NJ Proposes Massive Budget Cuts To Weather COVID-19 Crisis

NEW JERSEY - He warned us for weeks it is coming, and now, the major budget cuts Gov. Phil Murphy has been discussing in his daily COVID-19 briefing are laid out in a new plan released Friday by the Treasury Department.

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The Department of the Treasury delivered a budget update to the Legislature today, providing a detailed revenue report that illustrates the devastating impact COVID-19 has had on New Jersey’s finances and laying out plans to close the looming gap for the remainder of the extended fiscal year through a series of deep cuts and spending deferrals.

“This report is designed to serve as a road map to help New Jersey begin to navigate what is essentially uncharted territory. We are not alone. All across the country, states are facing similar challenges that seemed inconceivable just a few short months ago,” said State Treasurer Elizabeth Maher Muoio. “As a state, we had made great strides over the last two years to improve our fiscal condition. However, the global pandemic sparked by COVID-19 has halted this progress in its tracks.”

Based on a wide variety of economic assumptions, the State of New Jersey is potentially facing a combined revenue shortfall of nearly $10 billion over the remaining months of Fiscal Year 2020 and through the end of Fiscal Year 2021 – a potential decline that would be worse than the Great Recession.

The report provides the most detailed account to date of the significant shortfalls expected among the major tax revenues:

Gross Income Tax (GIT)

• FY 2020 revenues are projected to be $910.9 million, or 5.4 percent, lower than Governor’s Budget Message (GBM) forecast.
• FY 2021 collections are projected to be $3.955 billion, or 22.2 percent lower than GBM.

Sales and Use Tax

• FY 2020 revenues are projected to be $1.131 billion, or 10.9 percent, lower than GBM forecast.
• FY 2021 revenues are projected to be $1.528 billion, or 14.2 percent, lower than GBM.

Corporation Business Tax (CBT)

• FY 2020 revenues are projected to be $451.9 million, or 11.6 percent, lower than GBM forecast.
• FY 2021 revenues are projected to be $1.228 billion, or 32 percent lower than GBM.

Since his first budget proposal, Murphy has made building the state’s surplus reserves and rainy day fund a priority, officials said. While still not comparable to many other states, New Jersey’s reserves had increased to roughly three times the size inherited from the previous administration, helping to bridge the gap while uncertainty swirls around the prospect of additional federal funding

Murphy said that part of the reason he was elected was to restore fiscal sanity and fairness to New Jersey, noting the progress and plans his administration has made in that regard.

"But I'll repeat the phrase from the immortal philosopher Mike Tyson, everyone has a plan until you get punched in the face," he said.

So now the sizeable surplus and rainy day fund will be easily depleted and the administrations is focused on a proposed path through the extended fiscal year, which will now end three months later than normal, on Sept. 30.

Under Murphy's orders, the Department of the Treasury has taken a number of initial steps to ensure the state remained in a solvent financial position, including:

• Review of state spending across all branches of government and placement of approximately $1 billion of available appropriations into reserve.
• Transfer of the entire $421 million Surplus Revenue Fund, also known as the Rainy Day Fund, to the undesignated General Fund balance to help offset the anticipated shortfall; in addition, the planned deposit on June 30, 2020 will not be made.
• Implementation of a statewide hiring freeze with the exception of COVID-19 related needs.
• Ongoing review and approval by the Office of Management and Budget of department spending and contracting.
• Cancelling and reserving of pre-encumbrances, which will result in deferral or elimination of planned department spending.

Additionally, to help offset the anticipated billions in lost revenue, the administration is proposing significant cuts across nearly all sectors of government. The report proposes decreasing planned spending by over $5 billion, including:

• $1.3 billion in proposed deappropriations;
• $3.2 billion in cut or delayed first quarter appropriations; and
• Withdrawal of $849.7 million in proposed spending priorities put forth by the Governor in February.

Based on the size of the looming shortfall for the upcoming fiscal year, the report notes that without new resources, including the ability to access borrowing facilities or additional federal funding, significant additional cuts will be needed for FY 2021.

"Our hope is by then we will have a handle on what federal assistance we can depend on receiving," Muoi said. "And we will also have a better handle on how the state revenue situation is looking since we extended the tax filing deadline from April 15 to July 15 to help provide some relief for taxpayers."

Regardless of what the numbers show, Muoi said New Jersey needs a multi-faceted approach and it is going to require some tough decisions.

"Like many taxpayers, we, as a state have been living paycheck to paycheck for far too long" she said. "Just like it will be for many New Jerseyans our road ahead is going to require a combination of serious budget tightening, critically needed borrowing and federal assistance. Much more robust federal assistance."

Shortly prior to the onset of the pandemic, Governor Murphy had unveiled his proposed budget for Fiscal Year 2021, a spending plan that officials said:

• Continued to build on the fiscal responsibility of his previous two budgets
• Proposed another record payment into the pension system
• Significantly increased the state surplus
• Made a second consecutive deposit into the rainy day fund, the first time that has been done in more than a decade
• Made record investments in public education and NJ TRANSIT
• Reduced the state’s historical reliance on fiscal gimmicks such as one-shots and diversions

Much of that proposal has been rendered obsolete without additional federal funding and the ability to access.

"Our economic analysts, like analysts around the country, have been working around the clock to try to gauge the short and long term impact of this crisis," she said. "Based on a number of economic assumptions, we are now a New Jersey potentially facing a shortfall of nearly $10 billion dollars through the end of fiscal year 2021. That is a jaw-dropping figure."

Murphy himself described the looming economic crisis as an abyss that New Jersey must work to back away from and Muoi noted while there are many moving parts, it is clear that a decline of this magnitude would be worse than the Great Recession.

"I have no doubt we'll get through this as we have many times before. Like the Governor says, we're certainly not going to be spiking any footballs anytime soon. But as he is also fond of saying, we'll get through this together," Muoi said. "At the end of the day, I have no doubt we'll position New Jersey firmly on the road to recovery."

The full, 29-page, report can be viewed online.

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