New Jersey budget proposal aided by spending reductions, Fitch says
A heavy focus on expenditure savings in New Jersey Gov. Phil Murphy’s $38.6 billion budget proposal positions the state to withstand lower revenue growth, according to Fitch Ratings.
Fitch analyst Marcy Block wrote in a report Wednesday that Murphy’s executive budget relies on a “modest” $651 million, or 1.7%, of net growth compared to an estimated 6% rise for the current 2019 fiscal year that ends June 30. The Democratic governor’s spending plan assumes revenue initiatives of $550 million highlighted by a proposed millionaire’s tax that must be passed by the state legislature to become reality.
“Differing from the governor's inaugural budget proposal for fiscal 2019, the millionaires' tax is the lone substantial tax policy item,” Block wrote in her report. “Instead, this year's proposal is more notable for its focus on expenditure savings to create space for other spending initiatives.”
Block noted that the proposed budget banks on “a significant” $798 million in employee health benefit savings along with $475 million in recoverable Medicaid funds that coupled with proposed revenue initiatives would enable $546 million of increased appropriations for pensions, $282 million more for pre-K-12 education and $173 million more for debt service. Murphy also proposes increasing general fund support for New Jersey Transit by $100 million, which would replace prior transfers from the transportation agency’s capital funds and the New Jersey Turnpike Authority.
“Fitch believes the employee health care savings goals are attainable as $333 million reportedly have already been secured and the balance appears achievable based on historical results and announced agreements with collective bargaining units,” said Block.
The largest appropriation increase in the budget for pensions would up the state’s contribution to the underfunded system to nearly $3.8 billion with $2.7 billion derived from the general fund and just over $1 billion from New Jersey Lottery revenues. The 10% increase would bring the state to a 70% actuarially determined contribution level and continue a path toward full ADC funding levels in 2023.
“Pending full contributions in fiscal 2023, Fitch would expect further deterioration in the funded condition of the plans, even if all plan assumptions are met,” said Block. “The state's underfunded commitments to retired state employees and teachers have weighed on the state's rating and remain a negative rating factor absent further policy action.”
Fitch rates New Jersey A with a stable outlook.
A growing pension burden has weighed heavily in New Jersey’s general obligation bond ratings. The Garden State’s GO bonds are also rated A-minus by S&P, A3 by Moody’s Investors Service and A by Kroll Bond Rating Agency.
The Murphy administration estimates that increasing the personal income tax for those earning more than $1 million from the current $5 million threshold would generate $447 million in new revenue. The budget also assumes a legalization and taxation of recreational marijuana gets approved in time for the new budget to net around $60 million. Other revenue raisers proposed include increased fees on opioid distributors and manufacturers as well as an assessment on corporations that employ 50 or more people that are on Medicaid.
“Should the measures fail to be approved; other revenue solutions or expenditure reductions will need to be identified to balance the fiscal 2020 budget,” said Block.
Murphy’s first budget proposal last year relied on more tax revenue growth with an estimated surplus anticipated despite a reported slowdown in tax collections. Block noted that while PIT receipts have lagged, corporate business taxes have been boosted and that total revenue is now estimated to be $328 million above what was projected. The state is also expecting more PIT revenue to flow in during April as a result of changed taxpayer behaviors resulting from the 2017 federal tax changes.