Deep budget challenges greet New Jersey's new governor
The Chris Christie era in New Jersey ended late Tuesday morning with the swearing-in of Gov. Phil Murphy, who will be tested right out of the gate with a host of fiscal obstacles.
Murphy, a former executive at Goldman Sachs and ambassador to Germany, inherits a state that was downgraded 11 times during Christie's eight years, driven largely by a rising unfunded pension burden. Murphy, a Democrat, campaigned on a proposal to structurally balance the state budget with a millionaire’s tax, but new federal tax legislation that caps deductions on state and local taxes creates a potential hurdle to this revenue strategy.
“We will have a budget that is balanced fiscally and morally,” said Murphy in his inaugural address. He will present a fiscal 2019 budget plan in late February. “We will be bold, but we will be responsible and realistic and in doing so we will send a loud and clear message that our days of muddling through from crisis to crisis are over.”
Municipal Market Analytics analyst Lisa Washburn said New Jersey’s pension pressure could threaten Murphy’s ability to deliver on campaign promises such as increasing funding for education and infrastructure.
She noted that Murphy’s plan to raise an estimated $1.3 billion in incremental revenue from higher taxes on wealthy people and legalizing marijuana would likely be “insufficient” to meet rising pension costs. By the 2023 fiscal year, annual contributions to the pension system are projected at $6 billion, which is $3.5 billion more than what was allocated in 2018, according to Washburn.
“The contributions to the pension system are rising at a rapid pace principally because of the state’s persistent underfunding of its obligation for the past few decades,” said Washburn.
Howard Cure, director of municipal bond credit research at Evercore Wealth Management, said Murphy may need to seek other forms of taxes or fee increases to carry out an ambitious agenda. He said another option could include broadening the sales tax base by adding various services such as legal, accounting and dry cleaning firms.
“It’s definitely going to be a lot harder to administer now than it was before the federal tax bill,” said Cure of the millionaire’s tax, which Murphy has said could add up to $600 million in annual revenue for the state. “It’s absolutely a concern.”
Beyond New Jersey’s budget challenges, the governor must also contend with aging infrastructure, including the long-stalled Gateway Tunnel project under the Hudson River that is now in limbo after the Trump administration raised concerns about providing federal support. Christie and New York Gov. Andrew Cuomo announced their own funding commitments for the $12.7 billion project in December under a previous agreement orchestrated in the Obama administration that would have the federal government cover half the costs.
“This is a disaster waiting to happen, particularly if a storm damages some key components of the system,” said Cure. “There are big questions about the federal government’s commitment to fund a portion of the costs and how the state is going to fund its share.”
The commitments lined up by Christie and Cuomo include a $1.9 billion contribution from New Jersey Transit, which faces its own funding challenges due to a 90% drop in state support since the early 2000s, according to a recent report issued by the Fund for New Jersey. Cure said Murphy will have to grapple with whether the commuter rail line needs fare increases or a dedicated regional tax.
Steering New Jersey back to fiscal health will require Murphy selling to the public the advantages of his budget goals, according to Marc Pfeiffer, assistant director of Rutgers University’s Bloustein Local Government Research Center. Pfeiffer said that if Murphy can build up public support for financial improvements the markets will take notice.
“The governor is going to have to communicate with the public, which generally doesn't have a very high trust level in government, confidence that the burden of funds raised is fairly spread and is properly administered,” said Pfeiffer. “If there is public support, that can help build market support and improve the state’s credit.”