plan Murphy unveiled on Tuesday also counts on the state collecting more money from a series of proposed tax and fee hikes the governor is asking lawmakers to approve ahead of legislative elections in the fall.

These proposed increases include higher taxes on alcohol, cigarettes, online gambling and sports betting, according to an overview of the fiscal year 2026 budget shared with reporters during a background briefing Monday afternoon.

Murphy’s budget announcement is the start of a lengthy process that includes private negotiations between the administration and key majority Democratic lawmakers that may result in a budget larger than what the public sees now and with many changes in both the tax increases and spending requests.

Meanwhile, the Murphy administration is also planning to divert additional funding from the state’s dedicated debt reserve to help cover general expenditures during the next fiscal year, which begins July 1, officials said during the briefing.

Revenues vs. expenditures

However, a structural gap between annual revenues and expenditures that measured more than $2 billion at the start of the current fiscal year will be cut nearly in half under Murphy’s proposed spending plan for the 2026 fiscal year if lawmakers accept his proposals, the officials said.

The state Constitution generally requires a balanced spending plan each year with no actual budget deficits — structural gaps between projected revenues and planned expenses are usually closed using one-time maneuvers, like spending down surplus or diverting resources from other funds. While the governor’s proposed budget would spend down some of the opening surplus, more than $6.3 billion would also remain in the state’s undesignated closing surplus as the next fiscal year comes to a close in June 2026 under the spending plan put forward by Murphy, a second-term Democrat due to leave office early next year under term limits written into the state Constitution.

That surplus is a key budget reserve used to hedge against unforeseen revenue losses or spending needs, such as those that emerged at the onset of the COVID-19 pandemic nearly five years.

Unpredictability in Washington

And this year, having a robust surplus on hand could once again become an important factor amid ongoing talks among Republicans who control Congress about slashing federal spending, along with President Trump who appears to be committed to reducing the federal budget and workforce. Such cuts could result in New Jersey and other states eventually losing billions of dollars in federal aid, including for key programs like Medicaid, New Jersey state treasurer Elizabeth Maher Muoio said during the background briefing with reporters.

“It’s hard to predict because this is all a big question mark right now,” she said.

Spending on formula aid for K-12 public schools is due to increase year over year, by more than $385 million … to a record high of more than $12 billion.

In all, state spending would tick up by a little more than 2% in the next fiscal year under Murphy’s proposed budget compared to the $56.7 billion in the appropriations act that Murphy and majority Democrats in the Legislature agreed to enact for the current fiscal year, which began July 1, 2024. That’s slightly less than the annual rate of inflation measured by the federal government last month.

Moreover, annual spending would actually drop slightly in the next fiscal year when Murphy’s proposed budget is measured against appropriations changes and adjustments made since the current fiscal year began, which include more than $1.4 billion in supplemental appropriations that were not immediately made public by the administration in advance of Tuesday’s gubernatorial budget message.

Schools, NJ Transit, public-worker pension funds

For the fifth year in a row, the Murphy administration is proposing full funding of the annual obligation to the public-worker pension system, with the total allocation rising to $7.2 billion. This includes more than $1.1 billion in dedicated New Jersey Lottery revenues that flow directly into the state’s pension funds monthly, officials said.

Among the areas seeing the largest increase in spending year over year is mass transit, with New Jersey Transit due to receive more than $800 million in new funding for operations from proceeds of a temporary tax on top-earning corporations that Murphy and lawmakers agreed to establish last year.

This cash infusion would come after the statewide bus and rail agency, which was dealt a significant financial blow by the pandemic, hiked rider fares last year and is planning to do so again this year.

Spending on formula aid for K-12 public schools is also due to increase year over year, by more than $385 million. That would push the grand total for that line item to a record-high more than $12 billion, administration officials said.

At the same time, administration officials are promising that possible reductions in aid for some school districts under the state’s current school-aid formula will not total more than 3% year over year.

Property-tax relief

In past years, as New Jersey property-tax bills have soared to record highs, Murphy has made the argument that increased state funding for public schools results in property-tax relief for homeowners since spending by local school districts typically accounts for the largest single share of the revenue raised from residential property taxes in the state.

However, this year Murphy has also proposed allocating $600 million to help launch a new direct property-tax relief program called Stay NJ that has been championed by Democratic legislative leaders and is due to debut in early 2026.

‘This will not be the budget that gets signed into law, hopefully before the end of June.’ — state Treasurer Elizabeth Maher Muoio

This program will benefit an estimated more than 430,000 senior homeowners with relief checks that are intended to eventually cut property-tax bills in half for many eligible recipients if benefits from other state-funded relief programs don’t already accomplish that goal. But the long-term sustainability of the Stay NJ program remains a big question mark since no money will be set aside to fund benefits in future years, when the cost of funding the benefits at the promised amounts is projected to at least double.

Meanwhile, for other homeowners and tenants contending with rising housing costs, Murphy’s budget proposes spending another $2.4 billion to continue the popular state-funded Anchor property-tax relief program.

But despite rising rents and property-tax bills, Murphy is proposing to hold benefits flat for another year for all eligible Anchor recipients.

That would mean the maximum Anchor benefit would remain $1,750 for eligible senior homeowners, and $700 for eligible senior renters. The maximum Anchor benefits for eligible non-senior homeowners and tenants would remain $1,500 and $450, respectively.

What’s next?

It will now be up to state lawmakers to decide what to do with the governor’s proposed spending plan. Tuesday’s budget address kicks off a lengthy legislative review process that must end before July 1, a deadline set in the state Constitution.

As the review process plays out over the next several months, lawmakers will have to determine how much of Murphy’s budget plan makes it into the state’s formal appropriations act for the 2026 fiscal year.

Among the options before them is enacting Murphy’s plan unchanged or drafting their own spending bill to send to the governor for final consideration by the end of June.

In recent years, lawmakers have elected to inflate the size of the governor’s proposed budget, including last year, when more than $600 million in new spending on legislative priorities and pet projects was added just days before the July 1 deadline, leaving little time for public oversight.

During Monday’s briefing, Muoio pointed to the upcoming legislative review process, which will feature a series of public hearings before bipartisan budget committees in both the state Senate and Assembly.

“We now go through months of discussions,” Muoio said. “This will not be the budget that gets signed into law, hopefully before the end of June.”