Big Reports and Big Numbers That Frame the Governor’s Upcoming Budget Message
Now we know, at least now we know more than we knew before. In the last few weeks, five reports have been issued which clarify trends in the state’s financial condition, but raise important questions, not all of which will be answered in the governor’s upcoming budget message. Most of the new information comes from the administration itself, with the Office of Legislative Services (OLS) and Rutgers chipping in.
The Last Word on FY 2012: FY 2013 Gets a Smaller Surplus to Work With
For insiders, the release of the Consolidated Annual Financial Report (CAFR) is a big event. CAFR closes the books on Fiscal Year 2012 by comparing actual revenue and spending for the fiscal year to the budgeted amounts. The real nugget in the CAFR, however, is the actual surplus produced when all the spending is subtracted from all the income because of its impact on the current budget.
This year, New Jersey ended FY 2012 with a surplus of $447 million – $123 million less than the $570 million the FY 2013 budget counts on. In other words, this cuts the revenues available for the current fiscal year by $123 million.
The CAFR confirms that revenues from the major taxes were short by $275 million, or $21 million more than OLS projected in September. Other revenues were $43 million lower than the administration’s May estimates, for a total revenue shortfall of $318 million. However, spending also came in lower, at $195 million less than appropriated, thereby producing the $123 million cut to the surplus.
When compared to the revenues certified for FY 2012 when the budget was adopted in June 2011 – not the May estimates – revenues from the major taxes were $564 million short. Tax collections grew by 2.8 percent in 2012, significantly below the 5.1 percent growth certified in the budget.
Here are some issues raised by a close reading the CAFR:
First, when ten months of a fiscal year have lapsed, any administration should have a pretty accurate bead on how the year will end. In the five years that OLS has tracked administration revenue projections late in the fiscal year, this is the first time that actual collections were lower than estimated – and by $275 million. Given the trend in the prior three months of much lower-than-projected collections and the magnitude of the misestimate, this suggests that either the administration lacks the competence to make realistic projections or it is reluctant to acknowledge that collections are falling significantly short of projections (particularly during the height of the budget-making season).
Second, the intensity and frequency of attacks on the probity and competence of OLS by the administration is undeserved. Since July, the administration challenged the accuracy of OLS reporting and impugned the integrity of the OLS staff. Ironically, the OLS projections were based on the administration’s own numbers.
Third, in certifying the 2012 surplus when signing the 2013 budget, the governor would have, presumably, had the best and latest information on both revenues and spending. Without a detailed listing from the administration on the nearly $200 million in reduced spending against the final budget,, there is no way to measure the impact on the FY 2013 budget. For example, if any of the under-spending was achieved by delaying payments past the June 30 end of the 2012 fiscal year or by shifting liabilities from 2012 to 2013, then the real surplus is effectively reduced. Yes, 2012 looks better than projected, but 2013 starts with unspecified higher costs.
Finally, with the FY 2012 budget put to bed, the administration’s confidence in its projections and disparagement of those with differing views is noteworthy. Based on CAFR’s confirmation that revenues were off by $318 million in FY 2012 and so far in FY 2013 revenue collections are off by over $400 million, one wonders if the governor would restate or retract his July statement:
“I think January will be an important month to look at, but we’ll see what happens in June. I’m relatively optimistic. But, you know, they said we’re not going to hit our numbers in June. If we hit our numbers in June, maybe it’s time for them to shut up.”
December Revenues Were High, but Year-to-Date Growth Remains Sluggish
December’s revenue collections were slightly above the administration’s projections for the month and the year-to-date collections are still $426 million (4.1 percent) below its projections. If this trend continues through June, the revenue shortfall would exceed $1 billion for the fiscal year – on top of the $123 million shortfall in the 2012 surplus.
Revenue for FY 2013 is now 1.5 percent above last year; the adopted budget assumed 8.4 percent. To achieve the numbers certified in the budget act, revenues would have to grow 12.5 percent for the next six months – an achievement that is highly unlikely.
