For the second straight fiscal year, double-digit investment returns have lifted the value of the pension fund covering the retirements of many public workers in New Jersey.

Preliminary performance totals released Wednesday by the state Division of Investment indicate pension fund investment returns reached nearly 11% during the 2025 fiscal year, which ended June 30.

While still subject to final auditing, that investment performance bested the returns earned during the prior fiscal year of more than 10%, as well as the pension fund’s overall 7% assumed annual rate of return.

As a result, the market value of the share of pension fund assets managed by the Department of the Treasury’s investment division hit $76.5 billion as of the end of the 2025 fiscal year.

“What an incredible year,” said Deepak Raj, chair of the New Jersey State Investment Council, when the latest annual returns were reviewed in detail during the council’s Wednesday public meeting.

“I just want to thank all of you for doing a great job,’ Raj told employees of the Division of Investment who attended the meeting.

The report on the boost from investments came after state Lottery officials reported over the summer that the share of Lottery revenues dedicated to funding public-worker pensions in New Jersey totaled roughly $1 billion during the 2025 fiscal year.

New Jersey began dedicating a portion of the Lottery system’s annual revenues to the pension fund under a policy change enacted in 2017 by then-Gov. Chris Christie.

Meanwhile, the pension fund has also benefitted in recent years from funding policies implemented by Gov. Phil Murphy and state lawmakers, including the repeated full funding of what actuaries have calculated as state government’s annual employer pension contributions.

That funding policy reversed a prior practice that saw governors and lawmakers from both major political parties repeatedly short the state’s annual pension obligations as other fiscal policies, such as tax cuts, were prioritized.

Due to the underfunding previously carried out over more than two decades, the pension fund has a significant unfunded liability that the state’s actuaries have estimated will take decades to fully address.

Budget

NJ Lottery sales sag

But with full state pension contributions now being made on an annual basis, officials say the state’s fund managers have been able to take full advantage of the favorable market conditions that have boosted investment returns in recent years, easing pressure on taxpayers, who, along with the workers themselves, contribute to public-employee pensions in New Jersey.

During the 2025 fiscal year, total state pension contributions topped $7 billion, counting the dedicated Lottery revenues. The state contributions are projected to top $7 billion once again during the 2026 fiscal year, which began July 1, according to budget documents.

The pension fund assets managed by the Division of Investment help cover the benefits owed to thousands of retired teachers, judges and many other public workers in New Jersey. But not the retirements of most police officers and firefighters, whose benefits are covered by a separate fund that is managed by a different panel.

“This just further strengthens the plans on which all of our retirees depend,” — state Treasurer Elizabeth Maher Muoio

During Wednesday’s investment council meeting, state Treasurer Elizabeth Maher Muoio praised officials from the Division of Investment for generating overall annual returns of 10.96%

“This just further strengthens the plans on which all of our retirees depend,” Muoio said.

Among the asset classes that contributed to the strong year for investment returns were international small cap equity, 24.0%; non-U.S. developed market equity, 18.9%; emerging markets equity, 16.3%; and U.S. equity, 15.2%, according to the Division of Investment’s performance data.

Budget, Politics

NJ pension fund gains as markets sag

In the fixed-income category, high yield delivered 9.9% returns, and within private markets, real assets generated 11.1% returns, according to the data. Risk mitigation strategies delivered 8.9% returns, and private credit produced 7.7% returns, according to the data.

Meanwhile, over the last five years, overall pension fund investment returns have totaled 9.7%, easily besting the fund’s 7% assumed rate of return.

However, the latest estimates included in documents prepared for a recent state bond sale highlight the damage done to the pension system’s broader stability by the years of state government skipping its full actuarially determined pension contributions.

In all, the state’s net pension liability, as of the 2025 fiscal year, was nearly $80 billion, according to the bond documents issued earlier this month.

Meanwhile, the latest long-range projections indicate it will take until the 2050s to restore the pension system’s funded ratio to near 100%, assuming the current funding policies are continued.

And despite a surge in inflation that’s occurred in recent years, annual cost-of-living adjustments for retired government workers in New Jersey have been suspended for more than a decade under another reform that was enacted by Christie, in 2011.

New Jersey’s long-term credit rating has been upgraded one notch by one of Wall Street’s major credit rating firms a little over a month after Gov. Phil Murphy and lawmakers adopted state government’s latest annual budget.

That nearly $60 billion budget, signed into law in late June, hiked taxes by more than $600 million, helping reduce a structural budget gap that recently measured more than $2 billion.

The same spending plan also included state government’s full annual payment calculated by actuaries for the public-worker pension system, totaling more than $7 billion, and left aside $6.7 billion as a surplus to hedge against unforeseen spending needs or revenue losses.

These appear to be among the fiscal measures that drew the attention of analysts from S&P Global Ratings as they moved New Jersey’s debt grade up from A to A+ on Monday.

Why the upgrade?

“The upgrade reflects our view of the meaningful improvement in the state’s balance sheet reflecting management’s commitment to rein in its comparatively large debt and pension liabilities while striving to achieve a structural budget balance longer-term,” according to a news release issued by S&P Global.

“Under Governor Murphy’s leadership, our budgets have focused on building a state that is better positioned to meet its financial obligations, reduces its reliance on bonded debt, and is better prepared to weather unforeseen fiscal challenges,” Muoio said.

Why it matters

While technical in nature, a state’s credit rating can be a key factor in determining how easy it is for the government to borrow money to fund long-term investments in things like schools and transportation infrastructure that generally cannot be paid for in a single budget.

A strong bond rating can also lead to lower borrowing costs, costs ultimately funded in the state budget, which can ease pressure on taxpayers or free up funds for other priorities.

‘I’m proud that we’ve done right by taxpayers by tackling longstanding fiscal challenges that stacked up over decades.’ — Gov. Phil Murphy

New Jersey’s credit rating was lowered by two different Wall Street firms following the outbreak of the COVID-19 pandemic as the state suffered severe job losses and the annual budget was upset by swiftly declining tax revenues.

That left New Jersey with one of the lowest bond ratings of any U.S. state, just as the Murphy administration was preparing to issue roughly $4 billion in new debt to help sustain the state budget during the worst phase of the health crisis.

However, in more recent years, New Jersey has enjoyed a series of bond-rating upgrades from the four firms that routinely evaluate the creditworthiness of states as revenues have since rebounded.

The recent trend

The Murphy administration has also worked with lawmakers to prioritize funding pension obligations, paying down bonded debt and maintaining robust budget reserves.

In 2023, S&P Global announced a one-notch rating action that left New Jersey with an A rating, setting the stage for the additional upgrade announced on Monday.

In his own statement, Murphy, a term-limited Democrat due to leave office early next year, called the rating upgrade a “testament to the hard decisions we’ve made to address the high levels of indebtedness that we inherited upon taking office.”

“Although there is much more work to do by the next governor, I’m proud that we’ve done right by taxpayers by tackling longstanding fiscal challenges that stacked up over decades,” Murphy said.

The upgrade also drew praise from longtime Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen), who called it an “endorsement of the actions the Legislature and the Governor have taken over multiple budget cycles to effectively manage state finances, often in the face of challenging economic conditions.”

But a social media post from Sen. Michael Testa (R-Cumberland) on Monday focused on the state’s remaining structural budget deficit and was also critical of S&P Global itself.

Despite concerns about market volatility, the New Jersey pension fund covering the retirements of many public workers in the state appears to have benefited from another year of solid investment gains.

Preliminary performance estimates released Wednesday indicate net public-worker pension investment returns for the 2025 fiscal year were up by nearly 8% as of the end of May.

The numbers are still subject to final auditing, and the investment gain estimates for June, which is the final month of the state’s July-to-June fiscal year, are still pending, officials said in releasing the latest figures at the New Jersey State Investment Council’s meeting on Wednesday.

But with financial markets generally performing well last month, that’s lifting hopes that New Jersey’s public-worker pension fund ended the 2025 fiscal year ahead of its 7% annual assumed rate of return.

“We had a bout of volatility, but we had a strong recovery,” Shoaib Khan, the director of the state Division of Investment, said at the council’s meeting.

“I would also add June has been a constructive month as well,” Khan went on to say.

Criticism of fossil fuel investments

Still, not everyone was happy with the way state pension-fund investments are being handled.

“We have seen record temperatures and extreme weather that should not be politicized, but treated with seriousness and the proper care,” said Sharonda Allen, executive director of Operation Grow Inc., a nonprofit that works with underserved and at-risk youth.

“It would be important for all of you to take note that if you are not part of the solution, you are part of the problem,” she said.

Whose pensions are covered?

New Jersey’s nearly $73 billion pension fund covers the retirements of hundreds of thousands of current and retired government workers in New Jersey, including teachers, judges and other workers. It does not cover police officers and firefighters, whose pension investments are managed by a different government entity.

‘We have seen record temperatures and extreme weather that should not be politicized, but treated with seriousness and the proper care.’ — Sharonda Allen, executive director, Operation Grow Inc.

The pension fund assets are managed by the Division of Investment, as well as outside fund managers hired by the state, and when they generate strong returns, that can help ease pressure on taxpayers who contribute toward the retirements of public workers on a regular basis through the state’s annual budget.

A significant share of that overall state pension contribution is making up for more than two decades of pension underfunding by governors and lawmakers from both major political parties.

While Murphy, a Democrat, halted that practice — and no retiree is in danger of missing a pension check — the state’s actuaries have estimated it will take decades more to restore the pension fund’s overall fiscal health.

Three years of good returns

While not all asset classes were included in the latest snapshot due to a reporting lag, the 7.9% preliminary net returns recorded through the end of May put the pension fund on course to best the 7% annual assumed rate of return during the 2025 fiscal year.

If those returns hold, that would make fiscal year 2025 the third straight year to see net returns come in ahead of the fund’s assumed rate.

The net returns totaled 10.7% during the 2024 fiscal year, and 9% during the 2023 fiscal year, according to data included in the investment council’s latest annual report.

The final investment performance data for the 2025 fiscal year will likely not be available for review until the investment council’s October meeting, Khan said Wednesday.

The number of retirees in the U.S. who say they are relying heavily on Social Security benefits for their income is on the rise amid a period of significant inflation, according to the results of a new AARP survey.

In all, the AARP survey released Tuesday found 65% of retirees across the nation reported they  rely “substantially” on the income provided through their Social Security benefits, up seven percentage points from a decade ago.

In high-cost New Jersey, an estimated 1.7 million people collect Social Security benefits, most of them retirees.

And in recent years, state policymakers have worked to address growing concerns about the adequacy of retirement savings by establishing a state-administered retirement-savings program for private-sector workers who lack access to an employer-provided retirement-savings option.

That state program, called RetireReady NJ, has enrolled more than 18,000 residents over the last year, collecting a combined more than $8 million in savings, state officials said earlier this month.

The results of the AARP survey, which also polled U.S. adults on their confidence in the Social Security system among other related issues, were released as the nation prepares to commemorate the 90th anniversary of the founding of the national insurance program administered by the federal government.

Roots in Great Depression

The Social Security Act was signed into law by President Franklin Delano Roosevelt on Aug. 14, 1935, amid the Great Depression, and at a time when, like today, there were wide gaps in the amount of income held by the very rich in the U.S. and everyone else.

Today, more than 69 million U.S. residents receive Social Security payments, and more than 183 million workers are regularly paying into the insurance program, according to the AARP.

“Social Security is one of the most successful and popular initiatives in history,” said AARP chief executive officer Myechia Minter-Jordan during a press briefing held Tuesday.

‘If someone is really worried about that … reach out to your member of Congress to make sure they understand how important Social Security is to you, and to your retirement plans.’ — Bill Sweeney, vice president of government affairs, AARP

“It has helped generations of Americans stay out of poverty and live with dignity after a lifetime of hard work,” Minter-Jordan said.

Still, confidence in Social Security has been on the decline over the last decade, according to AARP’s survey results.

A decade ago, 43% of those surveyed said they were “very” or “somewhat” confident in the future of Social Security. However, that dropped to 36% when the same question was posed as part of this year’s survey.

