N.J. needs to borrow $5B to offset tax losses, Murphy says. Legislature takes up debate Monday.
The state Legislature on Monday will begin to consider Gov. Phil Murphy’s plan to borrow $5 billion to offset forecasted billions of dollars in tax losses.
Murphy’s been making the case for borrowing since the middle of April, warning of “historic” layoffs of state and local public workers if the state doesn’t get big a injection of cash through bonds or direct federal aid.
The state Assembly Budget Committee will hold a hearing on the proposal Monday morning and the full Assembly is scheduled to take up the COVID-19 Emergency Bond Act on Thursday. The Senate has not scheduled any action on the bill (A4175).
The leader of the Assembly, Speaker Craig Coughlin, D-Middlesex, has already expressed support for the legislation in light of the projected sharp reduction in tax collections in response to the coronavirus and mandated business closures ordered to slow the pandemic.
“The coronavirus pandemic represents the greatest public health and economic challenge we have faced since the Great Depression, nearly a century ago. Our residents face record unemployment, loss of business and difficulty in paying rents and mortgages. The middle class is struggling to make ends meet, "he said. “It’s an economic tsunami that requires an extraordinary action.”
“While not ideal, I will support the borrowing of necessary funds through bonding, provided the sacrifice is spread evenly and that proper Legislative oversight is included, to ensure our economic position is strengthened for both the present and future,” he added.
Senate President Stephen Sweeney, D-Gloucester, said the state should take a cautious approach to ensure it does not borrow more than it absolutely needs. He said he disagrees with provisions of the bill that allow the state to borrow on behalf of local governments, saying they can bond on their own and, in many cases, have higher credit ratings than the state.
“This money we’re going to use the next couple year’s budgets, we’re going to pay for for 35 years,” he said. “Phil Murphy didn’t create this crisis. I’m just cautious of how much money we borrow and how we borrow and the process of spending it.”
The state Treasurer has lowered the state’s projected tax collections through the end of next fiscal year in June 2021 by about $10 billion. Treasurer Elizabeth Muoio expects the state will record about $2.7 billion of those losses this year, and proposed to cut $1.3 billion in spending and tax the state’s meager reserves to close the gap.
While Murphy had anticipated revenues would total $41.2 billion between July 1, 2020, and June 30, 2021, his administration now estimates the state will bring in $34 billion, a difference of $7.2 billion. The new, $34 billion estimate is $4.7 billion lower than this year’s $38.7 billion budget.
Previously, Murphy had proposed about $1 billion in new and increased taxes in next year’s budget, including a higher marginal tax rate on income between $1 million and $5 million and taxes on opioid manufacturers and businesses whose employees are enrolled in Medicaid.
He also wanted to spends hundreds of millions of dollars more on K-12 public schools, make a record $4.9 billion contribution to the public worker pension fund and kickstart a tuition-free four-year college initiative.
The governor is not required to present a revised budget proposal until late August, and he’s offered no hints of his plans and whether he’ll pursue any tax changes or abandon any of these initiatives.
“Right now, we are watching revenues fall off the cliff with no assurance of additional federal aid in sight and uncertainty swirling around whether we’ll get legislative authorization to borrow,” Muoio said in May. “We’ve been faced with many tough decisions already, and unless we receive significantly more federal funding and the authorization to borrow, there will be many more more painful decisions ahead.”
Murphy began talking of plans to borrow in April after the Federal Reserve’s announcement that it would buy $500 billion in bonds from states and local governments. Under the Fed’s current parameters, the state would have to repay the central bank in full within three years. State officials have indicated they would refinance the bonds to repay them over a longer term.
“We don’t take any of this lightly,” he said. “But the fact of the matter is we are going to have serious cash flow challenges.”
If not, he said, “folks should assume we’re going to have to gut programs. And that will affect everybody in this entire state. There’s just no other way around it, and I hope it doesn’t come to that.”
Some state lawmakers are anxious about taking on more debt and raised concerns that New Jersey risks another credit rating downgrade.
New Jersey’s debt per capita is fourth highest among U.S. states, behind Connecticut, Massachusetts and Hawaii, according to the state’s annual debt report, which showed it had $44.4 billion in outstanding bonds as of June 30, 2019.
Moody’s Investors Service, the Wall Street rating house, lowered the Garden State’s credit outlook to “negative” as the coronavirus pummeled state finances and warned increased cash-flow borrowing may spur a credit downgrade, which could increase borrowing costs.
Michael Kanef, director of the state’s Office of Public Finance, told the Assembly Budget Committee on Thursday he expects the rating agencies will grant states leeway in managing the fiscal crisis.
“The rating agencies understand the sign and unexpected impact of COVID, not just on the state of New Jersey but on all of the states. They are not expecting a miracle," he said. "What they are expecting is appropriate fiscal prudence and sound fiscal management of the state in the face of the stress that we face, so that includes a combo of all the tools in the toolbox.
So it is about tightening the belt to the extent possible, it is about considering new revenues if there are opportunities that don’t unduly constrain the economy, and it is about judicious use of additional borrowing to the extent necessary during the crisis period.”
A former state assemblyman, Jack Ciattarelli seeking to unseat the governor next year has vowed to challenge any borrowing in court.
“For the sake of taxpayers and future generations of New Jerseyans, do not lazily repeat past mistakes that have left us financially ill-prepared to deal with the crisis at-hand. If you choose to press forward, I will file my complaint and see you in court.”
