In the first independent analyses of the recently enacted FY 2014 budget, Moody’s Investor’s Services and Fitch Ratings Service say New Jersey’s economy is slowly improving; there are significant risks in the budget; and the state continues to rely too heavily on one-shot revenues. The analysts at both agencies have maintained New Jersey’s current credit rating and “stable” outlook. (The agency reports are in response to the state’s $849.2 million offering of new Transportation Trust Fund bonds.)
Some key points included in the reports include:
• The budget’s assumption of 5.2 percent revenue growth is reasonable, but may still be optimistic due to a possible underestimation of the one-time boost in income tax collections for FY 2013 (caused by taxpayers accelerating income into calendar 2012 to avoid higher taxes). The state estimates that only 1.5 percent (about $200 million) of last year’s income tax growth was attributed to the this change.
• The budget’s $166 million increase in casino revenues, primarily due to implementation of internet gaming, is aggressive (however, these revenues only account for 0.5% of the total budget).
• Other budget risks: Potential for higher-than-expected woodwork effects and other cost increases associated with Affordable Care Act; nearly $340 million of disputed Medicaid reimbursements; the need for federal approval of $83 million in matching funds for a new hospital funding mechanism; and continued legal dispute over the $166 million transfer from uncommitted municipal housing funds.
• The budget surplus of only $300 million (0.9 percent of revenues) provides minimal liquidity and protection against contingencies; the 50-state median surplus is five times higher than New Jersey’s, at approximately 5 percent of revenues.
• The budget relies too heavily on non-recurring revenues ¬($1.2 billion this year) when most states have eliminated this practice and continues to be structurally unbalanced, reflecting continued weak financial performance, slow economic recovery and the pressure of rapidly rising pension costs.
• Fully funding the legislated pension contribution moves state closer to sound pension management but also allows continued growth in the unfunded liability.
• New Jersey’s pension liability remains among the highest in the nation (now 56.7 percent funded, down from 60.8 percent). The adjusted net pension liability based on FY 2011 data was 137 percent of revenues, fourth highest in the country (the state median is 45 percent).
• Pension reform initiatives provide little short-term relief but will provide long-term benefits. By 2041 pensions will be 84 percent funded, compared to 50 percent if reform had not been enacted; the annual required contribution is projected to be $5.5 billion rather than $13 billion.
• Meeting the increases in pension contributions will continue to be a challenge and could conflict with other long-term demands such as property tax relief, school funding and infrastructure.
• New Jersey’s job growth has improved relative to the nation and has outpaced the U.S. since April.
• Still, the state has been slow to regain jobs, recovering only 53 percent of the jobs lost during the recession.
• Growth in aggregate personal income will help income tax revenues; since New Jersey’s progressive income tax is so dependent on high-income people, personal income growth is a stronger indicator of future revenues than employment levels.
• Last year’s revenue collections were $538 million below the original budget projections.
• Annual cash flow borrowing occurred earlier in the fiscal year in FY 2013, and the period between repayment of old notes and new issuance was only six days.
• Health care savings – including increased employee contributions – have reduced the unfunded health care liability by about 2.5 billion, or 4 percent.
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