Rating analysts will watch how New Jersey tackles an estimated $8 billion deficit for fiscal 2011 after the state’s Office of Legislative Services released the anticipated budget shortfall on Tuesday.
New Jersey has some time to address the issue as its fiscal 2011 begins July 1, 2010. The OLS expects a modest base revenue growth of approximately $800 million next year. Conversely, immediate and future retirement costs, non-recurring funds from the American Recovery and Reinvestment Act, and the end of a one-time income tax hike, among other factors, may add up to a $8 billion funding gap, according to the report.
Rating analysts said they will evaluate how New Jersey deals with any potential deficit and noted that the state has a history of fixing budget shortfalls. Officials just closed a roughly $6 billion deficit, not including off-budget expenses, in its $30.2 billion fiscal 2009 budget.
“They’ve projected deficits in the past, but they’ve adjusted their budgets accordingly either through raising taxes or cutting spending or both,” said Standard & Poor’s analyst Karl Jacob. “So, it’s really not the size of the deficit as much as how you react to it. The fact that their rating is double-A, stable, really speaks to some of the actions they’ve taken to adjust to those budget shortfalls.”
New Jersey isn’t the only state projecting a budget gap for fiscal 2011. A July 2009 National Conference of State Legislatures report indicates that of the 24 states providing budget estimates, combined fiscal 2011 deficits could reach at least $58.5 billion.
The nearly $8 billion deficit for New Jersey includes “fully funded employer pension contributions” of $2.5 billion that would help the state meet immediate and future retirement costs. Officials may opt to decrease that allocation, as it has done in the past, to help bring expenditures in line with revenues.
The state, as of now, would also receive $1.6 billion fewer federal stimulus funds, and a one-year 0.75% income-tax increase for those earning $400,000 or more — and set to bring in $1.1 billion of additional revenue — will expire at the end of fiscal 2010.
In addition, homestead rebate provisions will total $1.6 billion unless lawmakers alter that allocation and officials anticipate various programs, including school funding, to increase by $1.2 billion, according to the report. The OLS also budgeted a non-recurrence of certain debt service savings of $200 million.
Moody’s Investors Service analyst Edie Behr said that while the $8 billion amount is large, the budget estimates give the state a blueprint of what to address.
“It’s important to understand that states identify that gap this far out so that they can use that as a planning tool,” Behr said. “And so it may be an alarming number ... It’s the same amount that they’ve just solved for fiscal 2010, but it gives them something to work toward as they start to develop their fiscal 2011 budget.”
In addition to the state’s operating budget, the report cited a potential fiscal 2011 funding gap for the New Jersey Transportation Trust Fund Authority, which will run out of funding beginning fiscal 2012. The OLS believes the TTFA may not have enough funds next year to fully support its capital program.
“While the current statute envisioned funding for projects through fiscal 2011, market conditions may not leave the authority with sufficient bonding capacity for a full capital program in fiscal 2011,” according to the report.