Extensive And Expensive: Coming To Terms With NJ's Fiscal Challenges

First report in a new series takes a nonpartisan approach to fixing the state’s financial faults, from cutting back on retiree benefits to boosting the sales tax.

From a huge unfunded obligation to retired employees to the lack of a substantial rainy-day account in the annual budget, a new report on New Jersey’s renowned fiscal challenges lays out in stark detail just how strained the state’s finances will be when a new governor and Legislature are sworn into office early next year.

The report prepared by the Fund for New Jersey, a philanthropic organization that encourages informed policymaking (and a funder of NJ Spotlight), proposes a number of tough-to-swallow, but balanced policy changes to address the state’s biggest fiscal problems. They include reducing spending on retiree healthcare by providing less generous health benefits, and boosting revenue collections by increasing taxes like the state income and sales taxes.

The 17-page fiscal review also makes the case that delaying action on these problems threatens the good schools, transportation, and clean air and water that many New Jersey residents take for granted.

“This is much more than bond ratings and budget deliberations,” said Feather Houstoun, a fund trustee who helped present the organization’s report in Trenton yesterday.

“It’s really about New Jersey’s ability to make public investments,” said Houstoun, a former state treasurer under Gov. Tom Kean.

NJ at the Crossroads

The fiscal report is the first in a “Crossroads NJ” series that the fund is planning to release during the 2017 election year, which will see both the governor’s office and all 120 state legislative seats up for grabs in November. It was released as lawmakers in the Senate and Assembly are expected to give final approval today to the next state budget, a proposed $34.7 billion spending plan that would go into effect on July 1 if Gov. Chris Christie signs off on it.

But the goal of the report, the fund’s representatives said yesterday, is really to kick off a discussion that will unfold in New Jersey over the next several months as the candidates for governor and the Legislature start to debate the state’s major issues.

“We are not suggesting that those are the only options, the only ways to solve the state’s fiscal problems,” said Deborah Poritz, a former chief justice of the New Jersey Supreme Court who chairs the fund’s board of trustees.

“Our point is to encourage debate, to make sure that debate is robust (and) looks at all of the options,” she said.

With a funded ratio of just 45 percent, New Jersey’s public-employee pension system takes center stage in the fiscal report, which highlights some estimates that put the system’s unfunded liability at close to $136 billion. The pension system was also ranked in a recent Bloomberg analysis of state-run retirement accounts as the nation’s worst funded.

In an effort to help improve that predicament, Christie, a second-term Republican, has been working with Democratic lawmakers in recent weeks to enact a complicated piece of legislation that would turn the state Lottery into an asset of the pension system. But enacting that change would still leave the funded ratio at 65 percent, according to estimates from the Department of Treasury.

Propping up retirement system

The proposed 2018 fiscal year budget that lawmakers are expected to approve today also includes $1.5 billion to put into the pension system, with the Lottery projected to add another $1 billion. Those two revenue streams, however, are still far below the $5 billion that actuaries say the state should be contributing this year to help keep the retirement system solvent.

To help free up more revenue to devote to the pension obligation, the report estimates $1.4 billion could be saved by offering retirees healthcare plans at what the federal government considers a “gold” level rather than “platinum.”

Other recommendations include reversing most of the phased-in tax cuts that were enacted last year in a bipartisan deal between Christie and Democratic legislative leaders, including a phase out of the estate tax and a decrease in the sales tax. And once those cuts are undone, the sales tax could be increased from 7 percent to 8 percent, while total revenue from the income tax could be hiked by 10 percent, though the report didn’t specify the exact method that could be used to do so.

The report also recommends expanding the number of services that would be subject to the state’s sales tax, such as investment counseling and interior decorating, changes that could make the tax policies both more productive and equitable. It also suggests changing tax regulations that apply to multistate corporations to more accurately capture revenue from sales that occur in New Jersey, and legalizing and taxing marijuana for recreational use. Both of those things are currently under consideration in the Legislature, but not expected to win Christie’s approval before he leaves office in early 2018.

$5 billion bump

Taken together, the fiscal policy changes proposed in the report could produce “somewhere in the area of about $5 billion” in annual revenue, said fund trustee Henry Coleman, who is a professor at Rutgers University’s Bloustein School of Planning and Public Policy specializing in state and local public finance.

“What’s needed is a blended, multipronged approach,” Coleman said.

The increased revenue could also help the state address another major financial problem, which is the lack of a significant surplus account or rainy-day fund. Those reserves are typically used to cushion against any major fluctuations in tax collections, especially when recessions take hold and abruptly impact revenues. But in recent years, the state’s budget surplus has represented just a fraction of total spending. The fiscal year 2018 spending bill that lawmakers are expected to approve today would leave $412 million in surplus, which is just over 1 percent of total spending.

The report calls for a “review of best practices in other states and a review of New Jersey’s provisions regarding the level of reserves to be maintained and the conditions under which they can be drawn down.” It also recommends that the state publish an annual report detailing tax expenditures like the incentives provided through the state Economic Development Authority to get a better sense of how they are impacting state finances. The size of the EDA incentives has increased dramatically during Christie’s two terms in office, and a recent state audit raised some questions about the state’s oversight of the incentive programs.

And while the fund’s report didn’t touch directly on the issue of New Jersey’s sky-high property taxes, both Coleman and Houstoun suggested that addressing the state’s fiscal problems could help ease the pressure on local governments who right now rely heavily on state aid to help pay for schools, roads, and other services.

“The state would be in a better set of circumstances to help out these local jurisdictions that are in need,” Coleman said.

The other reports that the fund is planning to release later this year will cover the issues of climate and the environment; criminal justice; education; housing and land use; jobs and the economy; and transportation.

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