Less certain

Last month, an annual report issued by the Social Security Board of Trustees indicated that, without congressional action, the national insurance program is on track to deplete its trust funds by 2034, something that would trigger a roughly 20% cut in monthly benefits.

“I find it hard to believe that members of Congress would go home to their constituents after letting their Social Security benefits get cut by 20%,” said Bill Sweeney, AARP’s vice president of government affairs, during Tuesday’s press briefing.

In all, more than 60% of those surveyed said the average monthly benefit was ‘too low,’ compared to 35% who said it was ‘about right.’

“That seems like a hard thing to imagine,” said Sweeney, who added those with concerns about Social Security’s solvency and the potential for benefit cuts should contact their congressional representatives to voice those concerns.

“If someone is really worried about that … reach out to your member of Congress to make sure they understand how important Social Security is to you, and to your retirement plans,” he said.

Insufficient funds

A majority of U.S. residents already view the average monthly Social Security retirement payment amount — about $2,000, as of May — to be too low, according to the AARP survey. 

In all, more than 60% of those surveyed said the average monthly benefit was “too low,” compared to 35% who said it was “about right.”

And nearly 80% raised concerns about whether Social Security alone will provide enough for them to get by on during their retirement years, according to the survey.

However, in a nation with deep political divisions, Social Security appears to be a unifying issue, the survey found.

A full 96% of those surveyed said they consider Social Security to be an important program. Among Democrats, 98% of those surveyed said Social Security was important, compared to 95% of Republicans, and 93% of political independents, according to AARP.

Public employees in New Jersey could face jaw-dropping hikes in health care premiums proposed to kick in next year, including more than 36% for county and local workers, 29% for school employees and 21% for state workers.

“Our members and the working people of New Jersey are drowning in health care costs,” said Billy Gallagher of the Communications Workers of America Union, which will see 35,000 members impacted.

“It’s clear that [state officials] do not want to fight with the health care industry or the CEOs of hospitals,” he said. “Well, the time has come where we need to do that.”

For years, inflation has driven up the price of doctor’s visits, hospitalizations and prescription drugs, including pricey new weight loss medication like Wegovy. New Jersey’s health care system is in a “death spiral,” according to one state official.

But a police union cited one example of an officer earning $105,000 a year and paying $17,000 in premiums for family health coverage, a premium that would now would face a 36% rate hike.

“It’s not sustainable, completely unsustainable,” said Mike Freeman, executive vice president of the New Jersey State Policemen’s Benevolent Association. “Even the state treasurer came out about a month ago and put a report out saying that the system has failed. The system has failed because they failed it.”

Meanwhile, state Sen. Declan O’Scanlon (R-Monmouth) — the Senate’s Minority’s budget officer — said state taxpayers are picking up the rest of the tab.

“The administration should be leading the charge as far as reforms go, and working with our public workers, because they have skin in the game, both in the quality of their health care and in the outrageous amounts of money that they’re having to contribute,” he said. “And there’s no easy answers, again, because the administration has waited so long to take action.”

“I’m past the point of finger pointing, because there’s plenty of blame to go around,” said Michael Cerra, executive director of the New Jersey League of Municipalities. Cerra said he expects significant fallout unless officials find a workable resolution before the rate hikes take effect Jan. 1.

“It could affect operations, day-to-day operations, it could result in reduction of services, it could result in property-tax increases,” Cerra said.

Linda Schwimmer, president and CEO of the New Jersey Health Care Quality Institute, a nonprofit advocacy group, said many solutions have been repeatedly recommended but not adopted.

“When you have a laissez-faire attitude towards managing a market, this is what will happen, and it’s a problem,” she said. “It’s just that we haven’t had the political will, fortitude, bravery, whatever you want to call it, to take action.”

Among the biggest challenges is keeping towns from abandoning the state health care pool in search of cheaper options, she said, and also pushing the state to negotiate more aggressively for better deals with hospitals and drug makers.

“The state can go directly to health systems and say, this is the price we want,” Schwimmer said.

Gov. Phil Murphy’s office released a statement: “The Governor believes these rate increases are unsustainable for both taxpayers and workers. He is ready to work with all parties over the next few months to lower costs.”

Meanwhile, Assembly Speaker Craig Coughlin (D-Middlesex) announced Democrats are working on legislation “to stabilize premium costs and implement long-desired governance and transparency measures…The Assembly will take action later this month and our goal is to have a solution in place before the rate increases take effect.”

O’Scanlon said he remains skeptical.

“This was probably somewhat PR driven, a scare the hell out of everyone with a 37% increase,” he said. “And then I expect people to pat you on the back when it’s only a 25% increase. We won’t be doing that, because it’s all a disaster.”

The issue could loom large in this fall’s elections and their campaigns, including for governor and all 80 Assembly seats.

New Jersey is set to see a record state budget of nearly $60 billion as well as another year of tax increases on a range of items. Here’s a breakdown of that budget negotiated by Gov. Phil Murphy and Democrats who control the Legislature.

Fiscal year 2026 budget highlights

Total spending: The size of the state’s annual budget will swell to $58.8 billion under a legislative appropriations bill set to receive final approval from lawmakers Monday. If Gov. Phil Murphy signs the spending bill into law unchanged, it will hike annual spending by nearly 4% compared to the $56.7 billion annual budget he signed into law a year ago.

Tax hikes: To help pay for record annual spending, majority Democrats have in recent days advanced a raft of tax and fee increases along with the new annual budget. Although final estimates are not yet available, the tax hikes hitting smokers, gamblers and those selling high-dollar properties in New Jersey are expected to raise hundreds of millions in new revenue during the next fiscal year.

Legislative add-ons: This year, majority Democrats continued a practice of inserting new spending into the governor’s final draft of the proposed budget, which Murphy released in mid-May. The more than $400 million in new spending tacked on by lawmakers includes funding to reverse cuts proposed by Murphy, such as slashed operating aid for county colleges. But the majority Democrats also added more parochial line items, such as funding for a community center in Edison and a park in Perth Amboy.

Structural gap: A gap between planned annual spending and revenues that measured just over $1 billion in Murphy’s final draft of the fiscal year 2026 budget now totals nearly $1.5 billion due to the last-minute add-ons from lawmakers, according to figures included in a budget score sheet prepared by the nonpartisan Office of Legislative Services.

Budget reserves: As federal lawmakers consider slashing funding for social safety-net programs like Medicaid, billions of dollars in costs could be shifted to the states, putting increased pressure on New Jersey’s budget surplus, which will total roughly $6.7 billion at the close of the 2026 fiscal year, according to the score sheet.

New Jersey’s revenue outlook is a bit brighter thanks to a strong spring tax-collection season, according to the latest forecasts released by Gov. Phil Murphy’s administration.

However, state lawmakers in their election year, continue to face a number of difficult fiscal decisions with a little over a month to go before the next annual budget must be enacted.

For starters, Murphy, a term-limited Democrat, is still banking on raising more than $1 billion from a series of proposed tax hikes that would go into effect during the fiscal year that begins July 1 to help cover increased spending on things like public education and public-worker pension payments.

And those tax hikes, including higher levies on things like alcohol and cigarettes, as well as a broadening of the sales tax base, remain on the table, even after the updated forecasts released Wednesday by the Department of the Treasury have padded the state’s projected bottom line.

‘We don’t have an exact number.’ — State Treasurer Elizabeth Maher Muoio.

Meanwhile, a final draft of the governor’s fiscal year 2026 spending plan also shared with lawmakers Wednesday continues to seek cuts in several key areas, including higher education, as part of a broader effort to narrow a wide gap between planned spending and projected revenues.

Under New Jersey’s Constitution, the governor proposes an annual spending plan and certifies the annual revenues, but lawmakers draft a balanced spending bill the governor must sign by July 1.

This year, the key budget decisions will be made just months before a fall election that will determine whether Democrats can remain in control of the 80-member state Assembly for another two years. Democrats have controlled the Senate and Assembly for over two decades.

If lawmakers decide to undo Murphy’s planned spending cuts as they draft the next budget bill, or reject some or all of the governor’s proposed tax hikes, they run the risk of widening a projected structural gap that already tops $1 billion in Murphy’s revised budget.

Also hanging in the balance is the size of a state surplus account. That surplus account has taken on increased significance in recent weeks as Republicans in Congress seek cuts to federal funding for several key programs such as Medicaid and food assistance and threaten to shift major costs onto state government.

The same surplus account has traditionally served as the state’s primary hedge against the types of huge swings in revenue that can occur during a recession, which is something many economists are seeing as more likely to occur in the wake of an international trade war President Donald Trump is currently waging.

During testimony before the Assembly Budget Committee on Wednesday, state Treasurer Elizabeth Maher Muoio told lawmakers the state is now on course to end the current fiscal year with nearly $400 million more than was forecast earlier this year.

“Taxpayers had a good year in 2024, and we are seeing that in the April collections,” Muoio said.

Meanwhile, Treasury’s revenue forecast for the 2026 fiscal year has also been revised up, by more than $320 million, she said.

However, amid the improved outlook, Muoio made a pitch for protecting a significant surplus in the face of the proposed federal cuts and potential for increased economic volatility.

“That makes it even more important to have,” Muoio told members of the committee.

Indeed, under the administration’s latest budget revisions, the state would spend more than $58 billion during the 2026 fiscal year, while leaving nearly $6.7 billion in surplus. That closing surplus is up from the $6.3 billion Murphy was seeking in an original budget proposal he put forward in late February.

Meanwhile, also at stake as lawmakers get ready to draft a new spending bill is $600 million in planned spending on a new property-tax relief program called Stay NJ that calls for enhancing benefits for an estimated 432,000 senior homeowners.

While majority Democrats have made the rollout of the new program a key talking point in the run up to this year’s legislative elections, the design of the relief program itself has drawn heavy criticism in recent months.

That’s because it would primarily benefit seniors making as much as $500,000 annually at a time when many other residents in New Jersey are facing an affordable housing crisis, and as Murphy’s budget threatens to reduce state funding for things like homeless prevention programs.

And that’s all before lawmakers add any new line items into the final budget legislation, including spending on pet projects and other legislative priorities that are often referred to as “Christmas tree items” inside the State House.

Such last-minute spending additions often inflate the size of the proposed annual budget, including last year, when the add-ons approved by majority Democrats widened the size of the structural budget gap to over $2 billion.

During her appearance before lawmakers on Wednesday, Muoio faced several questions about the administration’s push to reduce the size of that structural gap in the new budget, and whether that could be threatened if majority Democrats once again propose sizable budget add-ons in the coming weeks.

“What number are you comfortable with above the current budget?,” asked Assemblywoman Nancy Munoz (R-Union) during one of the exchanges with the treasurer.

“We don’t have an exact number,” Muoio said.

“I think the point is that we would hope for a final number that meets some of the goals of (the governor’s) budget, which are a significant surplus, making sure our pension payments are made in full, making sure the property-tax relief that’s in place is funded, and trying to keep that structural deficit down,” she said.

Gov. Phil Murphy is set to unveil his final fiscal plan for New Jersey as many residents face a barrage of rising costs, with prices for everything from eggs to energy to housing still going up.

Murphy, a second-term Democrat, is due to deliver lawmakers his latest gubernatorial budget message amid the significant upheaval in Washington, D.C. brought on by President Donald Trump.

To that end, economists are warning new policies supported by Trump and fellow Republicans at the federal level, such as tariffs, mass deportations and deep spending cuts, have the potential to both upset revenue forecasts and bring on a need for increased spending at the state level.

Only adding to the political backdrop this year is an election in the fall in New Jersey that will see control of the 80-member state Assembly up for grabs.

The governor’s seat itself will also be on the ballot since Murphy, a second-term Democrat, is unable to run for reelection under term limits written into the state Constitution.

Here are some key issues to watch as Murphy delivers his budget address before a joint session of the Legislature on Tuesday afternoon and to keep in mind as the debate plays out before the July 1 deadline for the governor and lawmakers to enact a balanced state budget.

