Murphy pushes bonding, taxes in revised New Jersey budget
New Jersey Gov. Phil Murphy pitched a revised $32.4 billion budget Tuesday, that hinges on billions of borrowing and newly enacted taxes to confront a coronavirus-induced revenue gap less severe than initially feared.
Murphy’s nine-month fiscal 2021 budget plan proposes $4 billion of bonding through June 2021 to help New Jersey offset revenue losses caused by the pandemic. The proposed debt is far less than the nearly $10 billion of borrowing state lawmakers approved earlier this summer under the New Jersey COVID-19 Emergency Bond Act.
New Jersey State Treasurer Elizabeth Maher Muoio forecasts a $5 billion revenue shortfall compared to earlier projections of a $10 billion miss.
“New Jersey is going into the fiscal 2021 budget negotiations in a much better position than it expected to be in just a few short months ago,” said Fitch analyst Doug Offerman. “It appears the problem they were trying to solve is smaller than it was.”
State lawmakers opted to extend the 2020 fiscal year by three months to Sept. 30 in order to account for the economic fallout and the state’s postponed tax filing deadline. Offerman said the improved financial health is largely attributable to higher-than-expected sales tax collections after New Jersey began gradually re-opening after months of emergency stay-at-home orders coupled with the utilization of federal CARES Act funding.
“This budget envisions a closing surplus of more than $2.2 billion — a much-needed cushion against revenue shocks from a second wave,” Murphy said in his budget remarks delivered at Rutgers University’s SHI Stadium in in Piscataway Tuesday.
The borrowing legislation Murphy signed July 16 authorized as much as $9.9 billion of state borrowing either through the issuance of general obligation bonds with up to 35-year maturities or short-term debt through the U.S. Federal Reserve’s Municipal Liquidity Facility program. New Jersey Department of Treasury spokeswoman Jennifer Sciortino said the state has not determined whether to use GOs or the Fed facility.
“Treasury’s Office of Public Finance is currently evaluating funding options to determine the optimal financing strategy, with an eye towards obtaining the most favorable interest rate,” Sciortino said.
The New Supreme Court upheld the borrowing measure following a Republican challenge over the constitutionality of issuing bonds to cover revenue losses, but the ruling also stated that the debt cap must be lowered if revenue projections improve. Any proposed borrowing would need to be approved by a four-member legislative commission.
The new budget proposal includes a millionaire’s tax that Murphy also pitched back in February, which would net the state around $390 million in revenue. The Democratic-controlled legislature has blocked Murphy’s previous two efforts at enacting the tax hike, which would up the marginal rate on annual income above $1 million to 10.75% from 8.97%.
“We will keep an open mind as we understand every option and proposal must be thoroughly reviewed and vetted,” Assembly Speaker Craig Coughlin, D-Fords, said in a statement. “All options are on the table.”
Murphy also proposed permanently incorporating the 2.5 % corporation surcharge that would generate $210 million in fiscal 2021. He also wants to raise state’s cigarette tax to $4.25 per pack, which would yield an estimated $143.1 million.
The budget would also allocate nearly $4.9 billion toward New Jersey’s underfunded pension system to bring it up to an 80% actuarially determined contribution level. The state remains on pace to reach a full ADC funding ratio in fiscal 2023.
“The pension funds in New Jersey have been very strained and laying out this plan to gradually rise to a full actuarially level contribution is meaningful,” Fitch's Offerman said. “It suggests that the state is not going to fall back on what it fell back on for so many years of viewing the pension contribution as kind of a de-facto budget pressure relief valve.”
A steep pension burden has triggered 12 credit rating downgrades in the last nine years to bring New Jersey GO bonds to the second lowest level of all U.S. states, better than only Illinois. New Jersey’s debt is rated A-minus by Fitch, A3 by Moody's Investors Service, A-minus by S&P Global Ratings and A by Kroll Bond Rating Agency.
The state legislature and Murphy have until Sept. 30 to approve the 2021 budget. State lawmakers adopted a $7.6 billion stopgap budget from July 1 to Sept. 30.