New Jersey plans spending cuts, using reserves
New Jersey plans a combination of large-scale spending cuts and drawdowns of the state’s reserves to tackle a massive deficit caused by the COVID-19 pandemic.
State Treasurer Elizabeth Maher Muoio proposed $1.3 billion of spending cuts and deferring $2.1 billion of outlays between July and September as part of a roadmap for coping with near-term revenue hits through the end of the 2020 fiscal year on Sept. 30. Muoio also proposed transferring $421 million from the state’s rainy day reserves into the general fund, according to budget documents released Friday.
“No amount of planning could have predicted the magnitude of the financial crisis we are facing,” Muoio said during Governor Phil Murphy’s COVID-19 daily news briefing Friday. “Some extremely difficult decisions will have to be made in the weeks and months ahead, decisions no one wants to make, but they will be unavoidable.”
Murphy and state lawmakers in early April extended the fiscal year by three months, to Sept. 30 from June 30, so New Jersey could fully gauge the economic fallout from the virus. Muoio is estimating a $2.757 billion, or 7%, drop from initial 2020 fiscal year revenue projections. The state is now forecast to end the 2020 fiscal year with a $494 million surplus compared to the $1.5 billion surplus originally planned.
The $1.3 billion of spending reductions begin with $920 million already frozen by the Department of Treasury in late March, and contain proposed cuts, which will require legislative approval, including $135 million from the state’s Homestead property tax relief program, $102 million in college operating aid and $68 million to combat opioid addiction.
Muoio also announced plans to delay a scheduled $951 million September pension system payment for public workers until October. The state’s original 2020 budget dedicated $3.8 billion toward its underfunded pension system with the goal of reaching a 70% actuarially determined contribution level.
Fitch Ratings credit analyst Marcy Block said the deferred pension payment would not have any bearing on the state’s general obligation bond rating, which is the second lowest of all U.S. states, ahead of only Illinois. Fitch downgraded New Jersey’s GO debt to A-minus from A last month citing its lack of “meaningful reserves” to combat a serious recession.
“At this point, we view it as a timing issue,” said Block of the pension deferral. “It’s an extraordinary time for them in terms of the extension of the fiscal year.”
New Jersey is rated A3 by Moody's Investors Service, A-minus by S&P Global Ratings and A by Kroll Bond Rating Agency. Moody’s and S&P both revised the state's outlook to negative from stable last month.
The administration wants to delay $467 million in school aid payments, due Sept. 22, into October. A scheduled $250 million special education aid payment and a $114 million state subsidy to New Jersey Transit would also be moved from September to October under the revised end-of-year budget plan, according to Muoio.
Murphy unveiled a $40.9 billion 2021 fiscal year budget plan on Feb. 25, before the COVID-19 pandemic led to a shutdown of non-essential business activity in the state on March 21. The Treasury Department plans to present a new budget proposal for the shortened nine-month 2021 fiscal year by late August.
The administration is pushing for legislative approval to authorize up to $9.2 billion of borrowing under the Federal Reserve's Municipal Lending Facility to help address New Jersey’s looming revenue gaps. The governor laid out a proposal last month for bonds with a maturity of up to 35 years.
“Our road ahead is going to require a combination of serious budget tightening, critically needed borrowing and federal assistance,” Muoio said. “We will need a multifaceted approach.”