Affordability: In recent years, Murphy and lawmakers have enacted a series of new tax cuts, including a state-level child tax credit, and they’ve also worked to sweeten numerous existing tax breaks, such as a phased-in expansion of the state Earned Income Tax Credit — all amid a period of significant inflation that has only added to the affordability concerns of many New Jersey residents. Moreover, state funding for direct property-tax relief programs has also been increased, and renters are once again receiving state-funded benefits.

However, tolls on state highways are up, as are transit fares and the state gas tax, and future increases in all of these areas are already in the offing. At the same time, residential energy costs are also rising, and the state-funded relief benefits for tenants – who pay property taxes indirectly through rent – have remained flat for several years for many tenants, despite significant cost increases for renters documented in monthly inflation reports issued by the federal government.

Meanwhile, many retired state and local government workers living on a pension in New Jersey have been going without cost-of-living adjustments to their benefits under a cost-saving measure enacted by state policymakers more than a decade ago.

Stability: In recent years, Murphy and lawmakers have reversed a long-term trend of shorting state obligations to the public-worker pension funds and underfunding New Jersey’s K-12 public-education aid law. Efforts have also been made to retire bonded debt and boost budget reserves, measures that were highlighted as progress by major Wall Street credit-rating agencies. However, the current fiscal-year budget is projected to have a gap of more than $2 billion between projected annual revenues and expenditures that has been closed, on paper, with a series of one-shot, nonrecurring measures. For example, a budget surplus that once totaled more than $10 billion is projected to drop to just over $6 billion by the time the current fiscal year comes to a close on June 30.

Meanwhile, the rate of growth in overall tax collections so far this fiscal year has trailed a year-end growth target, even though total collections remain slightly ahead of last year’s pace and Department of the Treasury officials expect better performance in the coming months. But only adding to the sustainability concerns are the latest long-range projections from a nonpartisan panel of fiscal experts assembled by Rowan University’s public-policy center. In a report issued last week, the group predicted multibillion-dollar gaps between annual revenues and expenditures are likely to persist for the next several fiscal years, even under its most optimistic revenue forecasts. New policies enacted in Washington, D. C., including cuts in funding for Medicaid health benefits, could also add “hundreds of millions of dollars to the structural deficit,” the panel said.

Public education funding: Last year, Murphy and lawmakers agreed to fully fund the state’s K-12 school-aid formula. That meant more than 20% of the overall nearly $57 billion current annual budget is devoted to cover direct “formula aid” for public schools. Adding to other significant state outlays for public education was spending on preschool aid, school facilities and teacher pension benefits, among other items.

Still, not everyone has been happy with the status quo, including parents in communities that have been losing state aid in recent years under the current state funding formula, even as the overall allocations have risen significantly. In recent weeks, state education officials have promised no district would see a reduction in state aid for the 2025-2026 school year totaling more than 3% of their state aid allocation for the current school year. But many superintendents have said even flat state funding will effectively be a cut due to rising costs, including for employee health care. Meanwhile, Trump’s call for an elimination of the federal Department of Education could also result in New Jersey districts losing substantial federal aid. This would put even more pressure on local property taxes, which currently serve as a primary source of funding for public schools in New Jersey.

Mass transit funding: Murphy and lawmakers enacted a temporary tax on top-earning corporations last year they called a “transit fee” because revenue generated by the tax is statutorily dedicated to help fund New Jersey Transit, the statewide bus and rail agency, until the tax expires, by law, on Dec. 31, 2028. However, during the current fiscal year, the governor and lawmakers directed all of the revenue from the new tax – about $1 billion – into the state budget’s general fund, even as NJ Transit rider fares were increased last summer to help close a projected operating deficit at NJ Transit.

With the state itself now facing another structural deficit, there are concerns Murphy and lawmakers could use language inserted into the next annual budget to at least partially undo the statutory dedication for NJ Transit. The agency’s own budget documents indicate it is expecting to receive nearly $770 million from the business tax in the new fiscal year that begins July 1. Murphy himself has stressed the role mass transit plays in sustaining the overall state economy, and while bus and rail service is not widely available in every region of New Jersey, recent economic-impact studies have indicated the state as a whole benefits from the billions of dollars in income earned annually by those who use mass transit to commute to work, including to jobs based in New York City.

Budget process: While the governor’s budget message receives a considerable amount of attention, it marks just the beginning of a lengthy review process that involves a series of public hearings, with members of the public and key executive-branch department heads among those who routinely appear before legislative budget committees to offer input on the next annual spending plan. From there, the state treasurer also comes before lawmakers each year in May to provide a final revenue forecast after April tax payments are collected and counted. But after the governor’s budget proposal gets this lengthy review, legislators make important changes to the budget often behind closed doors and just days before the constitutional deadline. Much of that work is typically rushed through budget committees with little time for public oversight.

Meanwhile, the individual sponsors of last-minute additions to the budget, including new line items for legislative priorities and pet projects selected by legislative leaders, are also routinely concealed by legislative leaders until weeks after the budget itself gets signed into law. Such spending totaled $600 million in the current fiscal year, roughly the same amount of funding that was diverted from a dedicated debt-relief reserve to help plug general fund budget gaps. The rushed approval of a final spending bill draws wide criticism every year from policy advocates from both major political parties, and several candidates for governor are pledging to make reforms to the state’s budget process, if elected. This year, Republicans in the Senate are also threatening to sue the Murphy administration, contending the use of state income-tax revenue to fund the last-minute budget additions and other, similar line items runs afoul of state constitutional language that says income-tax revenues can only be spent “pursuant to formulas established from time to time by the Legislature.”

New Jersey seniors are about to see big changes in how they can apply for state-funded property-tax relief benefits, according to the state Department of the Treasury.

Within the next few weeks, seniors 65 and older, as well as disabled homeowners, will be able to apply online for three separate property-tax relief programs using a new, combined application form.

And by early March, paper copies of the combined application — which has been dubbed PAS-1 by Treasury’s Division of Taxation — will be mailed to more than 1 million households, Treasury officials announced Wednesday.

Meanwhile, copies of the new application and the instructions for it can be downloaded from the Division of Taxation.

The application deadline for those using the new PAS-1 form is Oct. 31, Treasury officials said.

The debut of the combined application means seniors and disabled homeowners can for the first time in New Jersey seek benefits provided through the Anchor and Senior Freeze programs, as well as a promised new program called Stay NJ, without having to fill out separate applications for each program.

A note of caution

The combined application is only for seniors and disabled homeowners. This summer, many other homeowners and renters, who are eligible for Anchor benefits, will receive letters confirming their automatic eligibility for the latest round of Anchor benefits, and applications for Anchor benefits will also be distributed to other eligible residents via the mail, Treasury officials said.

New Jersey seniors have long complained about an onerous benefits applications process, and the establishment of a combined form was mandated in a law enacted by Gov. Phil Murphy in November.

Murphy and lawmakers have been socking away hundreds of millions of dollars annually over the last few years to help pay for the initial rollout of the Stay NJ program.

Still, while the overhaul of the application process for seniors is rolling out, Treasury’s news release cautioned that the availability of funding for the next round of various property-tax relief benefits remains “subject to State Budget appropriations.”

On Feb. 25, Murphy, a second-term Democrat, is scheduled to present his plan for the state’s next annual budget to a joint session of the Legislature. The next budget must be in place for the July 1 start of the 2026 fiscal year or state government is required to shut down.

On Wednesday, state Treasurer Elizabeth Maher Muoio provided an overview of the current pace of revenue collections for the 2025 fiscal year, which ends June 30, during a public meeting of the New Jersey State Investment Council, a panel that sets policy for most of the state’s public-worker pension funds.

NJ’s revenue outlook

While overall tax collections were running slightly ahead of last year’s pace through the end of December, Muoio also told council members the state anticipates a “tight budget year” in fiscal year 2026.

“The governor has directed all departments to propose reductions in their budget submissions,” Muoio said.

New Jersey is facing a sizable structural budget deficit that, if left unaddressed, ‘will wipe away the surplus that we have worked so hard to amass,’ Gov. Phil Murphy said.

However, the treasurer said Murphy remains committed to full funding of the state’s actuarially determined annual pension contribution. And if lawmakers go along, fiscal year 2026 would be the fifth year in a row that the state will have made its full employer pension payment after more than two decades of underfunding the pension obligations.

With the average property-tax bill running at an all-time high statewide, according to the latest data collected by the state Department of Community Affairs, more than $3 billion was set aside to fund direct property-tax relief programs like Anchor and Senior Freeze in the state’s current annual budget.

The property-tax relief appropriations helped fund the latest round of Anchor benefits, which were distributed to nearly 2 million eligible homeowners and renters, as well as the latest round of benefits distributed to thousands of senior and disabled homeowners through the long-standing Senior Freeze program.

Meanwhile, funding was also earmarked for the introduction of the promised Stay NJ program, which aims to further bolster property-tax relief benefits for many senior homeowners, starting around this time next year.

Stay NJ’s potential bounty

Under the current plans, Stay NJ would provide additional relief benefits to senior homeowners to ensure their annual property-tax bills are effectively cut in half if the combined benefits provided through Anchor and Senior Freeze do not already accomplish that goal.

Murphy and lawmakers have been socking away hundreds of millions of dollars annually over the last few years to help pay for the initial rollout of the Stay NJ program, which would be provided to eligible homeowners in early 2026, subject to appropriation by the governor and lawmakers.

Stay NJ promises to provide senior homeowners making as much as $500,000 annually with benefits totaling as much as $6,500 once fully implemented, making it more generous than any of the state’s other property-tax relief offerings.

However, senior renters would be locked out of the Stay NJ program altogether, something progressive activists have widely criticized as favoring wealthy homeowners at the expense of lower-income tenants.

Murphy, in a statement when he signed the law creating the streamlined application in November, said he was “hopeful that the State budget will be able to support the implementation of Stay NJ” without undermining fiscal progress that has been made during his tenure in several key areas, including pension and public education funding and the building up of state budget reserves.

In the same statement, Murphy, who is term-limited and due to leave office early next year, also said New Jersey is facing a sizable structural budget deficit that, if left unaddressed, “will wipe away the surplus that we have worked so hard to amass.”

Debates over Data

Public finance professionals continued to cogitate about how best to prepare and present budget and financial information for public consumption; a lot of this so-called “rethinking” of financial reporting is still going on. Friction is mounting between the traditional format of financial statements required under longstanding “governmental GAAP” accounting rules and the views of municipal finance officers as to what kinds of information are actually useful and desired by the people who ultimately read these reports — taxpayers as well as investors. That stew continues to simmer.

A related policy debate is likewise starting to bubble up from the federal Financial Data Transparency Act’s implementation process, where proposed rule-making is yet to become settled law. Just how much financial reporting information will be required from states and localities in machine-readable formats is yet to be decided — with the municipal professional associations having reiterated their position that less is more. There’s a lot of noise from practitioners about unfunded mandates, although the eventual shift toward digitalization is now pretty much inevitable.

This brings us to the companion issue of ownership of all kinds of public information collected and assembled by government agencies in the new era of artificial intelligence. It has become increasingly clear to entrepreneurs and investors that in the “AI Age,” information is the new gold. State and local governments have plenty of data ore to provide in this mining process, and it remains to be seen how much of that mother lode can be extracted by private companies for profitable use without paying royalties for its use. It’s still unclear how many state legislators, public-sector managers and local governing bodies have caught on to this issue; my sense is that most have not.

Pensions’ Hits and Misses

Public pension funds have greatly benefited from the stock market’s two-year gains of more than 45 percent, which should ultimately flow through into slightly lower contribution rates required to amortize their unfunded liabilities. Their balance sheets should soon look a bit healthier, tamping down the negative publicity so often hurled at them for actuarial and investment shortfalls

But while there were mostly hits inside the pensions’ portfolios, there were a few misses. On the plus side, while commercial real estate remained a headache, stocks went up, bond prices went down, private credit did well, some hedge funds beat the market and money market cash outdid inflation. The ugly unspoken issue all year for some pension funds was the cash-flow headache from hefty private equity portfolios that largely failed to deliver lucrative payouts on pace as modeled. Since such distributions were expected to pay retiree pensions for aging plans that are cash-flow negative, a few systems were forced to sell holdings in the secondary market. Overall, however, on balance it was a welcome and better-than-average year for most pension portfolios — at least on paper.

