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Credit-ratings agencies will be looking closely at how New Jersey proceeds
“The devil will be in the details,” a veteran credit analyst said of the state’s move to extend the 2020 fiscal year to Sept. 30.
On top of a health crisis, many states are also facing serious budget challenges as revenues plunge during the ongoing novel coronavirus pandemic. But New Jersey appears to be the only one in the country that is proposing to extend its fiscal year to serve as a relief valve.
That almost unprecedented step was announced jointly last week by Gov. Phil Murphy and legislative leaders, and now the hard work has begun to sort out exactly how to go about adding three more months to the state’s budget year, which typically lasts from July 1 to June 30.
A draft of the extension legislation is not ready yet, and may not be for several days, even though the bill is also intended to serve the dual purpose of officially delaying New Jersey’s state income-tax filing deadline from April 15 to July 15. That’s another major move that was announced by Murphy and lawmakers last week in response to the ongoing pandemic.
Wall Street analysts signaled New Jersey’s next moves will be closely watched by their credit-rating agencies, with one calling a move to change the state fiscal year “unusual.”
The move to extend the state fiscal year to Sept. 30 is intended to provide invaluable time for state budget officials to assess the damage the pandemic is causing to the New Jersey economy. It should also help policymakers set the best course for the state going forward. But it won’t wipe away some of the significant fiscal challenges that New Jersey was already facing even before the onset of the pandemic, including managing the state’s grossly underfunded public-worker pension system.
For example, what will happen to the plan that Murphy and lawmakers have been following in recent years to ramp up pension funding? That question will be among the key ones that major Wall Street credit-rating agencies and others in the public-finance community will be watching closely as the bill to extend the fiscal year is drafted and debated by lawmakers in the coming days or weeks.
‘Devil in the details’
“The devil will be in the details,” said David Hitchcock, a veteran S&P Global Ratings credit analyst, during an interview Friday as he discussed how states are managing their fiscal challenges amid the coronavirus pandemic.
Not every state operates under the same July 1 to June 30 fiscal-year calendar that New Jersey uses, but for those that do, April income-tax payments typically play a major role in ensuring the budget stays in balance by the time the fiscal year closes. Many state constitutions, including New Jersey’s, forbid the carrying forward of any deficits, making it difficult to significantly delay the April filing deadline, as New Jersey is now planning to do.
Also making matters worse for New Jersey compared to other states is its decision to not fully build up budget reserves during the strong economic times that followed the 2007-2009 Great Recession. The fiscal year 2020 spending plan that Murphy signed into law late last June included $1.3 billion in total budget reserves, a relatively small share of the state’s nearly $40 billion budget. A recent state-by-state analysis released by The Pew Charitable Trusts indicated New Jersey had enough funding in its reserves to cover operations for about 16 days, while the 50-state median was closer to 50 days.
New Jersey has also been feeling the effects of the coronavirus pandemic — and deep economic upheaval being caused by it — earlier than most other states, said Senate Budget and Appropriations Committee Chairman Paul Sarlo (D-Bergen). Murphy, a first-term Democrat, declared a state of emergency and ordered strict social-distancing measures last month that have shut down businesses deemed as nonessential and restricted most other non-emergency activities.
“I don’t think these (other) states have been hit as hard yet as we’ve been,” Sarlo said in an interview.
Less wiggle room than for other states
Some states can pass what’s known as a continuing resolution that can help provide more budget flexibility, including when fiscal challenges arise. But New Jersey works under more restrictive rules, according to Baye Larson, a senior credit analyst with Moody’s Investors Service.
“New Jersey does not have that option,” she said.
Many states also operate under a biennial budget, which can also provide them with more flexibility than the states that operate year-to-year like New Jersey, said Marcy Block, a lead credit analyst for Fitch Ratings.
“It’s a little bit easier for them right now,” Block said of the states that use a biennial budget.
To manage fluctuations in cash flow during a normal fiscal year, states like New Jersey typically take on low-cost, short-term borrowing commitments. But many states, including New Jersey, cannot float such borrowing beyond the close of their fiscal year due to constitutional restrictions.
Deciding to change a fiscal year altogether is “unusual,” said Hitchcock, before adding “very occasionally it has happened.”
The legislation proposed under the deal Murphy and legislative leaders struck last week to extend both the fiscal year and the state’s income-tax filing deadline is still being drafted, Sarlo said.
The goal is to get the measure enacted before the April 15 tax deadline, he said. But the veteran senator conceded there could be some delay as many legislative aides and other staff are working remotely amid the pandemic. Any delay that lasts beyond April 15 would force the Murphy administration to take some sort of executive action to ensure that tax payments to the state can still be put off, or at least to make sure no penalties or interest will be charged to those who wait until July 15 to file.
What also remains to be seen is whether the state will face any technical issues — related to things like reporting or accounting — that could slow down or even derail the plan to add three months to the end of FY2020.
“There’s the chance that this becomes more complicated than they currently expect,” Larson said.
Also in question are the state’s revenue collections even after extending the fiscal year. Block suggested that forecasting revenue for the planned nine-month budget for FY2021, and even for all FY2022, could be a challenge.
The state should get at least some help from the income-tax payments that typically come in before the April 15 deadline but would now be collected by mid-July because all those payments are tied to the 2019 calendar year, when the economy was still firing on all cylinders. In fact, the official FY2020 revenue forecast for income tax — which is the state’s largest single source of tax revenue — was upgraded in late February, with $308 million added to the original projection of $16.5 billion.
But this year’s income-tax withholdings are likely taking a hit, as are the sales and business taxes, the other large sources of revenue for the state.
Because of the pandemic, New Jersey has already frozen nearly $1 billion in FY2020 spending. The Murphy administration is also hoping to help ease the budget squeeze by using at least some portion of the significant federal aid the state is in line to receive from the $2 trillion stimulus bill that was enacted by President Donald Trump.
New Jersey made a significant quarterly pension contribution at the end of March, and the Murphy administration appears committed to making the next quarterly payment at the end of June. But it’s unclear what will happen in the future since the long-term revenue outlook is uncertain.
“The goal should always be to try and make your pension payments,” Sarlo said. “Whether that is possible or not will all depend on actual revenues for the current fiscal year, and the projections for the next year.”
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