How We Got Here: New Jersey’s Long Record of Not Putting Enough Money by for a Rainy Day


NJ Spotlight

Testifying before the Assembly Budget Committee in 2019, Sheila Reynertson of New Jersey Policy Perspective urged lawmakers to build up budget reserves, even if it meant also raising taxes.


New Jersey is slashing funding for property-tax relief, getting ready to defer public-worker pension-system payments and holding aid for K-12 school districts flat, all in response to steep revenue losses caused by the ongoing pandemic.

The state is also the only one in the nation to extend its fiscal year because of the health crisis, and lawmakers are now considering a virtually unprecedented emergency borrowing proposal by the governor that could stick taxpayers with debt and interest payments stretching out over 30 years.

All these measures are being taken, at least in part, because New Jersey didn’t have enough money socked away in budget reserves to help absorb the revenue losses occurring in an economic downturn set off by the response to the pandemic. New Jersey went into what could be a still-unfolding recession with only a fraction of its total annual spending in reserve, despite being urged repeatedly by fiscal-policy experts — and even the state’s own treasurer — to change course.

One of those warnings came just last year during a public hearing for the current state budget as it was being drafted. The message was delivered by New Jersey Policy Perspective’s Sheila Reynertson, who implored lawmakers to build up budget reserves, even if it meant they also had to raise taxes.

“We can break the cycle of gimmicks that dug New Jersey into its deep financial hole,” said Reynertson, NJPP’s senior policy analyst, before she was abruptly cut off during the hearing for speaking beyond a three-minute limit on individual testimony.

Another warning had come several years before from a highly respected state budget expert during the final year of his long tenure in Trenton. In one of his last appearances before lawmakers, David Rosen, the former budget and finance officer for the nonpartisan Office of Legislative Services, said New Jersey’s budget reserves ranked “at the very bottom” among the 50 states, leaving New Jersey vulnerable to a future downturn.

“New Jersey is disproportionately at risk, not so much because our revenues are more volatile than our peers, but because we have less of a surplus to respond to that volatility,” Rosen told lawmakers in 2015.

Warnings not heeded

But instead of heeding those warnings, and others, New Jersey made only minor progress on budget reserves. So even as experts at The Pew Charitable Trusts tracked the 50-state median for budget reserves last year at 13% of annual spending, New Jersey passed a budget with less than 5% of its annual spending in reserves.

In raw numbers, that means the state began fiscal year 2020 last July planning to have about $1.3 billion in reserves while total spending was increased to $38.7 billion. By contrast, if New Jersey had followed just the 50-state median for reserves under Pew’s analysis, policymakers would have put around $5 billion into its reserves. And if they had, a lot more money  would have been available to offset the revenue losses brought on by the pandemic.

Not surprisingly for those who’ve been raising concerns about the state’s fiscal practices, New Jersey’s budget reserves have now been totally swamped. The Department of Treasury is projecting total revenues will drop to $36.7 billion by the end of this month.

Looking back at her attempt to sound the alarm just last year, Reynertson in an interview called her experience of being abruptly cut off by lawmakers that day “unfortunate.”

Another lost opportunity

“Another lost opportunity to have a serious conversation about the needs of New Jersey,” she said.

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

One of those tools is the Undesignated Fund Balance, or what is commonly referred to as the “surplus.” At the start of FY2020, the surplus was projected to reach $900 million by the end of this month.

Another tool is the Surplus Revenue Fund, more commonly known as the “rainy day” fund. While some refer to the surplus and the rainy day fund interchangeably, they are separate accounts, although both generally do fall under the category of “budget reserves.”

Under a decades-old law, the rainy day fund is supposed to operate as a lockbox, with funds flowing directly into it whenever tax collections significantly outperform budget projections. Those funds are also supposed to be restricted, or only made available for spending in response to major emergencies or shortfalls, such as the current pandemic. By contrast, funds left in the surplus are unrestricted and can generally be used for any purpose.

While New Jersey was hit hard by the 2007-2009 Great Recession, revenues slowly rebounded, leaving some room for new spending initiatives, such as the aid increases for K-12 schools that Gov. Phil Murphy has been making a top priority since taking office in early 2018.

Some of the state’s revenue growth has also been used to pad the budget reserves, including last year when the first deposit into the rainy day fund in over a decade was made by Murphy’s administration. The deposit left the fund — which went broke during the Great Recession — with a balance of $401 million heading into this year’s downturn.

