As the Governor Prepares Next Year’s Budget Message, This Year’s Budget Faces Another Shortfall

With two weeks before the governor details his budget plan for next year, problems continue to plague this year’s budget as it moves past the halfway point. Even as other states are outlining ways to spend newfound budget surpluses, New Jersey’s reliance on overly optimistic revenue projections means the state continues to face a budget shortfall – one that could be as large as $1.16 billion. And just because there’s no name-calling from the governor’s office this year about Office of Legislative Services’ revenue estimates does not mean that this year’s budget is in much better shape.

Although revenue is growing at the fastest rate since before the recession, tax collections remain over $330 million, or 3 percent, below the administration’s projections – a larger figure than this year’s projected surplus. Unlike last year, when the shortfall was getting smaller as the months progressed, in recent months this year’s shortfall has been growing. Since this year’s surplus was only $300 million, the administration will likely need to again take significant mid-year actions to maintain a balanced budget.

revenue growth

The governor’s signal that he may call for a tax cut in his upcoming budget speech will have no impact on this year’s budget, but this year’s shortfall problem confirms that the state’s finances can ill afford talk of a tax cut. Even if last year’s spending is lower than budgeted and the downward trend in revenues turns around, carrying a generous surplus into next year appears unlikely. A skimpy budgeted surplus around $300 million offers no cushion going into next year.

Through December, overall revenue has grown by 5.7 percent, lower than the 6.6 percent that was projected. This is particularly problematic for the budget, since growth is expected to be weaker in the second half of the budget year. In other words, the administration needed higher-than-projected growth in the first half, not the lower-than-projected growth that the state has actually seen.

There are several ways to estimate what the year-to-date revenue performance means for the entire budget.

One way is to extrapolate the current budget gap to the entire year. If the current shortfall of 3 percent continues for the rest of the budget year, total base revenues would end up being off by more than $850 million. Since the 3 percent figure does not include internet gambling, it’s reasonable to add another $130 million in unrealized gambling revenue to the potential shortfall, resulting in what could be a total budget gap of nearly $1 billion.

Another way is to extrapolate the current difference between actual revenue growth and projected revenue growth. If this gap of about 1 percent continues for the rest of the budget year, total base revenues would end up being off by about $250 million. Adding in the likely internet gambling shortfall, the budget would have a total shortfall of nearly $400 million. (Keep in mind that the gap between the projected and actual growth may increase as the year moves on, thus increasing the total shortfall, if the weak revenue growth expected in the second half of the budget year proves true.)

In addition to current-year revenue gaps, this year’s budget will also be affected by last year’s closing surplus, which looks to be $166 million less than anticipated, according to recent bond offerings. If this figure holds (we’ll know shortly from either the audit or next year’s budget documents), the total shortfall would increase to somewhere between $600 million and $1.16 billion, depending on the methodology.


These projected shortfalls pose big problems for the budget. Even at the lower amount, the administration will have to scramble to maintain a balanced budget with a modest surplus. While the administration says it has already identified savings that will offset the $166 million reduction in the opening surplus, a large hole will likely remain and, unlike last year, when $400 million in property tax rebates was shifted to the next year to offset the mid-year revenue shortfall, there is no obvious silver bullet.

One Comment

  1. Could get a $5 billion ‘jump’ by eliminating NJ retiree medical, letting these people pay for Medicare and ‘Gap’ as the rest of us.

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