New Jersey budget agreement seeks cushion against virus headwinds
New Jersey's $32.7 billion budget for its shortened nine-month 2021 fiscal year includes the state's largest reserve levels in more than a decade as a backstop for revenue hits that may result from a possible second wave of coronavirus.
The approved spending plan, which Gov. Phil Murphy signed Tuesday afternoon, calls for a $2.5 billion budget surplus designed to help the state withstand potential new financial hits from the COVID-19 pandemic. The virus's outbreak in March led to a shutdown of non-essential businesses and resulted in a $5.5 billion revenue gap through June 2021 compared to pre-pandemic estimates.
S&P Global Ratings credit analyst Dave Hitchcock noted that while boosting state reserves is a positive, relying on $4.5 billion of borrowing to achieve structural balance in the budget contains risks. Murphy signed the New Jersey COVID-19 Emergency Bond Act in July to authorizing borrowing to sustain operating costs 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.
“If you have a $2.5 billion surplus, but it is partly the result of $4.5 billion in deficit bonds, it is somewhat artificial," Hitchcock said. “You can have as have as large a surplus if you want if you sell enough deficit bonds.”
Murphy and New Jersey lawmakers also sought to address the state’s deficit obstacles by striking a deal for an income tax hike on millionaires to 10.75% from 8.97% in exchange for providing annual rebates as high as $500 for families earning less than $150,000. The millionaire’s tax is projected to raise $390 million in new annual revenue, but it will be largely offset by an estimated $340 million cost of the rebates with the state planning to distribute a large portion of them in early fiscal 2022 after July 1.
The budget also banks on $210 million from an extension of the state’s 2.5% surcharge on corporations exceeding $210 million and $103 million from a newly enacted assessment on health-maintenance organization premiums. Lawmakers did not approve Murphy’s proposed tax increase on that would have netted $143.1 million.
Hitchcock said New Jersey’s credit conditions would hinge largely on the size of the state’s structural deficit both in the coming year and fiscal 2022 and the state’s liability burden. The legislature cut Murphy’s proposed $4.9 billion pension payment by $200 million at $4.7 billion, which puts the state at just under an 80% actuarially determined contribution level.
Rising pension liabilities and past structurally imbalanced budgets triggered 12 credit downgrades to New Jersey in the past nine years to the second-lowest ratings of the 50 U.S. states. The Garden State’s GO bonds are rated higher than only Illinois at A-minus by S&P, A3 by Moody’s Investors Service, A-minus by Fitch Ratings and A by Kroll Bond Rating Agency.
Lisa Washburn, managing director at Municipal Market Analytics, said she expect New Jersey’s credit quality to weaken in the medium-term compared to other states. Washburn said that while deficit borrowing was necessary to keep pace on the state’s goal of achieving a 100% pension ADC pension funding level by 2023 it would also create barriers balancing next year’s budget absent major spending reductions.
“Considering that annual appropriations currently allocated to debt service, pension and OPEB contributions, and Medicaid, are approaching 40%, taking on such a significant amount of debt will likely further impede New Jersey’s future ability to address its structural budget gap,” Washburn wrote in Tuesday’s MMA weekly outlook report.