Facing budget gaps, Pennsylvania, New Jersey governors turn to reserves

Bloomberg News

Budgeting was a bigger challenge than usual for governors this year. 

Federal spending and a strong economy made for years of easy budgeting, and while many governors want to maintain taxes through 2027, a number are grappling with structural gaps. 

Pennsylvania and New Jersey are facing shortages to the tune of billions of dollars. To close those gaps, these governors plan to use some of their historically strong reserves. 

Pennsylvania and New Jersey are somewhat unique in their willingness to spend their reserves, S&P analyst Geoff Buswick said. But the move isn't totally out of character. 

"Pennsylvania and New Jersey are tied for the second lowest rated state already," Buswick said. 

A difficult budget season 
These are not the only states with structural imbalances in their budgets, according to Eric Schnurer, president of consulting firm Public Works. 

"This is a situation that's been coming for two to three years, and that everybody has basically known it's been coming for two or three years, and everybody has largely ignored it," Schnurer said. 

Governors in most Northeast states have avoided proposing tax hikes to address this need for additional revenue, said John Hallacy, president of John Hallacy Consulting. 

States are navigating a slowing job market and economic uncertainty from the war in Iran, but the economy is still fairly strong overall, Hallacy added.

This year, states must also begin to address funding the Medicaid and SNAP cuts from last year's One Big Beautiful Bill Act. 

Many states are investing in improved systems and extra staffing to try to lower their SNAP error rate, avoiding the federal penalties, Buswick said. Some are also budgeting to cover certain SNAP-related programs, for children or pregnant women, or allocating more aid to local food banks. 

But when it comes to addressing Medicaid cuts, "just about every state is saying, 'We're not going to find state money to backfill that,'" Buswick said. 

Pennsylvania 
Pennsylvania Gov. Josh Shapiro proposed a $53.2 billion budget, but his executive budget expects to bring in only $50.8 billion of revenue. 

This is the fourth year in a row Shapiro has proposed closing a budget gap with Pennsylvania's reserves. In prior fiscal years, the legislature went along with the idea, spending nearly $8 billion of the commonwealth's general fund surplus.  

This budget would use $4.5 billion of the commonwealth's $7.5 billion rainy-day fund under Shapiro's plan. 

Shapiro, a Democrat, billed his proposal as a plan to "keep doing what's working." Republican lawmakers objected. 

"Here is what we can say with certainty about the governor's proposed budget: this will not be the final product," House Republican Leader Jesse Topper said. "It spends too much, it grows government too much, and is unsustainable in the future."

The executive budget would increase spending on healthcare, economic development, safety programs and education; a $665 million increase in school funding is a result of the state's loss in a 2023 court case. 

Shapiro proposed legalizing and taxing cannabis and placing a tax on slot machine-style "skill games" to raise $2 billion of revenue annually, but both have proven too divisive to pass the legislature in prior years. 

The executive budget includes a $1.2 billion increase in Medicaid spending. Shapiro also is proposed transferring $100 million from Pennsylvania's rainy-day fund to a new "Federal Response Fund" to address new costs resulting from funding changes made by Washington. 

Pennsylvania historically hasn't had reserves this high, Buswick noted, which might be why lawmakers have felt so comfortable spending them. 

Over the past few years, "we kept asking when the [general fund surplus] runs out, what are you going to do?" Buswick recalled. "And they said, 'we'll address it.'"

Last year, Pennsylvania failed to pass its fiscal 2026 budget until November. Republicans in the legislature objected to the reserve spending and couldn't agree on how to address fiscal cliffs in the state's transit agencies. S&P lowered the commonwealth's rating outlook as a result of the impasse and the reserve use. 

In this budget, Shapiro proposed transferring an additional 1.75% of the state's sales tax revenue — about $300 million annually — to its transit agencies. 

Pennsylvania is rated A-plus by S&P, Aa2 by Moody's Ratings and AA by Fitch Ratings.

New Jersey
New Jersey Gov. Mikie Sherrill stressed fiscal responsibility in her budget address.

"For too long, too many in Trenton have taken the easy way out — opting for a quick fix, instead of laying the foundation for a solid future," Sherrill said. "I'm submitting to this legislature the most fiscally responsible budget that our state has seen in years."

The newly elected governor ran on affordability, but the $3 billion structural gap in the state's budget is the driving force behind her proposal. 

Sherrill's executive budget is $60.7 billion. It shrinks the budget gap to $1.6 billion and finds $2 billion of savings. But the proposal also spends nearly $2 billion of the state's $7.2 billion general fund surplus. 

The proposal includes a full pension payment of $7.3 billion; the state's failure to fund its pension program for years damaged its rating and inflated its present-day obligations. Making appropriate pension contributions has caused substantial growth in the state's budget over the past 10 years.

New Jersey has "made a lot of investments and [created] a lot of good programs" in the past decade, Schnurer said, "but the revenues have not risen to match it, and I think they've got one of the larger built-in structural deficits of any state."

$500 million of the savings in Sherrill's proposal come from shrinking a property tax rebate for seniors. Sherrill also plans to cap corporate net operating loss deductions for the next three years. 

In response to federal plans to reform Medicaid and eliminate some recipients' eligibility, Sherrill proposed charging a fee to companies with 50 or more employees that don't provide health insurance. The fee is expected to raise $145 million a year, "to cover Trump's extra Medicaid costs," Sherrill said. 

The governor proposed hiring budget experts to advise local school districts on their finances. Sherrill's budget also includes more than $1 billion in subsidies for NJTransit, a more than $200 million increase, which Hallacy described as sorely needed. 

The state Senate's Democratic leadership said the legislature was "well-equipped to address" the state's challenges. 

"We will collaborate with Governor Sherrill over the coming months to develop a budget that reflects our residents' priorities and addresses the needs of our state responsibly," Senate President Nick Scutari, Senate Majority Leader Teresa Ruiz and Senate budget chair Paul Sarlo said in a joint statement. "We look forward to presenting a comprehensive budget in June that showcases our shared vision for a prosperous future."

New Jersey is rated A-plus by S&P, Aa3 by Moody's and A-plus by Fitch and KBRA.

S&P analyst Oscar Padilla said the legislature is probably capable of balancing the budget, at least in the long run. 

"Going forward, I think the legislature is really going to try to figure out how to achieve that structural balance," Padilla said. "If they have to use reserves, a billion or two, it's kind of what we were expecting."