There was one troubling culture war issue for pensions: environmental, social and governance investing (ESG). ESG has become an increasingly hot topic in legislatures, and now looks to take even more heat in the next year with the red-state political backlash creeping into Washington, D.C. Another likely thorn in the sides of pension advocates is the growing overconfidence of amateur investors with encouragement from political ideologues to put more money into defined-contribution plans for employee amateurs to play with at the expense of traditional defined-benefit pensions. We’ve come to that inflection point in both market and political cycles where the advocates on Capitol Hill usually start exhorting the wonders of capital markets vs. the socialization of income security.

In retrospect, however, 2024 was a pretty good year for public financiers, budgeters and investors. A lot of decisions and developments went right, for a change. Time will tell whether we will look back on this year with nostalgia, bewilderment or indifference.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management. Nothing herein should be construed as investment advice.

On the stratospheric end of the income spectrum, there is perennial grouching from the billionaire class, where vocal fat cats complain that their combined federal, state and local tax bills eat up more than half their income. Although that is rarely true in practice because the federal tax laws provide preferentially lower rates on investment income, the upper crust still makes a lot of noise about “confiscatory” taxes at the state and local level when added to the top federal bracket. It’s a common rationale given for relocating to low-tax states.

The fact is that less than 1 percent of federal taxpayers pay even a portion of income tax at the top rate. There are presently four states with top state and local income tax rates of 10 percent or more; in California and New York City, the top combined rates are in the lower teens. The intersection of those Venn diagrams is a population of about a quarter of 1 percent of American households. Because marginalrates are noteffectiverates, it’s nearly impossible for many of them to actually pay more than half of their total income in combined federal, state and local income taxes. And for historical perspective, under Eisenhower, Nixon and Ford the top federal bracket — not even taking into account state and local taxes — was 70 percent.

With that in mind, a case can be made for a “total tax circuit-breaker” for wealthy taxpayers whose income tax payments for all levels of government exceed the top combined rates in other developed countries. That works out to 45 percent or a bit less, and would arguably rebut the “confiscation” argument, at least in comparative terms. Also, bear in mind that there is no other country in the world where wealthy investors can collect tax-free interest from political subdivisions, which further reduces their effective and comparative tax rates.

Legislative Strategies

A reasonable, comprehensive total-tax circuit-breaker for the super-rich will surely irk some progressive politicos on the far left, but governors and mayors in higher-tax jurisdictions will quickly see the merits of this formulation. It undercuts the incentive for prosperous Californians and New Yorkers to relocate their tax residency to states like Florida, Nevada and Texas that have no income tax.

And by applying to taxable income of all kinds without any tax preferences, the revenue cost to Uncle Sam for this circuit-breaker credit would be minuscule relative to the proceeds of re-instituting the upper-tier 2016 tax rates or any other serious tax reforms that Congress may consider next year. Policy wonks can debate either way as to whether or which kind of muni bond interest should then be included in this exceptional and rarified calculation. For example, should income from private activity muni bonds that are subject to the alternative minimum tax be included or excluded from these formulas?

To win bipartisan approval, such a proposal would almost certainly need to allow residents of states with no or low income taxes to substitute their sales tax or homestead property tax payments in the credit calculation. In most cases, those regressive “consumption” taxes won’t tally enough to trigger a fat cat’s comprehensive 45 percent circuit-breaker very often, but such a provision would muffle some of the predictable demands for “tax parity” on Capitol Hill.

By working under the radar, these state-and-local provisions could still survive the messy politics of next year’s congressional tax bills, if promoted persistently in the right places on Capitol Hill — especially to the House Ways and Means committee and staff.

As November elections near, it’s unlikely that campaign ads or policy debates with this much granularity will occur, because retail politics are played in broad generalizations and rarely in such specifics. But some of these tax reforms could be summarized in simple terms easy for lawmakers to understand. There’s not a member of Congress who hasn’t heard about the SALT issue. Meanwhile state and local policy associations and staffers can work on Capitol Hill to promote key concepts that fit under the broad umbrella of intergovernmental tax equity.

By now, problems with workforce shortages are pretty familiar, but here's a specialized area you might not have thought about: The nation is in the middle of a shortage of accountants that’s only going to get worse.

Right now, the United States is short 340,000 accountants. Although many areas of the public sector workforce have finally gotten back to or surpassed pre-pandemic levels, public finance is one of the fields still having trouble matching supply and demand. In fact, there are fewer public finance workers on the job now than there were back in 2019. Departments are struggling to recruit and retain the next generation of workers, leading to lags in reporting, big backlogs for processing local taxes and licenses and a lack of auditors.

The workers who are still around are getting older. According to a report from the Government Finance Officers Association and the analytics firm Lightcast, nearly a third of the current public finance workforce is approaching retirement age. Within the next 10 years, they’ll be ready to hang up their calculators and close their Excel sheets for good, with the report noting that “New England is particularly vulnerable to retirements.”

“There are large numbers of retirements in public finance happening now, and more on the horizon,” says Kyle Wedberg, senior manager at GFOA’s research and consulting center. “So there is a real need to focus on succession planning and leadership development.”

Planning the Future

Succession planning in public finance could look like training younger or newer employees to take up a specific role within a department and shadow a more senior colleague who is approaching retirement age. Combined with preparing middle-career workers to take over leadership roles in their departments, this could lead to a more sustainable workforce pipeline.

Right now, however, recruiting is another major issue in the public finance workforce shortage. It’s always been difficult to find new or early-career accountants who want to enter the public sector, but the challenge seems to have increased. “Budget cuts in government at all levels — city, county, state — have left investment gaps in people and positions,” Wedberg says. “One of these investment gaps is in finance personnel. There’s more being asked of fewer individuals.”

Barriers to the profession stop many college students from entering. In particular, the 150 credit hours (or five years of study) required for accounting licenses doesn’t have the same appeal as entering a four-year finance track and making money sooner. In 2023, researchers at MIT found that the long licensure requirements cause “a 26 percent drop in minority entrants,” effectively robbing the profession of a greater workforce pool.

Pay differences also serve as a roadblock. Public sector positions such as tax examiners and license clerks often pay below $50,000 — less than starting salaries for accountants in the private sector.

But there are potential solutions, including lowering the 150 credit-hour requirement and offering financial aid to students from minority groups. Ideas that could be effective more broadly in government work, such as accelerating the hiring process and bringing in workers with skills who have not yet completed their degrees, would work in the finance arena.

Wedberg says that governments offer a fantastic place to start a career. It’s all a matter of making sure that potential employees understand what public finance has to offer them.

“Telling the story is essential, he says. “Candidates need to be told that a career in local government finance is a way to make a difference in people’s lives.”

With just days left to avert a government shutdown, a top state lawmaker said the Legislature is in agreement with Gov. Phil Murphy on New Jersey’s next annual budget, paving the way for final adoption by the end of the week.

However, key details of the emerging budget agreement remain hidden from public view, and time is running out for a meaningful robust public evaluation of what is expected to be a record-high spending plan.

Speaking at the start of Monday’s Senate Budget and Appropriations Committee meeting, state Sen. Paul Sarlo (D-Bergen), the committee chair, indicated legislative leaders are aiming to have a fiscal year 2025 spending bill voted out of budget committees by Wednesday or Thursday.

From there, that would put the Legislature on a course to send the spending bill to Murphy for final adoption on either Friday or Saturday, he said.

“There is a budget agreement in place between the Legislature and the administration,” Sarlo said. “The timing is still up in the air.”

Under the New Jersey Constitution, state government must shut down if an annual spending bill is not introduced, approved in both houses and signed into law by the governor, all by July 1.

Murphy’s office declined comment when reached later Monday. A spokeswoman for Assembly Speaker Craig Coughlin (D-Middlesex) also declined comment.

New corporate tax

However, as high-level budget negotiations played out behind closed doors, several sources have indicated Murphy and fellow Democrats who control both houses of the Legislature had agreed on one of the key outstanding issues — a new tax on the most profitable corporations for five years as part of the fiscal year 2025 budget.

The second-term governor first proposed that tax in late February and billed it as a dedicated source of revenue for New Jersey Transit.

The proposed tax, which would hit companies with more than $10 million in net annual income, has been widely panned by business-lobbying groups. But it’s also been heavily praised by transportation and environmental advocates, among others, as a long overdue, dedicated source of fiscal support for the state’s cash-strapped bus and rail agency.

‘If we believe in a robust democracy, that has to include meaningful public feedback on the biggest single bill of the year.’ — Jesse Burns, League of Women Voters

Word of the new corporate tax’s inclusion in a broader budget deal brewing in Trenton was shared in a message sent Monday to New Jersey Chamber of Commerce members by its president and chief executive officer, Tom Bracken.

“Our state cannot continually ignore our long-term economic needs in favor of quick fixes,” Bracken said in the message.

“Time is running out for New Jersey,” Bracken said. “This week will say a lot about how serious New Jersey is about economic growth being a priority — or whether it is business as usual in Trenton.”

Key details remain hidden

The timeline for budget adoption shared by Sarlo on Monday means lawmakers, who voted to give themselves a big pay raise earlier this year, appear poised to once again provide only the bare minimum when it comes to public participation in the late stages of the budget-making process.

It was just last year that more than $1 billion in new spending was added by Democratic lawmakers to Murphy’s final draft of the annual budget following last-minute budget negotiations. Amid the race to beat the shutdown clock, lawmakers canceled all public comment on the final fiscal year 2024 spending bill prior to crucial budget committee votes in both the Senate and Assembly.

This year, a coalition of advocacy groups is urging lawmakers to make the full text of the bill available to the public for at least 72 hours before budget committees are convened to move the spending bill to the floor for final approval in both houses.

“We must replace a system that benefits political insiders with an open process that includes the voices of communities that this budget is supposed to serve,” said Antoinette Miles, New Jersey director of the Working Families Alliance.

“If we believe in a robust democracy, that has to include meaningful public feedback on the biggest single bill of the year,” said Jesse Burns, executive director of the state branch of the League of Women Voters.

“The people of this state deserve better and are sick and tired of Trenton’s anti-transparency antics,” Burns said.

In all, 35 states had enacted budgets for the 2025 fiscal year as of June 20, including those operating on a biennial budget cycle, according to the National Conference of State Legislatures.

The last government shutdown in New Jersey occurred in 2017, after Republican Gov. Chris Christie and the Democratic-controlled Legislature remained deadlocked on a new budget until July 3.

I recently watched Rustin, the biopic about nearly forgotten civil rights leader Bayard Rustin, who was the chief organizer of the 1963 March on Washington for Jobs and Freedom. In 1948, the year of Mahatma Gandhi’s assassination, Rustin traveled to India to learn the techniques of nonviolent civil resistance, which he later taught to Dr. Martin Luther King Jr.

Not long after his India trip, Rustin wrote, “We need, in every community, a group of angelic troublemakers.” These words were echoed by another civil rights icon, John Lewis, who famously said, “When you see something that is not right, not fair, not just, say something. Do something. Get in trouble. Good trouble.”

Local government finance officers might be the last people you would think of as troublemakers of any kind. Their job, after all, is to keep cities and counties out of trouble by ensuring that tax dollars are managed responsibly. The truth is that finance officers are people too, not human calculators. Many of them care deeply about making their communities better — in a fiscally prudent way, of course.

Inspired by Bayard Rustin, here are 10 ways that finance officers can make good trouble by employing budget, revenue, procurement and other tactics that disrupt the status quo to finance important initiatives:

Align your budget with modern goals. Traditional government budgeting starts from the previous year’s spending plan, which perpetuates the values and priorities of the past. To promote a forward-leaning agenda, start your budget process by establishing goals for the future, including ones specific to reducing inequities. Implement outcome or priority-based budgeting to ensure that these goals drive decision-making.