Savings, optional

For years, governors and lawmakers in both houses had effectively made it optional to replenish the rainy day account by putting language into the annual appropriations act to override the intent of the original law. That’s allowed because the act serves the Constitution’s balanced-budget requirement, thus trumping any individual state law. The budget language — which last appeared in the FY2019 appropriations act — included a clause that said funds could go “from the Surplus Revenue Fund to the General Fund” with approval from Treasury officials instead of simply remaining in the rainy day fund.

To be sure, at the same time governors and lawmakers kept deciding to keep only modest amounts of money in reserve, they were also struggling to address one of the state’s other major fiscal-policy challenges, the public-employee pension system’s huge unfunded liability.

With that unfunded liability measuring more than $100 billion by some estimates, in the wake of the Great Recession former Republican Gov. Chris Christie and lawmakers prioritized a plan to ramp up pension funding; this was to slowly reverse the state’s long-standing practice of only partially funding what would be considered a “full” pension payment based on the calculations of the state’s actuaries.

To stick to the ramp-up plan, a major share of the state’s annual revenue growth has been devoted to pension funding since the end of that recession. It has paved the way for a string of record-high pension contributions that started during Christie’s tenure and have continued under Murphy, a Democrat.

During one of the years when New Jersey experienced a surprise revenue windfall —   when Christie was  in office — the extra funding, about $200 million, was used to boost that year’s pension contribution.

Digging an even deeper pension hole

While still not up to the level required by actuaries, the current state pension payment will total nearly $4 billion, counting all quarterly payments — including one due at the end of the month — and contributions from the state Lottery. By contrast, annual state pension contributions were deferred altogether during the depths of the Great Recession, digging the pension-funding hole even deeper.

The huge task of filling the pension-funding hole was often referred to by members of legislative budget committees from both parties during conversations about the competing need to build up the surplus, or to allow more revenue to be deposited into the rainy day fund. A common refrain during committee hearings in recent years was that the state is already facing a “rainy day” due to the pension-funding hole.

But several years ago, the Democratic-controlled Legislature and Christie also agreed to a series of tax cuts that have reduced the state’s revenue stream even as they made the commitment to increase state pension contributions. Those 2016 tax cuts, which include the elimination of the estate tax and a reduction of the general sales-tax rate, have cost the state more than $2 billion in annual revenue, according to recent Treasury estimates.

At the same time it has been urging lawmakers to build up the budget reserves, Reynertson’s think tank has been backing a series of proposed tax increases. They include restoring the sales tax to the 7% rate that was in place before the Christie-era tax cuts, and enacting a true millionaires tax. A higher tax on earnings over $1 million is also something Murphy has repeatedly tried to convince lawmakers to approve since he took office in early 2018.

It was the millionaires tax proposal that Reynertson had been attempting to highlight during her testimony before lawmakers in 2019 when she was cut off for speaking too long. (A State Police trooper was rising from his chair just as she stopped speaking.)

“We were using that as an opportunity to say it raises revenue and brings responsible budgeting practices to the forefront of the conversation,” Reynertson said in a recent interview.

Kicking the can…

“It had become too easy for legislators to just look at the road twenty feet ahead,” she said.

But also pitching an increase of budget reserves in recent years has been the state’s treasurer, Elizabeth Maher Muoio. A former lawmaker who served on the budget committee in the Assembly, Muoio at a hearing in 2018 urged her former colleagues to build up the surplus as part of Murphy’s first spending plan.

“New Jersey’s surplus hovers historically between one percent and two percent (of total spending),” Muoio said during that hearing.

“This is unacceptable as it leaves us critically vulnerable in the event of an economic downturn,” she said.

Muoio also warned lawmakers that a thin surplus draws the attention of major Wall Street credit-rating agencies. These haven’t been shy in recent years about issuing downgrades that stick New Jersey taxpayers with higher borrowing costs whenever the state needs to issue bonds to fund capital investments.

Just a year after Muoio testified, a report issued by Moody’s Investors Service gave New Jersey and Illinois the distinction of being the two states that were least prepared for the next recession.

New Jersey and Illinois, least prepared

Both Illinois and New Jersey have low reserve levels relative to the revenue declines they could see in a recession scenario,” a Moody’s analyst said in the report, which served as another warning to state lawmakers. (Earlier this year, as the pandemic took hold, Moody’s lowered New Jersey’s credit-rating outlook from “stable” to “negative.”)

