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Opinion: In Troubling Times, We Still Need to Consider Major Fiscal Issues

Wednesday, March 25, 2020  
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Gov. Murphy and the Legislature should develop a plan now to address the current situation and the next two to three years

I feel guilty writing about the state’s finances. There are more pressing events to worry about. But best to be prepared.

First, let me observe what a great job our governor is doing to address the coronavirus situation. Always available; always explaining the problems and his proposed solutions in a clear manner. Does he have all the answers? Of course not — but he is addressing the problems forthrightly and explaining his actions without blame and with confidence and reassurance. A striking contrast to the actions of the president.

While health concerns dominate the news, it’s also important to review the major finance issues the state will soon be facing, including revenue collections, future tax policy, spending, pensions, cash flow and unemployment insurance.

Our financial situation could be dire or just troublesome. I hope for the latter, but I fear the former.

Unemployment insurance for workers

Last week, unemployment claims jumped nationwide by 33%, and most likely will continue to increase for weeks, if not months. Each state administers its own unemployment insurance programs. Administration is funded with federal funds. Revenues are deposited in a dedicated trust fund — it is not part of the state budget. Revenue is provided by both employers and employees.

The current rate for employers is 0.6% and is determined each year by a statutory formula based on the status of the trust fund in relation to taxable wages. The rate for employees is 0.38% of salary. In fiscal year 2019, contributions were approximately $2 billion and benefits were $1.9 billion. The “cash surplus” in the fund is approximately $2.8 billion.

Most likely, the New Jersey fund will soon be depleted, as it was during the 2007-2009 fiscal crisis. States can borrow from the federal government as necessary to continue payments. Ultimately, the state must repay the loan, and the employer’s rate will be increased.

So, no worry to those seeking unemployment checks, but unfortunately a possible large future tax increase to employers.

Pension funds

The market value of state-supported pension systems is approximately $51 billion, but the systems’ unfunded ratio is 54% — one of the worst in the country. In the last two years, substantial and necessary contributions were made — totaling $7 billion. In the proposed budget, an additional $4.9 billion is recommended, including a proposed supplemental appropriation in the current year of $279 million.

The chance of a supplemental appropriation is nil, and the recommended appropriation for next year will surely be reduced. Furthermore, a 7% rate of return is assumed on the investments — almost surely not happening. Like private retirement savings, the value of the state pension funds has taken a significant hit. It is likely to be a long and slow process of recovery.

This is a significant state responsibility, and current and future retirees expect the money to be there. The current economic climate and its assuredly slow recovery will not allow this to happen. In prior years, we always pretended that pensions would ultimately be paid — maybe not now. What to do? First choice might be to re-examine the “Path to Progress” report, but even that might not be sufficient. In any case, this issue needs to be carefully re-examined and addressed.

K-12 education assistance

The proposed budget includes $18 billion (44% of all spending) for schools, municipalities and school districts — principally for schools. Included in this amount is an increase of $577 million for K-12 schools, such as formula aid, preschool aid and benefits for teachers. In the current year, this same general level of funding is allocated for schools. With a decrease in revenue for the remaining four months and a slow recovery for next year, this level of spending — both in the current year and next — will not happen.

Other spending items

The proposed budget includes an increase of $132 million (for a total of $600 million) for NJ Transit. Furthermore, given the recent 88% decrease in ridership, the current year’s transit budget is under significant stress.

Other proposed new programs, such as $50 million for college students, and a wide range of other important but not critical increases of almost $700 million must be reconsidered and likely eliminated. In my judgment, the $320 million increase for the critical Medicaid program is necessary.

Revenues and taxes

The revenue estimates for the current year of $39.5 billion and the projected $41.2 billion for next year are not possible given the current economic climate.

Next year’s increases include $494 million to expand the income tax on millionaires and $180 million to levy a fee on employers of up to $725 a year for each employee or dependent of an employee who receives health coverage through Medicaid.

The latter would almost certainly lead to discrimination in hiring and layoffs against people of color, single mothers, etc. Why would an employer hire these employees compared to others if they knew they must contribute to the cost of their Medicaid coverage? It was always a bad proposal and now worse in this economy.

An increase in the millionaires tax was always doubtful given opposition by the Legislature. Depending upon how one looks at the current economic situation, it is now either more dead on arrival — or the only way to get money to offset the inevitable decreases in all other revenue.

During the national crisis of 2007-2009, the New Jersey income tax decreased $1.8 billion, the sales tax by $650 million and other taxes by another $1.4 billion. It took six years for the income and sales tax to recover to 2008 levels. This decrease will happen again, but this time much more severe.

I do not know the status of current revenue collections — the first definitive glance is usually in early April as we approach the April 15 due date of income taxes. If the state follows the IRS lead, as it should, in delaying the filing and payment date, we probably won’t have a good idea on current revenues for 90 days.

My educated but informed guess is that a $4 billion shortfall over this two-year period is likely — and  perhaps it will be even more. More important, the state‘s cash position will be stretched beyond the ability to make timely payment on existing commitments.

Think of it this way: On average each month the state collects approximately $800 million in sales tax and $1.2 billion in income taxes (normal withholding from paychecks). This will not happen in March or April for sure — and maybe for several subsequent months. And, while the income tax collections due April 15, 2020 will include the already projected large capital gains from 2019 — the fiscal year beginning July 1, 2020 will not follow suit because of the impact of the current slowdown.

Under our constitution, the state is prohibited from issuing bonds for ongoing operations. Each year, the state does issue short-term notes of $1.1 billion for cash flow purposes, but they must be repaid by the end of the fiscal year. The cash situation will be severely tested.

The state has $732 million in its rainy-day fund to help — but far less than necessary. However, the projected regular surplus of $750 million will not materialize in the current year and the projected $900 million at the end of FY2021 will not exist. Furthermore, when the one-time rainy-day fund is used, it will not be readily replaceable.

At the local level, the property tax is basically the only revenue source (except for state aid). There is little chance that financially stressed homeowners will make their full May, August and November payments. This will create substantial problems at all levels of local government affecting police, trash collectors and teachers.

I could go on, but I think you get the point. The big determinant is, how long will this lock-down continue?

Final observations

It is hard to know what to do, and New Jersey is not alone. All states will face similar problems to some degree. Help from the federal government is the best route, as they are the only one who can print money and borrow at very low rates.

But they have other problems, and the current thinking has money being provided directly to taxpayers and the business community — certainly critical priorities. But states will need assistance, or critical programs will be curtailed, especially those that help the poor and disadvantaged.

The experience from 2007-2009 suggests that federal support for state and local budgets, either as grants, loans or direct expenditures, is critical to restore public confidence and economic demand. We did not do enough then, and the recovery stretched out longer than needed. I fear we will make the same mistake again.

In the interim the governor has taken necessary actions to freeze certain spending items. My guess is, before the year finishes, he will have to totally eliminate these appropriations and perhaps delete more items, such as the final quarter payment to the pension fund, in order to end the fiscal year with a constitutionally required balanced budget.

Some will argue for an income tax increase on millionaires. Perhaps necessary, but the impact must be carefully examined, as it is by far not a full solution nor perhaps desirable. A better approach is a national tax on high incomes with revenues redirected to states. This would generate revenue without pitting states into an unhealthy competition with each other. Any chance?

Some argue for a sales tax holiday or reduction in the rate. That would be a big mistake — the state cannot afford to lose more money than will already happen.

We have a responsible governor and a cooperative Legislature — especially in trying times. The executive and legislative branch must develop a plan now to address the current situation and the next two to three years. It must be done now. I think they will be up to the task, and we wish them good luck.


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