Leverage outcomes to find new revenue. Addressing the root causes of societal problems can actually save money! That’s the basis of social impact bonds, also known as “pay for success.” The city of Denver attracted $8.6 million in private investments to provide permanent supportive housing to 360 chronically homeless individuals. An evaluation by the Urban Institute found that the program reduced jail, health and other costs enough to repay investors with a return. The same concept has been used in other places to increase pre-K slots, enhance prenatal nurse visits and reduce recidivism.

Make fees and fines scalable. One-size-fits-all fee and fine levels disproportionately burden those who are least able to pay. A recent paper by the Government Finance Officers Association argues that “segmented pricing” — charging people based on their ability and willingness to pay — can lead to higher revenue collection. The San Francisco Treasurer’s Financial Justice Project reports that its actions have reduced hardships and, in some cases, increased revenues.

Consider alternative financing strategies. Energy savings performance contracts have been widely used by local governments. They leverage future energy cost savings to install solar panels, convert streetlights to LED fixtures, etc. Newer financing tools of this sort include bonds for green infrastructure to manage stormwater at lower cost than concrete culverts and pipes, and carbon credits that generate revenue for planting and preserving trees.

Target services and capital investment where it is most needed. In 2018, an analysis by Boston’s Department of Public Works found that service requests for sidewalk repair coincided more with household income than actual sidewalk conditions. By using conditions instead of complaints to prioritize projects, the city has improved vital infrastructure for neighborhoods that need it most.

Check your tax expenditures. When Baltimore’s budget office studied the city’s development tax credit programs in 2022, it found many issues. The credits primarily benefit wealthier neighborhoods; they over-subsidize some development without controls on cost and eligibility; and they profit developers, who use them to increase the asking price of houses instead of passing them along to homeowners. Local governments that use tax credits or similar incentives should give them the same scrutiny as other expenditures.

Hold contractors and grantees accountable for results. Many local governments use contracts and grants to deliver social and health services through not-for-profit providers. “Results-driven” contracting shifts provider accountability from compliance with line-item budgets to measurable results for clients and the community. In 2017, Seattle consolidated and competed 26 homeless services contracts that had not been up for bid in over a decade. According to the Harvard Government Performance Lab, the eight new contracts that resulted have given providers more flexibility to meet client needs and the city more visibility into performance and progress in moving people from homelessness to permanent housing.

Give the community a real say in budget decisions. A number of cities have experimented with participatory budgeting, a process in which residents design and vote on projects to fund with a designated (typically small) portion of the municipal budget. Targeting participatory budgeting to low-income neighborhoods can help address hyperlocal needs that can otherwise be overlooked.

Connect zoning and budgeting. Analysis of the fiscal impacts of land-use decisions shows that higher-density development yields more property value per acre than suburban-style single-family zoning. Single-family neighborhoods typically don’t produce enough tax revenue to maintain their infrastructure over the long term. Reconsidering zoning restrictions can help to meet the demand for affordable housing and reduce road maintenance costs.

Run your government more like a business. This last one may seem out of place, but a more cost-effective use of resources is the best way to make room in the budget for forward-thinking initiatives. Examples of how to do this include monetizing assets, competing out service delivery, improving business processes and using data to catch tax cheats.

What these tactics have in common is that they upend traditional thinking when it comes to local government budgeting. That’s what making good trouble is all about.

The commentary is republished from the American Society for Public Administration’s PA Times. Read the original here.

New revenue estimates from the Legislature’s top nonpartisan fiscal experts largely agree with projections drafted last month by Gov. Phil Murphy’s administration, establishing some early consensus in the annual budget-making process underway in Trenton.

For the current fiscal year, which ends June 30, state tax collections would come in $210 million higher than the administration’s forecast for the same period under the estimates released Monday by the Office of Legislative Services.

Looking ahead, the OLS analysts’ tax-collection estimates for the new fiscal year that begins July 1 are virtually identical to the administration’s forecast for generally modest year-over-year growth.

Trajectories in sync

Finding agreement on the trajectory of the state economy and the pace of expected tax collections is a key concern each year for the governor and lawmakers in the run-up to the start of each fiscal year.

The state Constitution requires the governor and lawmakers to enact a balanced budget by July 1 each year.

Last year at this time, forecasts drafted by the Murphy administration and the legislative analysts differed by about $1 billion heading into the always-crucial spring income-tax-return season, just underway this year. It took Murphy and fellow Democrats who control the Legislature until the end of June to reach agreement on a new fiscal-year budget last year.

This time around, if the OLS forecast holds true for the current fiscal year, it would give Murphy and lawmakers more money to spend, or to sock away in surplus, than currently anticipated by the administration.

“I don’t know if we’ve ever been closer on our revenue projections than we (are) this year,” said Treasurer Elizabeth Maher Muoio during a lengthy Assembly Budget Committee hearing on Monday.

Making the case for the budget

Still, concerns about overall spending, the size of the surplus and plans to boost property-tax relief for seniors were among other key topics of discussion during the hearing, which saw both legislative analysts and administration officials come before lawmakers to discuss the budget on Monday.

‘At the risk of oversimplification, the current fiscal picture can be synopsized as follows: Stagnating revenue collections and increasing spending are eroding the state’s relatively elevated reserves.’ — Thomas Koenig, the Legislature’s nonpartisan budget and finance officer

Under a $55.9 billion spending plan proposed by Murphy for the 2025 fiscal year, the state would spend nearly $2 billion more than it plans to take in from taxpayers over the course of the full fiscal year, using either the administration’s or the OLS forecasts, according to budget documents.

That level of spending will help cover several line items where costs are rising, including complying with state law for funding K-12 public schools, which increases the line-item by nearly $1 billion year-over-year, Muoio said.

Financial crisis ahead?

But Assemblywoman Nancy Munoz (R-Union) raised concerns about the administration’s plan to operate with a structural deficit, something she suggested could set the stage for a “financial crisis” to emerge in New Jersey within a matter of years.

“You’re spending more than you’re bringing in. That’s how you define a ‘structural deficit’,” Munoz said during Monday’s hearing.

Budget documents provided last week to NJ Spotlight News in response to a public-records request indicate the administration is planning to take more than $2 billion out of the state budget surplus to help cover annual spending during the next fiscal year.

After a similar drawdown in the current fiscal year, the surplus is on course to drop from over $10 billion at the start of the current fiscal year to just above $6 billion by the end of the 2025 fiscal year.

Thomas Koenig, the Legislature’s nonpartisan budget and finance officer, offered lawmakers a warning about the state’s current fiscal trajectory given the latest tax collection and spending trends, including the repeated drawdown of surplus.

“At the risk of oversimplification, the current fiscal picture can be synopsized as follows: Stagnating revenue collections and increasing spending are eroding the state’s relatively elevated reserves,” Koenig told lawmakers during the hearing.

“The surplus is still substantial by the state’s historical standards, but were the current trend to persist, we would return to pre-pandemic surplus sizes around the end of (fiscal year) 2027,” he said.

Muoio: Surplus is key

The size of the state surplus was also a concern raised by Muoio when it was her turn to address lawmakers.

While there may be a temptation to reduce it further to support more spending, the treasurer said the surplus is a key factor looked at by major credit-rating agencies. She also cited national figures that indicate the average surplus for states as a group is equal to 23% of projected annual spending this fiscal year, well above New Jersey’s projected rate of roughly 15%.

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

Meanwhile, the size of the surplus is now a key concern for top Democratic legislative leaders after they agreed to link it to plans to establish a new property-tax relief program for New Jersey seniors, called Stay NJ.

Gov. Phil Murphy’s plan to spend more than the state will take in during the next fiscal year means one-shot sources of revenue could cover more than 5% of annual spending for a second straight year.

According to new budget estimates obtained through a public-records request, Murphy is planning to use nearly $3 billion in revenue from nonrecurring sources to support his proposal to increase overall state spending to a record-high $55.9 billion during the 2025 fiscal year.

Experts on state fiscal policy generally caution against relying too heavily on nonrecurring revenues to back annual spending because it can create structural deficits that can make a budget unsustainable over the long term.

The largest source of nonrecurring revenue backing Murphy’s proposed budget is a plan to take more than $2 billion from the state’s general budget surplus, according to the estimates drafted by the Department of the Treasury and provided to NJ Spotlight News under New Jersey’s Open Public Records Act.

An estimated $585 million will be diverted from the dedicated debt defeasance and prevention reserve and go into the budget’s general fund, according to Treasury’s estimates.

Digging a bigger hole?

Murphy, a former Wall Street executive, has himself outlined the fiscal dilemma that can be created when revenues he referred to as “one-shots” are used to balance annual spending. During his fiscal year 2021 budget message to lawmakers in Trenton, Murphy said: “One-shots may help balance the books for one year, but always — always — lead to a mad scramble to close an even bigger hole the next.”

When asked about those comments, Murphy administration officials last week pointed to budget projections that indicate the state would still have $6.1 billion left in surplus at the end of the 2025 fiscal year — more than 10% of projected annual spending — even after the latest planned drawdown of reserves.

That would leave state government with a surplus that is “much higher than it has been through most of living memory,” said Treasury spokeswoman Danielle Currie.

Easing inflation and the pending full phase-in of a school-funding ramp-up law are factors that would reduce pressure on future nondiscretionary spending, Currie said and she suggested recent investments in the state economy could soon begin paying off on the revenue side of the ledger.

“Many of the economic investments we have made in the innovation economy and the just-signed affordable housing legislation will start paying dividends as increased State revenues in the next few years,” Currie said.

Keeping up with inflation

In all, Murphy, a second-term Democrat, is planning to hike year-over-year spending by about 3%, or about the rate of annual inflation, during the new fiscal year that begins July 1.

Spending on K-12 public-school aid and public-worker pension obligations are among the many line items due to increase in the new fiscal year under Murphy’s proposed budget.

The Murphy administration is also expecting overall tax collections to increase by more than 3% during the next fiscal year, to just over $54 billion.

‘One-shots may help balance the books for one year, but always — always — lead to a mad scramble to close an even bigger hole the next.’ – Gov. Phil Murphy during his fiscal year 2021 budget message

Still, the governor’s budget proposal would only narrowly decrease how much revenue would come from nonrecurring sources year-over-year, from 5.7% to 5.2%, according to Treasury’s latest estimates.

To be sure, the state’s reliance on nonrecurring sources of revenue is down from the more than 10% of annual spending backed by one-shots during the worst years of the COVID-19 pandemic, which brought on revenue losses that caused Murphy and lawmakers to sell $4 billion in bonds, without voter approval to help keep the state budget afloat.

But as tax collections eventually recovered, Murphy and lawmakers whittled down the state’s reliance on one-shots by the 2023 fiscal year, when less than 2.5% of such sources of revenue was used to back annual spending, according to Treasury estimates.

Will lawmakers add more spending?

Last year, lawmakers in late June added more than $1 billion in new spending to Murphy’s proposed budget for the 2024 fiscal year, even as the administration downgraded revenue forecasts. According to updated budget projections released last month, there is now a more than $3 billion gap between projected adjusted appropriations and projected revenues through the end of June. And Treasury now estimates nearly $2 billion in surplus will support annual spending during the current fiscal year, which ends June 30.

Also scored by Treasury as a source of nonrecurring revenue for the 2024 fiscal year is nearly $780 million in revenue paid by companies making more than $1 million in net annual income under a temporary corporation-business tax surcharge that expired on Dec. 31.

‘If the state should revert to structurally unbalanced budgets, as experienced during the many years it contributed less than actuarial recommendations to its pension funds, or as it did in fiscal (year) 2021 when it sold a large GO bond issue to fund operations, we could downwardly revise the state GO outlook or rating.’ — S&P analysts 

This year, Murphy is proposing to effectively restore the surcharge as a permanent change to the tax code, but this time only on companies making more than $10 million in net annual income.

If lawmakers go along with that proposal, it would create a more than $200 million one-shot for the 2025 fiscal year because Murphy wants to make the tax hike retroactive to Jan. 1,  boosting the revenue the new tax would generate for the budget in the first year.

