With more than $2 billion in funding obligations deferred until October, what now — tax hikes, spending cuts?

After signing a stopgap budget into law Tuesday to keep the state open for another three months, Gov. Phil Murphy and lawmakers must now find funding for several big-ticket items they deferred into October amid the uncertainty of a still ongoing pandemic.

The deferrals made it easier to adopt the short-term budget, but those obligations totaling more than $2 billion will still come due, even as revenues may still be depressed by the pandemic.

New Jersey is also in the midst of ramping up its funding for its public-worker pension accounts, a plan Wall Street credit-rating agencies are watching closely as the state tries to remedy what is considered the nation’s worst-funded state-run retirement plan. Another increase in the state’s contribution to the pension funds is scheduled to begin in a few months, meaning it will have to be paid for in the next budget following the three-month stopgap, unless the ramp-up plan is to be abandoned.

Whether those fiscal challenges, and others, will bring on a series of new tax hikes, significant spending cuts, or major new borrowing that could take several decades for taxpayers to pay off remains to be seen. But there’s also some hope as the rate of new COVID-19 infections slows — at least in New Jersey — that the state’s continued reopening could buoy state tax collections enough to ease the way.

Murphy, a first-term Democrat, is required to submit his next budget plan to lawmakers by August 25. It will cover spending between Oct. 1 and June 30, 2021, the remaining months of a fiscal “year” 2021.

“The fiscal impacts of the COVID-19 pandemic are as unprecedented as this public health emergency itself,” Murphy said during a media briefing in Trenton on Tuesday.

“As we look forward, toward the nine-month fiscal 2021 budget we will enact at summer’s end, the decisions we make now will have an even bigger impact,” he said.

Pandemic changed everything, even budget deadlines

New Jersey generally operates under a July 1 to June 30 fiscal year. But this year, the deadline to pass a new fiscal-year budget was pushed back to Sept. 30 as part of a law Murphy enacted in the wake of the pandemic that also delayed the deadline for submitting state income-tax payments, from mid-April to mid-July.

To extend appropriations beyond the typical June 30 deadline, lawmakers over the last week drafted and sent to Murphy a $7.7 billion stopgap spending bill. That legislation — which Murphy signed into law on Tuesday — will cover appropriations for July, August and September. The same bill also authorizes the “de-appropriation” of over $1 billion in spending that had been approved in the original budget for FY2020 that Murphy enacted last year.

As part of the stopgap budget, the governor and lawmakers also set up deferrals into the fiscal year that begins on Oct. 1 totaling an estimated $2.19 billion. Spending on those items would typically occur before the end of September. They were cataloged in a recent commentary on New Jersey’s budget plans released by S&P Global Ratings, one of the “Big 3” Wall Street credit-rating firms.

Among the spending items scheduled for deferral are a $951 million quarterly state-worker pension contribution; a $468 million payment to K-12 school districts; municipal payments totaling $355 million; and special-education aid totaling $250 million, according to S&P.

The firm’s analysts called the state’s three-month spending plan “artificially low” due to the deferrals.

The deferred spending items will still have to be funded during the nine months of FY2021 even as revenue collections are being hit hard by the pandemic. Murphy’s administration is forecasting just $34 billion in revenue will be collected between July 1, 2020 and June 30, 2021, below the $38.7 billion budget signed into law this time last year for FY2020.

As the stopgap spending bill was debated in the State House on Monday, several Republican lawmakers highlighted the deferrals while also pointing to other fiscal challenges looming in October. They accused Murphy and majority Democrats of “kicking the can down the road” instead of more directly taking on the financial impact of the pandemic with bigger cuts and reforms.

“It should scare every single taxpayer,” said Sen. Declan O’Scanlon (R-Monmouth).

Are tax hikes in the mix?

Meanwhile, Murphy for the time being has dropped a push for new tax hikes by July 1 to fund a series of spending increases he has also put on hold. But tax-hike proposals could reemerge as part of the spending proposal for the shortened FY2021 that the governor is due to provide to lawmakers by Aug. 25.

In addition to tax hikes, also unclear right now is whether Murphy will be able to count on any revenue from an emergency borrowing proposal that he’s been pressing lawmakers to approve as part of the state’s response to the pandemic.

The borrowing measure would allow the state to issue at least $5 billion in general obligation bonds without voter approval. The bill also authorizes refinancing of short-term debt to stretch out repayment as far as 35 years. It would also allow for an increase in the sales tax along with statewide property-tax assessments in the event the debt service on the bonds cannot be repaid with general budget revenues.

The legislation has already cleared the Assembly but stalled in the Senate, where Senate President Steve Sweeney (D-Gloucester) has voiced several concerns, including how the new debt would be paid off. Sweeney suggested earlier this week that he was working to negotiate a deal on borrowing with Murphy and Assembly Speaker Craig Coughlin (D-Gloucester), but those talks had yet to result in a breakthrough on Tuesday.

Several Republicans have already threatened court challenges to block the borrowing initiative in the event that Murphy and the legislative leaders reach a deal on it. The Republicans have pointed to language in the state Constitution that strictly limits the use of funds generated by state bonds. A recent opinion on state borrowing restrictions drafted by legal counsel for the nonpartisan Office of Legislative Counsel also questioned the constitutionality of balancing future budgets with revenue raised from bond sales.

Meanwhile, a report published this week by the Center on Budget and Policy Priorities, a think tank based in Washington, D.C., also raised concerns about states using borrowing to offset sagging revenues during the pandemic, suggesting it would only push their fiscal problems further into the future. The report instead made the case for the federal government to provide more aid to states to ease their budget woes.

“Even for a state not constrained by its constitution, it would be risky to borrow for long periods to cover budget gaps, which could set the state up for even deeper financial problems down the road,” the center’s report said.

“No one knows how long the recovery from this recession will last or when a natural disaster might strike; states could find themselves in new fiscal straits before paying off the debt incurred during this recession,” the report went on to say.

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