The Threadbare Cushion: New Jersey Budget Reserves are Among the Lowest in the Nation

The recent years’ squabbles over rosy revenue projections in the New Jersey budget process would be of far less importance if the state was budgeting a larger surplus to provide a cushion to its highly volatile tax system. One new report finds that New Jersey’s budgeted reserves are among the lowest in the nation and far below the national average, while another notes that New Jersey is one of only two states that has depleted its rainy-day fund to zero. But at a time when the state continues to be under fiscal stress, just how much more should those crafting the budget put into the surplus and what would that mean for other needs?

The Pew Charitable Trusts finds that New Jersey’s $465 million of “reserves” in fiscal year 2013 represented only 1.5 percent of spending – the fourth-lowest share in the nation and far below the national median of 8.2 percent. The report’s data is slightly out of date, however. If Pew used the actual $313 million surplus confirmed in the recent audit, the share would fall below 1 percent of spending (New Jersey would still rank fourth lowest).

Given all the real needs not addressed in recent state budgets, it is not realistic to expect New Jersey to begin socking away 8.2 percent, as that would represent an additional $2.5 billion set aside in reserves in next year’s budget. But perhaps the state should aim to set aside 3 percent, as suggested by the Office of Legislative Services’ David Rosen this week. This would increase the projected surplus for next year by $600 million, up to $900 million. If 3 percent and $600 million is considered too far a stretch, the state could double the amount of the surplus by putting away 2 percent. This would be the start of a return to past practices; the average budgeted surplus since 1990’s budget has been approximately 2.5 percent.

A second recent report on the health of “rainy day” funds by the Center on Budget and Policy Priorities (CBPP) confirms New Jersey’s woeful fiscal condition. It turns out that among states that mandate a rainy day fund, New Jersey and Pennsylvania are the only two that have depleted their pre-recession funds to zero. The CBPP report – also using FY2013 data – finds that New Jersey’s budget surplus is the third lowest behind Illinois and California, helping to explain the three lowest rated states from the credit agencies.

If New Jersey fails to turn the corner and begin putting more towards reserves, we’re likely to continue on the same path we’ve seen over the past few years, with relatively modest swings in tax collections or spending having a much greater impact on the budget than if the state were budgeting a larger surplus. Without a significant surplus, revenue shortfalls will continue to lead to questionable fiscal decisions like this year’s $92 million tobacco settlement maneuver and retroactive reductions to an already underfunded pension system. (Standard & Poor’s recently cited these “less conventional” actions as part of their decision to lower the state’s credit rating.)

Granted, planning for the future by increasing the surplus and meeting unmet needs is a tough balance to strike when crafting a budget. But if the state has an unexpected windfall in the form of increased tax revenues, asset sales or other sources, it may be wise to put a portion of this windfall into the state’s reserves rather than spending it all.

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