COVID-19 forced the governor and lawmakers to rewrite the budget playbook. Here’s what they did

This story was written and produced by NJ Spotlight. It is being republished under a special NJ News Commons content-sharing agreement related to COVID-19 coverage. To read more, visit njspotlight.com.

Gov. Phil Murphy is getting ready to sign a $32.7 billion spending plan into law this week, officially closing the books on a tumultuous budget-approval process that was delayed by a deadly pandemic and detoured through New Jersey’s Supreme Court.

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Among the unusual events that played out this year amid the coronavirus health crisis was the collection of state income-tax payments in July instead of by the typical mid-April deadline.

The income tax is the largest source of tax revenue for the budget, and delaying the deadline for several months for public health purposes upset the entire budget-making process.

Public hearings on a new state budget were also put on hold due to the pandemic, and then only partially rescheduled, triggering concerns about transparency and public oversight as the effects of the health crisis lingered into the fall.

An odd year for the state budget

Here’s a recap of some of the other things done in response to the pandemic, which turned this year into one of the oddest in recent memory when it comes to the state budget.

Extended fiscal year: One of the first things that Murphy and lawmakers decided to do in the early months of the pandemic was to add three months onto the end of the state’s traditional, 12-month fiscal year. New Jersey was the only state in the nation that took this step, but it helped to ease a significant cashflow crunch created by the extension of the state income-tax payment deadline. It also required the adoption of a three-month stopgap spending bill to fund state operations in July, August and September, another first for the state.

The $32.7 billion budget Murphy is preparing to sign into law this week will cover all planned spending between Oct. 1 through June 30, 2021, for a nine-month fiscal “year” 2021.

Court-sanctioned deficit spending: At one point during the pandemic, the Murphy administration was projecting the crisis could trigger revenue losses as large as $10 billion through the middle of next year. While that figure has been whittled down as stay-at-home orders have been lifted, the administration is still projecting a wide gap between expected revenues and planned spending.

To help fill the gap, Murphy and lawmakers contended the pandemic qualified as the type of major emergency that the state Constitution allows as an exception to otherwise tight limits on borrowing and deficit spending. The state’s highest court signed off in August after Republicans challenged an emergency borrowing law enacted by Murphy weeks earlier. The nine-month budget relies on $4.5 billion in borrowed money to align spending with revenues.

Written testimony only: Murphy actually proposed a budget plan for a full 2021 fiscal year in late February, a few weeks before the state reported its first COVID-19 infection. Public hearings began throughout the state, but they were called off and Murphy ended up pulling back his 12-month budget plan for FY2021 following the three-month extension of fiscal year 2020.

After Murphy proposed a nine-month budget in late August, lawmakers decided they would not hold any hearings to take public testimony amid the pandemic. Instead, they accepted only written testimony, and just until a Sept. 11 deadline. In response, a coalition of unions and other interest groups decided to hold its own “virtual” public hearing for testimony on the budget using videoconferencing software.

Padding reserves and pension funding: New Jersey has one of the worst credit ratings among U.S. states, and the nine-month budget — backstopped by the borrowed money — addresses two areas that credit analysts often flag as big concerns. For starters, the budget calls for a $2.5 billion budget surplus, which would be the largest in over a decade. New Jersey has for years been operating with only modest reserves compared to overall spending, and having a larger surplus at the onset of the pandemic would likely have obviated the need for new debt to be issued to help offset revenue losses.

New Jersey also has a long history of not fully funding what actuaries would consider to be a full state pension contribution in the annual budget, and that has helped make the state’s public-worker pension system one of the nation’s worst-funded state retirement funds. This year, the budget calls for a record-setting, $4.7 billion state pension contribution.

Credit-rating concerns: Despite the significant resources being devoted to the surplus and pension payment, New Jersey may still get another credit-rating downgrade. Earlier this year, all three major Wall Street rating firms were already listing the state’s credit outlook as “negative,” and the new borrowing to fund deficit spending may raise even more concerns about a widening structural budget deficit among analysts and investors.

In all, some 15% of annual spending will likely be scored by analysts as being funded by one-time revenue sources, which would be the highest amount in over a decade. Moreover, while a series of tax hikes are baked into the nine-month budget, a big share of the new revenue will be needed to cover a new tax-relief program the governor and lawmakers are promising to fund in next year’s budget, on the eve of the 2021 gubernatorial election.

To read the article in the original format, click: No public testimony. Court-sanctioned deficit spending. NJ budget like no other