Brighter New Jersey revenue forecast may lead to smaller borrowing

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Legislators concerned about New Jersey Gov. Phil Murphy’s borrowing plans have new ammunition to fight it, as the state’s Office of Legislative Services tax revenue projection was $1.37 billion more than the Department of Treasury said.

The projection covers collections through the end of June, and is the largest gap ever between estimates from OLS and Treasury "to the best of my knowledge," according to senior fiscal analyst David Dresher.

State Treasurer Elizabeth Maher Muoio last month forecast a $5.6 billion revenue shortfall from Murphy's $40.9 billion February budget. The OLS projections would leave the state around $4.2 billion short of early 2020 revenue estimates.

“Our fiscal condition may take years to fully recover," said New Jersey State Treasurer Elizabeth Maher Muoio.

Murphy, a Democrat, pitched a nine-month $32.4 billion spending plan on Aug. 25 that would include $4 billion of borrowing to offset the expected revenue losses. The state could use either general obligation bonds or short-term debt through the U.S. Federal Reserve’s Municipal Liquidity Facility. Any proposed borrowing would need to be approved by a four-member legislative commission.

“Folks that are worried about the amount of borrowing in the governor’s budget are certainly going to use this forecast gap as an argument against that,” said Matt Hale, a political science professor at Seton Hall University.

While Democrats control both the state Assembly and Senate, the party’s moderate and more fiscally conservative lawmakers may want to reduce Murphy’s $4 billion borrowing plans in light of the new revenue forecast, he said. The New Jersey Republican State Committee filed an unsuccessful legal challenge to the borrowing plan in State Supreme Court, arguing GO bonds cannot be issued without voter approval under the state constitution.

The budget proposal also relies on $1.1 billion of new revenues from proposed tax increases that would need legislative approval, including a millionaire’s tax the governor has unsuccessfully pushed since getting elected in 2017, that would net the state around $390 million. It would raise the marginal rate on annual income above $1 million to 10.75% from 8.97%.

“Murphy has tried every year for a millionaire’s tax and has never gotten it,” Hale said. “This [OLS forecast] could have a significant effect on whether that is included as part of the budget or not.”

Also on the table is permanently incorporating the 2.5% corporate surcharge, which was slated to get rolled back, If made permanent, this would generate around $210 million of revenue in fiscal 2021. Raising the cigarette tax to $4.25 per pack, which Murphy seeks, would yield an estimated $143.1 million.

Ben Dworkin, director of Rowan University's Institute for Public Policy and Citizenship, said the OLS calculations create further barriers for the proposed tax hikes and may also lead to reduce borrowing. While only Murphy has the power to certify revenues under the state Constitution, he said, the forecast difference could ultimately lead to a compromised fiscal plan that will likely not be adopted until just before the state’s Sept. 30 deadline.

“Legislators who are naturally gun-shy about raising additional revenue through taxes or fees are going to take advantage of this [OLS] number] and offer a budget that relies on that $1.4 billion coming in,” Dworkin said. “This situation lends itself to backroom negotiations.”

Nearly two-thirds of the revenue difference between OLS and the Murphy administration stems from better-than-expected projected income tax collections, since withholding payments did not drop as much as anticipated, according to Dresher. The rosier numbers can be attributed to state unemployment spikes being heavily concentrated in low-wage sectors where income tax rates are much lower, he said.

Muoio stood by the Department of Treasury’s revenue forecast during testimony before the Senate Budget Committee Tuesday. Uncertainty about how long the COVID-19 pandemic persists, she said, will mean revenue volatility. “Our fiscal condition may take years to fully recover,” she said.

Escalating pension liabilities and past structurally imbalanced budgets triggered 12 credit rating downgrades to New Jersey in the past nine years, with the state’s general obligation bonds rated higher than only Illinois among U.S. states. New Jersey’s GO debt is rated A-minus by Fitch Ratings, A3 by Moody's Investors Service, A-minus by S&P Global Ratings and A by Kroll Bond Rating Agency.

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