As we move towards the end of the summer, here are five questions that the administration and legislature need to address in order to have healthier, better-informed discussions on the state’s fiscal health and any potential tax cuts.
1. What Do the Credit Rating Agencies Think About the Budget?
Each summer New Jersey’s treasurer meets with representatives from the three rating agencies (Standard and Poor’s, Moody’s and Fitch) to review the adopted FY 2013 budget and the state’s economic health. After the meetings, the agencies will each issue a report on New Jersey’s fiscal status and decide whether the state’s bond rating should be adjusted.
These analyses should be especially interesting since at least one – Moody’s – has already challenged the revenue estimates certified by the administration for the current year. Moody’s believes FY 2013 revenues will track FY 2012’s modest growth instead of spiking up, as the administration forecasts. The Office of Legislative Services (OLS) has warned that the state could face an additional $1.3 billion shortfall if Moody’s is correct.
It will also be interesting to see how the agencies react to the delayed implementation of any tax cuts. Will they see this as a sign of prudence and fiscal stability, or will the looming possibility of the cuts – and the $1.5 billion in lost revenue – sustain the agencies’ pessimism about New Jersey’s credit?
Whether the treasurer has yet made the trek to Manhattan or not, these credit rating reports will be a critical piece of the puzzle as the discussion on tax cuts and other fiscal issues move forward.
2. What Were Last Year’s Final Revenue Numbers?
Revenue estimates dominated the budget discussions this spring and early summer, but since the budget was adopted we’ve heard nothing about how revenues are faring. Since the administration has not issued a revenue report for either June or July, we still do not know if the numbers hit the administration’s target or fell short, as predicted by OLS.
OLS will likely release a report within the next month on the final FY 2012 revenues for the major taxes that OLS and the administration track on a monthly basis. Since the revenues collected during the month of July are split between two fiscal years, the administration’s monthly report does not produce the final number for FY 2012. One will have to await the year-end report that is published in December to know the administration’s official declaration of revenues and surplus.
The revenues from the major taxes that are reported monthly do not tell us if the FY 2012 target surplus of $570 million was met or not. Between $5 billion and $6 billion in other revenues need to be reported, and unspent funds from last year that will “lapse” into the surplus are also part of the calculation.
Although administrations generally know the size of the closing surplus by mid-September at the latest, this information is not shared with the public or the legislature until December’s financial statements are released.
The normal schedule needs to be tossed out this year. The public discussion between the administration and legislature should begin in September, with meetings of the budget committees with the treasurer and OLS. The focus should be on the FY 2012 revenue collections, the closing surplus – and their impact on this year’s budget.
3. How Are Revenues Performing This Year?
The revenues that the governor certified for this year’s budget were nearly $500 million above the OLS estimates, and – as noted earlier – the shortfall could be even larger.
The first “check point” for FY 2013 revenues should be in October, when the administration can report on the collections from the major taxes in the first quarter (ending in September).
The first quarter returns are critical to the tax-cut discussions. The legislature should call the treasurer back to meet with the two budget committees in October. Alternatively, the hearings could be delayed until mid-November when a full quarter of sales tax revenue will be available, and an additional month of income tax and corporate tax collection data are also available.
4. What Does the Structural Deficit Look Like?
What are the structural issues for the FY 2014 budget? In other words, – how much in revenue can reasonably be expected and what is the projection of spending growth to meet current program needs? This is what has historically been referenced as the “structural deficit.”
Discussing this issue is important since how the state deals with the structural deficit has an impact on the budget and future budgets. Solutions have historically been a mix of recurring fixes – reducing spending or increasing taxes – and one-time actions – deferring costs to the future, diverting funds from intended use, underfunding formula-driven programs such as school aid, and cutting aid to municipalities, colleges and universities. Since 1989 virtually every state budget has been balanced with some one-time actions – thus pushing decisions off to the future.
Administrations generally have estimates of the range and magnitude of the structural deficit by late September as the treasurer begins work on the upcoming budget. OLS typically prepares its estimate during the fall, if requested by a legislator.
The structural deficit calculation is particularly important this year since the proposed tax cuts are very modest in the current budget, but are multiplied in the 2014 and 2015 budgets. The legislature needs to show the same caution about distributing tax cuts from revenues that don’t exist in the near future as it showed this year with its conditional approval.
The legislature should request the administration to scope out the setting for the 2014 budget as well as provide updates on the current year.
5. Is a Tax Cut the Best Potential Use of $1.5 Billion?
If there is indeed money available to pay for a tax cut, the final question becomes: is that the best use of $1.5 billion over the next few years?
It’s certainly not the only option.
New Jersey has cut support for the operating budgets of public colleges and universities by 20 percent over the last six years of increasing enrollments and greater inflation, producing dramatic increases in tuition. Why not use available revenues to increase operating support in return for lower tuition increases?
A portion could also be used to fully fund the Supreme Court approved school aid formula, or to return revenues – Energy Tax Revenue and funds from the Consolidated Municipal Property Tax Relief Act – that have been taken from municipalities over the past decade.
The state could also look towards the future, and invest in creating centers of innovation and research in partnership with research universities and the private sector. When done in the 1980s after careful review by the Commission on Science and Technology, it produced dramatic returns in attracting talent and producing spinoff companies and patents.
There are other options for spending an additional $1.5 billion – if it is truly available.
If it is, the legislative leadership should propose a joint effort with the governor to seek the most productive uses of the “surplus.”
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