In her 2018 testimony, Muoio raised concerns that the federal government — which came to the aid of states during the Great Recession — may not be as eager to do so the next time around. Those remarks appear to be especially relevant today as Murphy’s repeated calls for the federal government to provide more assistance to New Jersey and other states have thus far been falling on deaf ears.

“We cannot reasonably expect, given the current national climate, that a federal bailout would be forthcoming,” Muoio warned in 2018.

Fast-forward to the economic challenges of 2020, and Muoio, responding to a question on what New Jersey faces today, said, “I know I began to sound like a broken record after the last two budget seasons, but the reason this administration has pushed so hard to build our reserves is because we knew the surplus we inherited was woefully inadequate and that an economic downturn was inevitable sooner rather than later.” She added, “While no one could have predicted the depth and breadth of the financial crisis we are now facing, we knew we needed a much bigger cushion given that other states have an average of 10% of budgeted appropriations on hand to weather an economic downturn, as well as the fact that those states with the strongest surpluses in the Great Recession were the earliest to recover from that economic crisis.”

Muoio maintains that “tremendous progress” was made in fiscal management, with the state “roughly tripling our reserves and planning a second consecutive Rainy Day Fund deposit, the first time that would have happened in a decade.” But, “Then COVID-19 hit and halted this progress in its tracks. Now we are witnessing public need for government assistance increase while revenues plummet. I cannot imagine what it would be like to manage this crisis without the cushion we had built, but the fact that our reserves still fell far short of what we need to meet our obligations means we now have to pursue a mix of drastic solutions, including severe belt tightening and emergency borrowing.”

Josh Goodman, a state fiscal-policy expert at Pew, said there’s no set amount of money that a state should have in reserve. But there is a “general guiding principle,” he said, which is: States that experience higher levels of volatility typically are the ones that need to put more funds into surplus accounts than those that experience less volatility.

Near the bottom of the pack

Yet New Jersey’s budget practices have run counter to that principle. The state tends to run in the middle of the pack when it comes to revenue volatility, but it routinely ranks near the bottom when it comes to how much has been socked away in reserves.

In Pew’s most recent 50-state rankings, only four other states set aside  a smaller percentage of their respective annual spending in reserve funds than New Jersey had in reserves as of last year.

“Considering your volatility is a good way to start making reserves,” Goodman said in a recent interview.

That’s also the same issue that Rosen, the former OLS budget expert, was warning lawmakers to pay attention to back in 2015.

“That’s clearly an area where New Jersey ranks at the very bottom in terms of the amount of surplus and rainy day fund money that we’ve put aside,” Rosen said at the time.

In addition to evaluating budget reserves as a percentage of total spending, Pew also compares states by looking at how many days they could operate using just their reserves, and this measurement is also not favorable for New Jersey. The 50-state median last year was 48 days, but New Jersey could have operated using reserves for just 16 days.

Goodman raised an additional concern for New Jersey. The state has significant liabilities still on its books as a result of economic-development tax incentives promised to companies. The incentives were awarded under a now-expired 2013 law intended to jump-start what was at the time a sluggish state economy.

The case for capping tax incentives

Goodman was among a group of policy experts who testified in Trenton last year at hearings on possible tax-incentive reforms. Among those backed by Goodman are capping the state’s annual spending on tax incentives and improving evaluations to ensure they remain worthwhile initiatives.

“It’s ideas like these that could potentially allow New Jersey to make these programs more cost-effective,” he said during a recent interview.

Looking ahead, it remains to be seen whether New Jersey will enact tax-incentive reforms, or whether it will have the ability to build reserves back up following this latest downturn. Building reserves may require some of the tax hikes, backed by Reynertson and NJPP, which remain a political hot potato in Trenton. It may also take a constitutional amendment to ensure the rainy day fund can be fully replenished and protected from diversions in time for the next downturn, just as the state’s Unemployment Insurance Trust Fund was secured a decade ago after it also ran dry during the Great Recession.

However, the latest official short-term projections are not very promising for those who favor making budget reserves an immediate priority.

Under Treasury’s latest plans to keep spending in balance, which is required by the state Constitution, the rainy day fund will be completely depleted again by the end of this month. In addition, the balance of the surplus account will be reduced to just $344 million, which is less than 1% of total spending.

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