Former Sen. Steve Sweeney, who lost reelection in November, stressed his warnings are not meant as criticism of current or past gubernatorial administrations. (Edwin J. Torres/ Governor’s Office)
Former state Sen. Steve Sweeney and a cavalcade of state fiscal heavy hitters warned lawmakers against profligate spending amid record revenue, saying in a report released Wednesday that economic conditions could see the state’s voluminous cash reserves drained in the coming years.
The officials said during a press conference in the Statehouse in Trenton Wednesday that even if the state avoids new spending and commits to already announced programs, like Murphy’s proposed ANCHOR property tax relief program and a continued phase-in of state aid to school districts, New Jersey’s spending will likely outpace its revenue by between $10.5 billion and $20.5 billion through fiscal year 2027.
The report from Rowan University’s Steve Sweeney Center for Public Policy comes as officials from the Treasury and the Office of Legislative Services predict tax collections will remain swollen in fiscal year 2023, which begins July 1.
“We wanted to get this to the Legislature in advance of making some decisions this year that they might regret next year,” said Sweeney, who chairs the center. “It’s just to make sure we don’t screw things up, because we do too often.”
Sweeney, the longest-serving Senate president in New Jersey’s history who is widely expected to mount a run for governor in 2025, lost reelection in November in a stunning result that upended Trenton’s power structure. He launched the Sweeney Center in March, saying it would provide research for and find answers to some of the state’s most complex policy issues.
On Wednesday he repeatedly stressed the center’s report is not meant as criticism of current or past gubernatorial administrations.
His center’s warnings come as lawmakers have set their eyes on new and potentially costly tax relief measures. Assembly Speaker Craig Coughlin has called for New Jersey to enact the “largest tax relief program in state history.”
Three financial models
The center created three models showing the trajectory of the state’s finances through fiscal year 2027 under three sets of economic conditions.
Under a baseline scenario in which existing economic conditions like inflation, gas prices, supply chain issues, and expected interest rate hikes persist, the Sweeney Center predicts state revenue would begin to lag behind expenditures beginning in fiscal year 2024, forcing the state to begin spending down its surplus.
By the end of fiscal year 2027, it projects the nearly $12 billion in excess revenue Treasury officials expect to amass by the end of the coming fiscal year would be drained to just $789,878, the reserves dropping by an average of about $3.5 billion in fiscal years 2025, 2026 and 2027.
“In the short-run, because we have so much surplus, it looks like we’re OK, but if you run some different revenue scenarios, that would suggest when you get out further you’re not so good. So beware, everybody. That’s what this report is really saying,” said Richard Keevey, a Rutgers University senior policy fellow who has served as budget director for administrations of both parties.
The center’s analysis is based on a “current services budget,” which assumes lawmakers start no new programs and increase spending only on existing funding commitments, like state school aid and expenses currently paid for by federal aid that will lapse in the coming years.
Lawmakers are expected to appropriate some portion of the state’s excess revenue, meaning the state won’t build a $12 billion surplus. Sen. Paul Sarlo (D-Bergen), the chamber’s budget chair, has previously said he would like to see the state’s surplus increased to between $7 and $8 billion, levels Treasury officials have called reasonable.
The budget address Gov. Phil Murphy delivered in March called for a $4.2 billion surplus, but that speech was made before two rounds of rosy revenue projections.
The center’s second and most pessimistic forecast, which assumes economic conditions push the state into a recession in 2023, predicts even larger shortfalls. Under this model, New Jersey would drain its surplus midway through the 2026 fiscal year, and by the end of fiscal year 2027, its surplus would be $9.1 billion in the red.
Only under its optimistic model, which center officials said is the unlikeliest of the three, would New Jersey be able to maintain and even increase its spending without dipping into its reserves.
The center intends to release a second report, this one containing policy recommendations, in January.
Budgeting best practices
The center’s report is an exercise in multi-year budgeting, a practice that proponents say gives lawmakers a clearer view of how contemporary programs will affect New Jersey’s finances in the long run.
“The consequences are right there on paper, so it also has a chance to stop short those politically convenient maneuvers that tend to dominate when we do a budget year-by-year, what I call whack-a-mole style,” said Sheila Reynertson, a senior policy analyst at progressive think tank New Jersey Policy Perspective and a member of the center’s working group.
The system could help lawmakers avoid starting programs only to be forced to shut them down in subsequent years.
New Jersey is no stranger to that cycle, and lawmakers have often been forced to cut politically popular programs to make up for revenue shortfalls, as has happened to tax rebate programs during past economic downturns.
Sweeney offered a hypothetical situation of a lawmaker promoting $10 million for autism research, only to find six months later that revenue is lower than expected.
“Guess what? I’m not spending $10 million. I’m spending $5 million, but I told you, the public, I’m spending 10,” Sweeney said. “This is a more honest, more predictive way of presenting the budget, and for my former colleagues, I wish I had this.”
Multi-year budgeting can also provide legislators with a more accurate view of the state’s finances than a single-year budget because a multi-year plan reduces the impact of revenue volatility that can upend traditional budgets, said Charles Steindel, a former vice president of the Federal Reserve Bank of New York.
The panel also suggested the state adopt consensus forecasting, which would bring Treasury and Office of Legislative Services together for a single set of revenue projections. Under New Jersey’s constitution, the governor has the sole power to certify the state’s revenue.
Lawmakers passed a bill that would have enacted consensus forecasting, along with other changes to budgeting practices, but it was vetoed by former Gov. Chris Christie and never reached Gov. Phil Murphy’s desk.
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