Meanwhile, a projected structural budget gap of roughly $1.8 billion for fiscal year 2025 could grow wider if lawmakers once again add new spending to the governor’s proposed budget without creating any new sources of revenue to pay for such spending.

Keeping an eye on credit ratings

In his most recent budget message to lawmakers, Murphy highlighted a series of credit-rating upgrades New Jersey has received during his tenure, including after his administration resumed the practice of making the full annual pension contribution calculated by the state’s actuaries.

“We are proving that New Jersey can be trusted again,” Murphy said on Feb. 27.

But it was a credit-rating upgrade for New Jersey that was announced around this time last year by S&P Global Ratings that raised the issue of structural balance in a section that looked at the state’s longer-term fiscal outlook.

“If the state should revert to structurally unbalanced budgets, as experienced during the many years it contributed less than actuarial recommendations to its pension funds, or as it did in fiscal (year) 2021 when it sold a large GO bond issue to fund operations, we could downwardly revise the state GO outlook or rating,” the S&P analysts said.

The Biden administration urged Congress to provide $700 million for a tunnel project beneath the Hudson River, $5 million for upkeep on the Statute of Liberty site and about $140 million for Energy Department projects across New Jersey, including nuclear fusion research at a Princeton lab.

The White House made these requests last week to Congress, which ultimately writes and passes federal budgets, as portions of its sweeping $7.3 trillion budget proposal for the fiscal year that begins in October.

Many of the administration’s goals, such as raising the corporate income tax and ending billions of dollars’ worth of fossil fuel tax incentives, are non-starters for congressional Republicans, who control the House.

Appropriators on Capitol Hill are in somewhat of a budgetary limbo this week, as Congress faces a potential government shutdown on Friday, when funding for military, homeland security, health care, labor programs and more will start to lapse, and committee hearings about the next budget will start.

“The president has really laid out a plan that invests in America,” Sen. Cory Booker (D-NJ) said in an interview with NJ Spotlight News. “He’s trying to lower costs, make things easier for the average American family making ends meet.”

Republicans will almost surely strike a different tone in the budget hearings that start this week, when Cabinet secretaries start a series of appearances before the House Appropriations Committee to field questions about their proposals.

The biggest item for NJ

The largest New Jersey-related item in the White House proposal for the budget is $700 million for the Hudson tunnel project, an element of the broader Gateway rail project to ease train traffic between north Jersey and New York City.

That proposal, an agreement between several agencies, including the Port Authority of New York and New Jersey, New Jersey Transit and Amtrak, would create a new tunnel for heavy-rail traffic beneath the Hudson River, connecting New Jersey to Penn Station in Manhattan.

‘Even though the budget has come over, we’re still trying to get last year’s done.’ — Rep. Donald Norcross (D-1st)

“It’s going to impact my residents, my constituents a great deal, because they’re the ones living in New Jersey, traveling to New York,” Rep. Donald Payne (D-10th) said in an interview. “It should be more, actually,” Payne said of the Hudson tunnel request, adding that the broader Gateway project will loom large for generations. “This is the largest infrastructure project in the country and really one of the most important over the next 50 years.”

The Biden administration called for $14.3 billion for a variety of public transportation grants, up $645 million from the 2023 fiscal year. That grant funding could be used for transit agencies like NJ Transit, which in January proposed fare hikes of 15% to shore up its budget.

A new bridge to Ellis Island?

In its budget documents, the National Park Service outlined plans to spend $5 million to acquire 3 acres within Liberty State Park, home to the Statue of Liberty, that would be used to build a new bridge to Ellis Island, as well as a new screening site in Lower Manhattan for visitors to the statue.

The current screening system to visit the Statue of Liberty, established after the Sept. 11 terrorist attacks, was meant to be temporary.

New Jersey would see about $140 million in funding from Energy Department projects under the administration’s proposal, an increase from the $116 million under the budget reached two fiscal cycles ago.

In particular, the Princeton Plasma Physics Laboratory, one of the 17 national labs across the country, would get $55 million for two of its research programs, up from $14 million for the 2023 budget year.

The Federal Emergency Management Agency said in its budget proposal, it plans to update a radio station in Lodi, N.J., that’s part of a national emergency broadcasting network in the upcoming fiscal year.

Coast Guard projects

And the Coast Guard, which like FEMA is part of the sprawling Department of Homeland Security, said it would use money from its budget request to complete four projects in New Jersey, including two in Cape May, where the agency has a base.

The other two are in Beach Haven and Wildwood, the Coast Guard said.

The herky-jerky trends that have come to dominate the federal budget process make it difficult for federal officials to plan.

Rep. Bill Pascrell (D-9th), the lone member of the New Jersey delegation who sits on the Committee on Ways and Means, the mighty tax-writing committee of the House, singled out the White House proposals on Social Security, the tunnel money and two elements of the tax code as positive elements of the administration’s proposal.

“I see this Biden budget as another blueprint for a strong national future,” Pascrell said in a statement. ‘Social Security is protected. There is big money for the Hudson Tunnel to ease travel for New Jerseyans over the next generation. In name of tax fairness, the president targets some of the worst tax loopholes in the entire code that I have been trying to close for years.”

Tax provisions

The tax provision Pascrell wants Congress to close are the so-called carried interest loophole — a benefit to investment managers and the financial industry — and a separate law on inherited assets.

The White House also called for $6 billion from Congress for an internet access program that emerged from the COVID-19 pandemic but has since begun to wind down and is running out of money.

Of the 12 bills Congress passes every year to fund the government, six from the previous budget have been signed into law. The other six, including the bill to fund the Pentagon, will expire at the end of the week — a maddening fact to Rep. Donald Norcross, (D-1st).

“Even though the budget has come over, we’re still trying to get last year’s done,” Norcross, a member of the House committee that oversees the military, said in an interview.

The herky-jerky trends that have come to dominate the federal budget process make it difficult for federal officials to plan.

“It’s incredibly disruptive,” Norcross said. “China doesn’t have this problem.”

Gov. Phil Murphy’s proposed budget includes nearly double the amount of funding for a state program that pairs police officers with clinicians to respond to mental health crises throughout the state. 

The proposed increase in funding for the Arrive Together program (Alternative Responses to Reduce Instances of Violence and Escalation), which operates in several forms and has been expanded to all 21 New Jersey counties, comes as the state has been grappling with how best to respond to mental health emergencies where the only option for many had been to call 911 and see the police respond. Now, the state program would receive an additional $9.5 million under the proposed budget with an aim to add new municipalities, among other measures, according to budget documents recently released by the Murphy administration.   

In an analysis of data from 342 police calls for service and follow-ups involving the Arrive Together program between December 2021 and January 2023, force was not used in 97% of cases and 98% of cases did not result in an arrest during an Arrive Together call for service or follow-up, according to a March 2023 report from the Brookings Institution, a Washington, D.C.-based nonprofit organization. 

“The doubling of the funding, I guess it really speaks to this understanding on the part of the administration, certainly out of the current attorney general’s office, that the old way of doing business in New Jersey is no longer good for business,” said Racquel Romans-Henry, the policy director of Trenton-based Salvation and Social Justice. 

A shift in the narrative

It is due to the tireless work of advocates and directly impacted communities that New Jersey has experienced a “seismic shift” in the narrative around mental and behavioral health, substance use and what is an “appropriate and effective” way to respond to those who are experiencing these challenges, Romans-Henry added. 

“It’s because of the countless loss and the unrelenting pressure from the public that the state has had to, number one, first acknowledge that not only are there inherent dangers with a strictly police response to highly charged, sensitive calls, but also acknowledge that there’s another way of doing things,” Romans-Henry said. “And this doubling in the investment is really the state saying, ‘Not only do we acknowledge that, but we have the ability and the resources to explore and implement these alternatives.’”    

In January, Murphy signed the Seabrooks-Washington Community-Led Crisis Response Act. The law allows additional state funding to go to community-led nonprofits that provide de-escalation, stabilization and follow-up support for communities experiencing high rates of violence. The groups would be able to use the money to expand services where team members respond to emergency calls that involve behavioral health issues or substance abuse, instead of sending armed police officers. The law also aims to create pilot programs in counties, including Hudson, that do not have community crisis response teams. 

‘We can’t deliver the services if we don’t have the practitioners. … So how are we going to address that?’ — Assemblywoman Aura K. Dunn (R-Morris)

In March of 2023, Paterson police shot and killed Najee Seabrooks, a 31-year-old anti-violence activist who worked for the Paterson Healing Collective, while he was experiencing a mental health crisis. Later that month, Attorney General Matthew Platkin announced that his office would take over the Paterson Police Department.

In late August, Jersey City police shot and killed Andrew Jerome Washington, 52, after responding to a call about his mental health emergency. Washington’s family, who called for help, said they did not expect a police response.

Then in December, Platkin announced that Paterson would be the first municipality in Passaic County to participate in the state’s Arrive Together program.

Shortage of mental health workers

The Seabrooks-Washington Community-Led Crisis Response Act is an effort to reduce instances of violence and deaths by expanding the use of nonprofit organizations comprising community members from the cities and counties responding to these behavioral health emergencies. 

“Institutionalizing Arrive, institutionalizing community-health crises and so forth is a major step in the right direction because now the state can’t say that it doesn’t have models of this happening in New Jersey,” said Jason Williams, an associate professor of justice studies at Montclair State University. “If these programs show that they work … they might be able to argue for a more permanent spot on the state’s budget,” said Williams.  

But while Murphy’s budget proposals for mental health and addiction drew praise from many, some lawmakers remain critical of the need to address a workforce shortage that continues to hamper the mental health care field in New Jersey and throughout the country. 

“We can’t deliver the services if we don’t have the practitioners,” said Assemblywoman Aura K. Dunn (R-Morris). “And we know that there’s still a dearth and real, severe shortage. So how are we going to address that?” 

Gov. Phil Murphy is planning to include another full employer pension contribution in the new state budget he is scheduled to unveil to lawmakers later this month, a key member of the administration told top state pension officials Wednesday.

The latest promise on pension funding means the state would extend its current streak of making full pension payments to four straight years after going more than two decades of shorting such contributions or, in some years, making no payment at all.

Murphy, a second-term Democrat, isn’t due to provide the full details of his budget proposal until Feb. 27. But the administration’s plan to maintain full pension funding suggests another roughly $7 billion will be set aside in the budget for the fiscal year that begins July 1, if lawmakers ultimately go along.

“That should assist the state pension as it continues to drive toward more fulsome funding levels,” said Assistant State Treasurer Michael Kanef during a public meeting of the New Jersey State Investment Council.

Last big spending item to talk through

The highlighting of the administration’s pension-funding goals marks the latest major spending item to be discussed publicly in the run-up to this month’s budget message.

New Jersey’s more than $90 billion pension fund covers the retirement benefits for an estimated 815,000 current and retired government workers, and how much funding the state government sets aside each year to cover promised retirement benefits is a perennial budget issue.

The two decades of prior underfunding by the state left the pension system in a deep financial hole, and actuaries estimate it will take decades to fully undo the damage.

As part of that effort, significant taxpayer contributions will be required for years to come out of the state’s annual budgets to restore the pension fund to good health.

No retiree is in immediate danger of not receiving a pension check. But cost-of-living adjustments for retirees have been suspended indefinitely as an ongoing cost-saving measure.

Restarting full employer contributions

New Jersey resumed making full employer pension contributions during the 2022 fiscal year as tax collections swelled during the recovery from the worst years of the COVID-19 pandemic.

Murphy and lawmakers continued the practice in the 2023 and 2024 fiscal years, making the pension contribution one of the line items that has increased significantly as overall state spending has also risen to a record high since Murphy took office in early 2018.

New Jersey’s pension-funding reversal has helped bring on a series of credit-rating upgrades the state has earned over the past several years after two decades that were marked by steady downgrades.

However, New Jersey and other states are now being closely watched by national experts as a cycle of moderating tax collections has become the norm in many places.

