Billions more in taxes came in, but state drained its ‘rainy-day’ fund

JOHN REITMEYER, BUDGET/FINANCE WRITER | JULY 1, 2021 

NJ Spotlight News

June 24. 2021: Senate President Steve Sweeney is at the podium in the Senate chamber during voting on the budget.

---

After becoming flush with cash in the weeks leading up to the deadline for adopting a new budget — a bill rushed into law — legislators said they would use the money responsibly and that included paying into New Jersey’s oft-ignored “rainy-day” fund.

Restoring the rainy-day fund, a restricted budget reserve that helps the state prepare for unexpected economic downturns, was also a goal the state treasurer laid out in a written report to lawmakers last month as she delivered news of a massive tax windfall.

But that rainy day fund is still dry.

Final budget documents for the fiscal year that began Thursday indicate the Department of Treasury transferred the balance of the fund — more than $2 billion — into the state’s general fund.

The fund was drained to help underwrite other budget priorities and comes even as the unexpected tax windfall has helped generate a massive, $10 billion budget surplus in recent weeks. Money from the rainy-day fund is only supposed to be used during difficult fiscal times.

To be sure, Treasury’s latest budget documents also indicate more than $2 billion has been socked away in another budget reserve, ensuring the state will operate with a roughly 5% margin for error over the next 12 months.

Treasury officials have also highlighted another significant pot of money just established by Gov. Phil Murphy and lawmakers for paying down state debt in a statement provided to NJ Spotlight News.

Still, several lawmakers issued statements and posted messages on social media in recent days that have left the impression they believed the rainy-day fund had more than $1 billion in the budget that Murphy signed into law on Tuesday.

Taking Trenton to task

And while the mix-up over the budget-reserve balances could be viewed as largely academic since the accounts themselves represent only a small percentage of the total budget, it may also provide new fodder for activists and others who have been calling for lawmakers to reform Trenton’s process for enacting a new spending bill each year at the end of June.

This year, lawmakers took only a few days to formally introduce and then send along to Murphy a record $46.4 billion budget. That left little time for a closer review of the budget before it was sent to the governor. Taking longer to review it could have given lawmakers more time to ensure the rainy-day fund was as well-funded as they seemingly had originally intended.

Putting revenue in reserve

New Jersey’s fiscal policies generally provide two different tools that lawmakers and governors can use to stash revenue in reserve for economic downturns and emergencies.

One of those tools is the undesignated fund balance, which is commonly referred to as the “surplus.” The other is the surplus revenue fund, which is often referred to as simply the rainy-day fund.

While both accounts fall under the category of “budget reserves,” there is a key difference in how they are supposed to operate. Funds left in the surplus are unrestricted and can generally be used for any purpose. But under a law enacted in 1990 by then-Democratic Gov. James Florio, the rainy-day fund is supposed to generally operate as a lock box.

Under the statute, the rainy-day fund’s balances are supposed to rise whenever taxes that support the budget’s general fund significantly exceed forecasts, and those balances are only supposed to be tapped during times of emergency or when the state is facing a revenue shortfall and contemplating tax hikes.

But over the years governors and lawmakers have frequently failed to replenish the rainy-day account, and language is often inserted into the annual appropriations act to override the intent of the original law. That’s allowed because the appropriations act serves the state Constitution’s balanced-budget requirement, thus trumping any individual state law.

The fine print

In the budget Murphy signed Tuesday, on page 276 of the 280-page spending bill is a line that allows for the balance of the rainy-day fund to be “transferred to the General Fund, subject to the approval of the Director of the Division of Budget and Accounting.”

Murphy’s original budget plan for the 2022 fiscal year also called for draining what was expected to be the rainy-day fund’s more than $2 billion balance to help support a hefty year-over-year spending increase. That was to occur despite a recent trend of rising revenues that Treasury had been tracking even before the news of an unexpected tax windfall broke last month.

However, when Treasurer Elizabeth Maher Muoio issued a written report to lawmakers in early June that disclosed a more than $5 billion windfall, she also indicated the Murphy administration had a new plan for the budget that recommended “retaining the funds in the Surplus Revenue Fund instead of transferring the balance to the General Fund, as initially proposed.”

Several weeks later, after lawmakers held behind-the-scenes budget negotiations with Murphy, a legislative budget document known as the “score sheet” was drafted for the fiscal year 2022 spending bill. It indicated lawmakers intended for there to be a $1.3 billion balance in the rainy-day fund at the close of the 2022 fiscal year. Another nearly $600 million would also remain in the unreserved surplus, according to the legislative score sheet.

The differences between the surplus account and rainy-day fund may be subtle in the big picture of the budget itself, but it was the Murphy administration that extolled the benefits of replenishing the rainy-day fund in 2019, after tax revenues exceeded forecasts and allowed for the first deposit into the account since it was drained during the 2007-2009 Great Recession.

“Everyone is taught the importance of saving for a rainy day, but unfortunately it has been far too long since New Jersey’s rainy-day fund has seen any deposits,” Muoio said at the time.

Last week, lawmakers — who are granted the sole authority to appropriate in the state Constitution — touted their plan for the rainy-day fund as they discussed the new budget. And after attending Murphy’s lengthy bill-signing event for the new budget on Tuesday, Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen) issued a statement that said the budget “uses resources wisely by creating a debt-reduction plan … and a renewed Rainy Day Fund.”

Statements about the new budget that were posted on social media by Senate President Steve Sweeney (D-Gloucester) also promoted “strategic financial moves” that included “setting aside $1.3 billion in a Rainy Day Fund.”

While a total of $3.7 billion was stuffed into the state’s newly established Debt Defeasance and Prevention Fund as lawmakers intended, Treasury’s final budget documents indicate the 2022 fiscal year will close with a total of $2.356 billion in the undesignated fund balance — and with no money at all in the rainy-day fund.

Asked for comment on the reversal from early June, Treasury spokeswoman Jennifer Sciortino said, “Treasury’s June revenue and budget update did not account for subsequent legislative changes to the Governor’s February budget proposal.”

“Prior to the Appropriations Act enactment, the Governor and Legislative leadership discussed the need to transfer the Surplus Revenue Fund to the General Fund in order to both support the fiscally responsible decision that was made to pay down a sizable portion of State Debt and offset future debt payments (Debt Defeasance and Prevention Fund) and maintain a healthy and more flexible surplus of over five percent for State operations,” Sciortino said.

A spokesman for the Senate Democrats declined comment.

Do you like this post?

Showing 1 reaction


published this page in News and Politics 2021-07-01 02:12:17 -0700