Do the Latest Bond Statements Tell the Whole Story?
Offering statements are what bond issuers must prepare before selling their bonds. New Jersey is the first state that signed a deal with the Securities and Exchange Commission promising to be more complete and forthcoming in its offering statements. Offering statements are reviewed by lawyers, not campaign managers.
The Economic Development Authority’s January 15 Offering Statement for School Construction Bonds updates information on the state’s fiscal situation from earlier statements. Here’s a summary:
• The FY 2012 CAFR is cited to report that the state ended the year with $123 million less in surplus than the amount anticipated when the FY 2013 budget was signed in June. In previous disclosures the state had simply stated that the FY 2012 closing surplus was anticipated to be “significantly less.”
• The supplement acknowledges that the state collected $426 million less than the administration estimated for the first six months of the year (see above) and identified areas where expenditures may be higher than budgeted (no amounts were offered on the spending side).
• These spending and revenue estimates are subject to revision when the governor presents his FY 2014 budget message.
• No mention is made of the year-end consequences if recent spending and revenue continue through June. Potential bond buyers might want to know that a straight-line projection from the first six months through the end of the fiscal year would put the state about $1 billion in the hole.
What is not revealed to bond buyers is well known in the treasurer’s office. With less than six weeks before the budget message, the administration has a very good idea of the range and magnitude of potential revenue shortfalls for FY 2013. Moreover, it has a good bead on spending in the first half of the fiscal year compared to budgeted levels. In fact, the administration probably has laid out scenarios about the size of potential shortfalls and what to do about them. It is obvious that revenue and spending projections for FY 2014 are built on expectations for the current year.
All this leads to this question: Has the administration provided prospective bond buyers and rating agencies complete and timely information on New Jersey’s fiscal health?
Rutgers: If Feds Deliver the Aid, Sandy’s Economic Impact Will be a Wash
Since Superstorm Sandy devastated so much of New Jersey in late October, there has been much speculation about her economic impact on the state this year and beyond. The first stab at an answer comes from the most recent Rutgers Regional Report.
The bottom line: assuming the federal government comes through with its relief and rebuilding aid, Sandy’s impact will be but a rounding error in the state’s budgets in this and the next three years.
The net impact through four years of budgets, including 2013, is a revenue loss of about $13 million compared to projections absent the storm. Since the state will spend somewhere around $135 billion over the same time period, Sandy has about the same effect a two-inch rainstorm has on the total water volume of the Atlantic Ocean.
However, the report notes that if the feds fail to deliver on the legislated aid, this year’s budget would suffer most of the $140 million hit to revenues.
The report may limit the administration’s reliance on Sandy rebuilding as a source of a revenue surge in next year’s budget. Since so little is known yet about the timing and targeting of federal assistance any projections or modeling is dicey at best. With such uncertainty, the administration would be wise not to lean on Sandy aid to build a case for aggressive revenue forecasts.
New Jersey’s Debt is Rising Faster Than the Nation’s
In Fiscal Year 2012, New Jersey’s overall debt load increased by about $6 billion, or 9.2 percent, to $71 billion. The federal debt level, the subject of so much breathless concern, rose by about 7 percent.
The annual debt report includes both bonded debt, which increased by about $300 million and now stands at $34 billion; and, unfunded obligations for retiree benefits and pensions, which shot up by $5.2 billion to $32.3 billion, a one-year rise of 16 percent. These amounts do not represent the entire pension and post-employment benefits obligation, but those that are not covered sufficiently by assets in the pension funds (retiree health benefits are on a pay-as-you-go basis).
The other component ($4.8 billion) is mostly explained by the 2002 borrowing by the state against future payments from the Tobacco Settlement to balance the FY2004 budget.
This report confirms that New Jersey is deep in hock, a fact that will impact future budgets, particularly for repaying bonds and paying for retiree health benefits, both of which will rise significantly in coming years.