Indeed, the latest report on tax collections released by the New Jersey Department of the Treasury indicated overall revenues were off by about 3% year over year through the end of December.

Moreover, some of state government’s largest individual sources of revenue, including the income and corporation-business taxes, are among those seeing year-over-year declines this fiscal year, according to Treasury.

Despite the near-term revenue decline, Treasury officials said last month that “slight growth” is still expected during the second half of the 2024 fiscal year, which includes the always-crucial April income-tax returns.

During Wednesday’s report to the members of the investment council, Kanef noted the state’s latest revenue trends don’t represent a measurable decline in economic activity, but instead have been driven largely by increased tax refunds that have been paid to individuals and corporations over the first half of the fiscal year.

When the first half of the state’s fiscal year ended last month, New Jersey’s total tax collections were off nearly $530 million from the same point in the previous fiscal year.

In all, the state’s revenue haul from the beginning of July through the end of December declined by nearly 3% compared with the same six months in the fiscal year that ended June 30, 2023, the Department of the Treasury reported Wednesday.

Some of state government’s largest individual sources of revenue, including the income and corporation-business taxes, are among those seeing year over year declines this fiscal year, according to Treasury.

To be sure, a modest slowdown in overall collections was predicted for the first half of the fiscal year as inflation and high interest rates remained key economic concerns.

And several U.S. states have been experiencing budget challenges in recent months, including California, New York and Pennsylvania, according to a recent report published by The Pew Charitable Trusts.

Burdened by $55B budget?

Also putting pressure on New Jersey’s budget was a big increase in annual spending authorized last year by Gov. Phil Murphy and fellow Democrats who control both houses of the Legislature. That pushed the size of the annual budget up to a record-high, nearly $55 billion.

There’s still plenty of time to make up ground, but any revenue shortfalls that remain by June 30 would have to be made up for by drawing down reserves or making other budget adjustments since New Jersey’s Constitution generally prohibits the state from operating with a deficit.

Updated revenue forecasts and revised spending projections for the current fiscal-year budget are expected to be released by late February when Murphy delivers his annual budget message to the Legislature, but “slight growth” is still expected during the second half of the fiscal year, Treasury officials said Wednesday.

Also putting pressure on New Jersey’s budget was a big increase in annual spending authorized last year by Gov. Phil Murphy and fellow Democrats who control both houses of the Legislature.

Overall revenues would have to grow 1.5% higher than the certified amount for the 2023 fiscal year, which ended June 30, 2023, to keep the current fiscal-year budget on track over the final six months.

For the 2024 fiscal year, which began July 1, 2023, total collections were running slightly above $18 billion through the end of December after hitting nearly $18.7 billion over the same period last year, according to Treasury.

Total collections in the month of December fell about 3% short of last year’s total for the same month.

In the first five months of this fiscal year, collections were off the previous year’s pace by $385 million. At the end of December, that grew $529 million.

Income tax collections running behind

This year, the income tax was running about 6% behind the last fiscal year’s totals through the end of December. The income tax is the largest single source of revenue for the annual budget, with proceeds constitutionally dedicated to funding items that include direct property-tax relief and K-12 public-school aid.

For the month of December, income-tax collections were off about 1.5% compared to the same month in the last fiscal year, with moderate growth in employer withholdings offset by declines in estimated and final payments, as well as higher tax refunds, Treasury officials said.

Collections for the corporation-business tax, or CBT, which is another major source of revenue for the annual budget, were down about $123 million, or roughly 5%, year over year through the end of December.

A nearly 17% drop in CBT collections was measured for the month of December, driven by higher refunds and lower final payments and partnership payments, among other factors, Treasury officials said.

The corporation-business tax is not forecast to see a major rebound over the second half of the fiscal year; by law, a special surcharge that had been levied on the profits of New Jersey’s top-earning businesses for the last several years was allowed to expire on Dec. 31.

Meanwhile, sales tax revenue through the end of December was running effectively flat compared to the same period in the last fiscal year, with collections totaling about $5.35 billion over the first six months of the current fiscal year.

The state reports sales-tax revenue with a one-month lag, so the latest figures represent economic activity through the end of November.

Among other tax sources, receipts from the state’s pass-through business alternative income tax, or PT-BAIT, were up by more than 9% year over year through the end of December, while realty-transfer tax collections were off by 24% year over year, according to Treasury.

Collections from the alcoholic beverage excise and tobacco products wholesale taxes were both up year over year, by 4.4% and 2.7%, respectively. 

State lawmakers are considering another extension of special accommodations put in place during the worst of the COVID-19 pandemic that let companies remain eligible for economic-development tax incentives even when employees are working from home.

However, this time around, the requirements for employees to work in the office would be lifted for only a few more months, according to legislation that could soon get a final signoff in Trenton.

The latest proposed tweak to the state’s tax-incentive policies marks another attempt by New Jersey policymakers to adapt to broader economic trends that continue to be shaped by the lingering pandemic.

Those changes include the prevalence of work-from-home and hybrid employment arrangements that became a necessity at the onset of the health crisis and remain popular among workers today. Many state tax-break programs enacted prior to the pandemic rewarded companies for locating in New Jersey, where their workers would likely buy lunches and help generate additional economic activity, often in urban downtowns located in communities targeted for growth.

Concerns about downtown effects

However, due to the pandemic, specific requirements related to the time workers are expected to be in the office to help accomplish the broader economic-development goals were relaxed for companies receiving state tax breaks. The latest extension approved by Gov. Phil Murphy lasted through Dec. 31, 2023.

While COVID-19 cases remain a concern in New Jersey, many lawmakers have begun to openly call for workers to generally return to  the workplace, including in the locations where the state sought to incentivize more economic development in the first place by offering the tax breaks.

An analysis prepared by the nonpartisan Office of Legislative Services suggests the proposed extension could cost the state revenue if businesses continue to take advantage of the waiver.

The latest proposed extension of the special accommodations for tax-break recipients — which would last through March 31, according to the legislation — went before a key Senate committee in late December, when lawmakers outlined the thinking behind a brief extension this time around.

“People need to get back in their offices to help our downtown urban centers,” said Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen).

“People should be back to work,” added Senate Majority Leader Teresa Ruiz (D-Essex).

“Flexibility, priority always for families and folks who need it, but there are unintended consequences when we just evacuate office buildings and keep them empty,” she said.

The details

Under the bill, which  the Senate committee unanimously approved, the waiver of rules requiring full-time employees of a company receiving a state-funded tax break to spend at least 60% of their work hours in the office would be extended once again, but only until the end of March.

But the bill also requires businesses electing to waive on-site work requirements to make payments equal to 5% of tax credits received, through March 31, meaning it could also lead to increased revenue in some cases, according to the OLS analysis.

Moreover, those revenues would be directed to the state Economic Development Authority to “support certain economic development activities,” according to the analysis.

The bill has already been approved by the full Assembly and is up for consideration in the full Senate on Monday, which is the last full day of the current lame-duck legislative session.

Other tax-policy changes

In addition to providing waivers for the tax-incentive recipient work-from-home requirements, lawmakers have worked with Murphy to make other policy changes in response to the pandemic, including changing other tax policies to adapt to the latest employment trends.

New Jersey is among the states that rely heavily on income-tax revenue, including to fund public education, with potentially billions of dollars in annual tax collections at stake.

To that end, Murphy and lawmakers also established new state income-tax credits for residents who successfully mount a legal challenge of the taxing of their income by another state when the income is earned while they are located physically in New Jersey.

Tax credits are also now being offered to residents who seek and accept from their employers a reassignment from an out-of-state location to an in-state location, all under a law enacted last year.

For many feds, holiday season 2023 is shaping up to be less “Home Alone”—where all but one member of the family takes a fun, faraway vacation—and more like “A Christmas Carol,” a quick and grudging single day off from a Dickensian world, offering barely enough time to empty your stocking. 

In fact, more than a quarter of all government workers surveyed—at the federal, local and state levels—report they had not taken even one vacation over the previous year. 

The survey results, by Eagle Hill consulting and released days ago, reveal a huge chunk of the public-sector workforce is overworked. Or, at the very least, lacking in downtime. It’s leading to burnout, according to the researchers behind the survey. 

“Worker burnout is a big problem across both the public and private sector,” Melissa Jezior, president and CEO of Eagle Hill, told Government Executive. “When workers are burned out, they can’t perform at their peak level.”

“And burnout can be dangerous for the many government public safety workers and their communities – from firefighters to nurses to air traffic controllers,” she added. A recent investigation of fatigue and related problems among the FAA’s air traffic control staff, conducted by The New York Times, attests to this.

Fully 40% of the public-sector workforce reported “that one of the biggest reasons they don’t take a fully unplugged vacation is the pressure they put on themselves to stay on top of their work,” Jezior said. About a quarter of employees cited staffing shortages as another factor in foregoing days off. Nearly a fifth cited pressure from their managers as an “impediment” to taking a vacation. 

The survey, which breaks out some of the data by age and income cohorts, shows that lower-income employees are even more likely to have not taken at least one break (39% of modest earners vs. 26% of all earners in the survey sample.) 

“It’s essential that government leaders understand burnout levels and causes, and also create a ‘take a break’ culture,” Jezior noted. “That means [management that should be] encouraging workers to take time off—unplugged time off—so they can rest and recharge. Leaders also need to set an example by taking time off too.” 

Having said all that, as regards the end-of-year holiday season, there are additional factors preventing public-sector employees from basking in the downtime that they might—on paper—be entitled to. 

“Taking vacations during ‘traditional’ days off is really challenging in the public sector,” Jezior said, breaking out a list of vacation-impaired public servants that leads with feds. “For example, the winter holidays are one of the busiest times of the year for air traffic controllers. And summer vacation time often is busy for public safety officials dealing with crowds, weather, and traffic."

For more on the survey, start here or go directly to the full results here.

New Jersey’s public-worker pension fund closed out the last fiscal year with healthy investment gains and a big increase in overall market value, according to new estimates released Wednesday. 

The full review of the pension fund’s fiscal year 2023 performance was a major subject of discussion during a Wednesday meeting of the New Jersey State Investment Council, the panel that sets policy for the pension fund.

In all, net investment returns hit 9% during the 2023 fiscal year, which ended June 30, according to the new estimates reviewed by members of the council.

While still subject to final auditing, the fiscal year 2023 investment performance will easily top the pension fund’s assumed rate of return of 7%, said Shoaib Khan, the director of the Department of Treasury’s Division of Investment.

“We’re pleased with the outcome,” said Khan, who credited the efforts of division staff during his remarks to the council.   

Up some $6B in value

Meanwhile, the overall market value of the pension fund topped $91 billion as of the end of June, according to the latest estimates. That marks a big increase compared to the prior fiscal year, when net negative returns helped drag the fund’s overall market value below $85 billion.

The surge in market value also coincided with state government’s relatively recent return to funding full employer pension contributions in the annual budget, a practice that allowed the fund to maximize the upswing in investment returns during the 2023 fiscal year.

Moreover, the pension fund last year also benefited from $3.72 billion in state Lottery sales, a banner year. That’s because a portion of Lottery revenues is dedicated by law to funding public-worker pensions in New Jersey. Those contributions to the pension fund totaled $1.13 billion during the 2023 fiscal year, the Lottery reported earlier this year.    

Turbulence ahead?

However, in the face of these positive developments, the pension fund already appears to be facing more turbulence, including during the first quarter of the current fiscal year, which began July 1. 

Preliminary estimates suggest investment returns were running net negative through the end of September, although not all asset classes were included in the initial snapshot provided to council members on Wednesday due to a reporting lag.

The state pension fund covers the retirement benefits for an estimated 815,000 current and retired state and local government workers.

Looking beyond June 30, the latest estimates suggest a more difficult period may be looming.

The pension fund operates separate from the state budget and is supported by regular contributions from both government workers and taxpayer-funded employers, including the state. The state now spends roughly $7 billion annually, including the Lottery contributions, on its employer pension obligation, making it one of the largest expenditures in the current $54.3 billion state budget.

The dedicated revenue from the state Lottery and gains from fund investments also help support the pension fund.

However, due to state government’s long history of underfunding annual employer pension contributions — and, in some years, making no contributions at all — New Jersey’s pension system remains among the nation’s worst funded, and the latest actuarial estimates indicate it will take decades of robust state funding to fully reverse the damage.

Decline seen in FY ‘22

During the fiscal year that ended June 30, 2022, pension-fund investments generated net negative returns of 7.9%, according to the investment council’s annual report. Total pension fund value also dropped below $85 billion as of the end of that fiscal year, according to the report.

But as market conditions improved during the 2023 fiscal year, both the pension fund’s investment returns and overall market value enjoyed solid rebounds, according to the new estimates released Wednesday.  At 9.06%, the net annual returns for fiscal year 2023 easily topped the fund’s benchmark rate of return, which was 8.43%, according to the estimates.  

Allocations in equities and shifting more resources to cash equivalents were among the moves that were credited with helping to provide the fund’s strong annual returns.  

“In a rising interest-rate environment, this adds value to the pension fund portfolio, while at the same time, it allows us to preserve liquidity,” Khan said while discussing the cash allocations. 

However, looking beyond June 30, the latest estimates suggest a more difficult period may be looming. Preliminary estimates of the pension fund’s fiscal year 2024 investment returns indicate they barely broke even during the months of July and August, before falling slightly into net negative territory through the end of September.

Still, the preliminary estimates indicate the pension fund was generating more than 6% net returns so far this calendar year, and was boasting three-year returns of 6.67% and five-year returns of 5.86%.

The pension fund’s estimated market value as of the end of September was slightly below $90 billion, well off the nearly $100 billion in market value that was recorded at the end of September 2021. 

New Jersey’s total tax collections sagged below last year’s totals through the first quarter of the current fiscal year, with several important revenue sources among those seeing declines.

A drop in revenues was not unexpected after the 2024 fiscal year began this summer amid a period of general economic uncertainty. Department of Treasury officials noted Tuesday they’ve forecast major taxes will be in decline through the midway point of the state’s July-to-June fiscal year before experiencing a second-half rally.

But it remains to be seen just how significant the decline could be over the first half of the fiscal year, and whether the predicted upswing can generate enough revenue to keep on track a record-high, $54.3 billion spending plan enacted by Gov. Phil Murphy and lawmakers in late June.

In all, the state’s tax collections through July, August and September dropped by $517 million, or about 6%, compared to the same three months last year, Treasury reported Tuesday.  

Receipts for the income tax, the largest single source of revenue for the state budget, were off by about 7% year over year through the end of September, according to Treasury. Receipts from the corporation-business tax, another major revenue generator, were off by nearly 15% year over year.    

Any revenue shortfalls that develop over the course of a fiscal year would have to be made up for by drawing down reserves or making other budget adjustments since New Jersey’s Constitution generally prohibits the state from operating with a deficit. 

However, the state would be able to pad its reserves or generate new resources for other budget priorities if there is a strong rally that ends up producing enough revenue to exceed the initial forecast for the current fiscal year, which ends June 30, 2024.

Off 5% in September

The month of September is an important one on the state’s revenue calendar because it includes several estimated payment dates, including for the gross income tax, the corporation-business tax and the pass-through business alternative income tax. 

The revenue drop-off for September alone was nearly $260 million, or about 5%, compared to the same month last year, according to Treasury. That included a 10% decline in income-tax receipts compared to the same month last year.

Despite strong monthly employer withholdings, there were declines recorded in estimated and final income-tax payments, as well as higher refunds, that combined to more than offset gains on the withholding side, Treasury officials said. 

In late June, Democrats who currently control both houses of the Legislature added roughly $1.5 billion in new spending to Gov. Murphy’s final version of the fiscal year 2024 budget.

The income tax is not only the largest source of revenue for the state budget, but its receipts flow directly into the state’s Property Tax Relief Fund, which is dedicated to funding popular property-tax relief programs like “Anchor” and “Senior Freeze.”

Meanwhile, state sales-tax collections — another key source of funding for the state — also dropped slightly in September compared to the same month last year. But they were still slightly ahead of last year’s pace through the first quarter of the 2024 fiscal year, according to Treasury. The state reports sales-tax revenue with a one-month lag, so the quarterly figures represent economic activity through the end of August.

For the corporation-business tax, or CBT, the monthly decline for September totaled about 6% compared to the same month last year. In all, corporation-business tax revenues were off by about $200 million year over year through the first quarter of the 2024 fiscal year, Treasury said.

Dispute over a business tax

For much of the last year, the CBT has been the subject of a long-running policy debate because current law calls for a 2.5%, temporary surcharge on the incomes of businesses with $1 million or more in annual profits to expire at the end of this calendar year. That tax-policy change will cost the state an estimated more than $320 million in revenue during the second half of the 2024 fiscal year, according to Treasury forecasts.

Progressive activists have been among those calling for the surcharge to be left in place, arguing big corporations right now are in line to receive a major tax break at a time when funding for key state services such as mass transit remains uncertain.

But business-lobbying groups have argued the extra surcharge has made the state a national outlier when it comes to business taxes, sending the wrong message to companies that could be considering making a move to New Jersey. 

Among other tax sources, the quarterly receipts from the state’s realty-transfer tax were off by nearly 31% year over year, according to Treasury.

Meanwhile, quarterly collections from the alcoholic beverage excise and tobacco products wholesale taxes were both up year over year, by 17.7% and 7.8%, respectively.

In late June, Democrats who currently control both houses of the Legislature added roughly $1.5 billion in new spending to Murphy’s final version of the fiscal year 2024 budget as they drafted the annual appropriations bill. That pushed total projected spending above the projected revenues for the full fiscal year, creating a structural gap of more than $1 billion.

However, the final spending bill enacted by Murphy, a second-term Democrat, also maintained more than $8 billion in reserves, providing a cushion for any unforeseen revenue losses or spending needs that may arise before the fiscal year closes on June 30, 2024. 

With federal deficits soaring, bond issuers may face higher financing costs. State and local cash managers shine for now, but all eyes will be on the coming congressional budget battle.

Deficit financing has caught up with Uncle Sam, as federal outlays for interest payments have surged to record levels and the nation’s annual budget deficit is on track to double in this fiscal year. That’s just for starters: To dampen inflation, the Federal Reserve has hiked short-term interest rates and keeps jettisoning U.S. bonds, not buying them as it had been. Meanwhile, key foreign buyers including China have recently exited the Treasury market, also driving yields a bit higher.

Those federal interest expenses appear doomed to escalate yet higher in the next year or two as older, cheaper debt rolls off the books while forthcoming budgets remain locked in deficits and ambitious prior infrastructure appropriations are spent. Beyond that, compound interest will be America’s gnarlier enemy unless budget discipline is re-established on Capitol Hill. The Fitch rating service has downgraded Treasury debt, citing the partisan congressional dysfunctionality fueling this fiscal food fight.

So far, the indirect impact on the municipal bond market of these tectonic macro shifts is measured in fractions of a percentage point, so it’s hardly the end of the world. In California earthquake-speak, it’s a tremor, not a Big One. Meanwhile, the impact on state and local operating budgets today is arguably net-positive for most. But fiscal hawks and critics of Modern Monetary Theory are crowing that a dreary hangover of elevated and more costly interest rates seems to be here to stay — at least until the next recession, when the central bank presumably will have no choice but to once again cut rates and investors flee stocks to pile into the safety of government bonds. Bond market math is indeed a dismal science.

With nasty partisan political budget battling likely to resume in the coming month, the issue of deficit financing will return to center stage. Although most pundits expect that Congress will ultimately approve various appropriations to avert a government shutdown, next year’s budget line items for intergovernmental aid will once again be on some budget hawks’ chopping block, and the perennial sparring over tax-exempt bond rules is always a collateral damage threat to the muni bond market.

On the rosier side of this paradox, public-sector cash managers are now cheerfully gleaning short-term yields on their investments that exceed the CPI inflation rate. That produces a clearly positive “real” rate of return (net of inflation) for the first time in a decade. Public-sector cash invested tax-free today will likely buy more goods and most services next year, for a pleasant change. (Escalating health insurance premiums are a maddening exception.)

Even public financiers who unwisely invested too far into the future at puny rates during the pandemic have now washed away their mistakes and will be back in the black with their prospective portfolio values in coming months. Time was their ultimate cover-up.

Short-term money market yields are now expected to hover above 5 percent until the Federal Reserve sees inflation consistently drifting down closer to its 2 percent target, so cash managers are likely to make positive contributions to operating budgets for some time to come. Happily for budgeters, the rate outlook for the coming year looks pretty stable, so revenue estimation will generally be easier and hopefully more accurate with less guesswork.

Muni Bond Metrics

In the municipal bond market, the recent uptick in Treasury bond yields, especially in the Treasury Inflation Protected Securities market, has impacted tax-exempt borrowers. Typically muni bonds trade off the Treasury bond interest rate structure with a yield advantage for their federal tax exemption. But if traditional buyers of T-bonds are skittish about U.S. debt at a time when the Fed is trimming its bond holdings to rein in the money supply to combat inflation, the market pressure on tax-exempt issuers will remain adverse, with bond issuers on the hook for fractionally higher yields.

So far the impact of these yield shifts in the long-bond market have been modest and nobody has really been crowded out by federal deficits, but the Fitch ratings downgrade should be a wake-up call to state and local financiers.

In theory, the cost of high-quality muni debt should be less than the inflation rate, in light of the 30 percent tax-exemption advantage that many wealthy investors glean from them. But in today’s market, most states and localities must increasingly pay the price of near-record real interest rates in the U.S. Treasury market. Triple A issuers of 20-year serial muni bonds can slightly undercut today’s latest CPI inflation rate, but even they will pay a real interest cost if price inflation does eventually normalize to lower levels. Meanwhile, most muni issuers — almost everybody with lower ratings — are already paying a cost above inflation, albeit less than comparably rated corporate borrowers.

Today’s U.S. Treasury market inverted yield curve, with especially attractive short-term T-bill yields, is also an open invitation to “abusive” — and therefore profitable — reinvestment of lower-cost tax-exempt borrowings in higher-yielding Treasuries. This recent market development is certain to draw the ire of congressional and IRS tax policy staffers. Beware the arbitrage watchdogs who are waiting to pounce if too many public-sector CFOs get too cute by turning a quick profit on untaxed borrowings.

The ultimate longer-term federal fiscal impact on muni finance could be less interest rate-driven and more political. It’s no secret that congressional tax committees are always looking for ways to trim the issuance of tax-exempt debt, which the Congressional Budget Office scores as a “tax expenditure” in its budget forecasts. With Congress divided politically and a muni-friendly White House for now, I don’t fear major erosion of the tax exemption in this congressional term. But when the 2017 federal tax cuts expire after 2025, muni mavens need to remain en garde, especially for new restrictions on conduit financing, advance refundings and investment arbitrage.

Bolstered Pension Funds?

One other aspect of higher real interest rates is the longer-term benefit for public pension funds if bonds can continue to consistently deliver a material risk-free real return on investment. Once (and if) stock valuations eventually adjust to sustained positive real interest rates, the assumed positive spread between public pension fund portfolios’ investment portfolio returns and their benefits-cost inflation could ultimately bolster actuarial valuations and relieve pressure on future payroll contribution rates. That’s provided that subsequent federal budget deficits do not worsen beyond a tipping point and the Federal Reserve doesn’t persistently monetize escalating compound interest costs in the next decade. The latter scenario would reignite the pension funds’ inflation anathema and drive payroll costs skyward.

So my word to the wise for pension trustees and public employers is that although today’s real interest rates could someday become a long-term boon to pension payroll costs, that scenario requires future federal fiscal discipline that so far eludes Capitol Hill. Don’t count those chickens before they’re hatched.

As with global warming and climate change, the impact of federal deficit finance will be gradual but increasingly evident to state and local leaders. Like the world’s glaciers, the ice keeps getting thinner as political frictions heat up. So it’s wise to be ready for fiscally foul weather coming from Washington.