Lost Dollars Outweigh Gains for New Jerseyans In Federal Balanced Budget Agreement

Four Fiscal “Flashpoints” Cast Doubt on State’s Ability to Replace Cuts

TRENTON — The agreement to balance the federal budget by the year 2002 could cost the state of New Jersey close to $3 billion over the next five years-and several factors particular to New Jersey cast doubt on the state’s ability to make up the difference. That is the key finding of a report released today by New Jersey Policy Perspective, called “When Washington Tightens its Belt Will New Jersey Lose its Shirt?”

“For New Jersey, the budget agreement is like a group trip to Atlantic City: there are winners and losers, but the group as a whole loses money,” says the report’s author, Henry J. Raimondo. The first detailed analysis of how the state and its residents will be affected by the agreement reached last summer, the report assesses the impact on state government operations and individuals, those being the two largest recipients of federal dollars coming into the state.

Raimondo is a professor of public policy at the Eagleton Institute of Politics and the Bloustein School of Planning and Public Policy, both at Rutgers University in New Brunswick. He also serves as a member of the Governor’s Council of Economic Advisers. New Jersey Policy Perspective is a nonpartisan organization founded last year to conduct research on major state issues. The report was made possible by a grant from The Fund for New Jersey.

Jon Shure, president of NJPP, said, “This report gets past the headlines and looks at the bottom line. New Jersey stands to lose a lot of assistance that helps people, especially the most vulnerable. We need to have an honest debate about what to do next.”

Noting that the state departments of Health & Senior Services, Human Services, Transportation and Environmental Protection receive 40 to 80 percent of their budgets from federal dollars, the report says, “Any reduction in federal assistance to these departments will reduce, delay or cancel programs which support, among other things, job-training, social services, wastewater facilities, and economic development.”

In addition, 1.2 million elderly New Jerseyans who rely on Medicare and 790,000 young and poor persons who depend on Medicaid for health coverage risk losing as much as $3.5 million in Medicare funding and $345 million in Medicaid cuts.

And while many in the state will keep more of their income because of the agreement’s much-heralded tax cuts, “when all the changes are tallied up, New Jersey will lose $2 for every $1 it gains,” the report says. Especially important: “those New Jerseyans who can least afford to lose financial resources will in relative terms lose the most.” In fact, the report found that two thirds of the capital gains rate cut benefits will go to only 2 percent of New Jersey tax filers.

Examining state-budget “flashpoints” that will strongly affect the availability of funding within the state over the next few years, the report observes that “State government will be in a poor position to offset these losses in programs and services over the next five years.” Those four flashpoints are:

  • The likelihood of an economic slowdown. In the past, a national slowdown has meant a more serious slump for New Jersey and a longer recovery than other states. The obvious concern is that an economic bump means a revenue dip. The Governor and the Legislature could be facing real spending cuts in 1998 and beyond. Worse, this “bump and dip” would coincide with implementation of the federal balanced budget agreement.
  • Calls for property tax relief and increased school aid. The political pressure could grow from Trenton to relieve the municipal tax burden with additional state aid at the same time that the adverse effects of the balanced budget were becoming clear. And, state aid to education is a flashpoint because the full cost needed to comply with the state Supreme Court’s ruling on school funding is not yet clear, but–regardless of the eventual amount-education funding will be “first among equals” in the competition for scarce state dollars.
  • The usual growth in major executive-branch department budgets. Shifting budget priorities are a fact of life. They claim limited state dollars, hamper the flexibility of governors and legislators and alter agreed-upon spending practices. Departments that have consistently grown at a rate faster than the growth of the state budget in recent years include Education, Corrections, Community Affairs, Human Services and Transportation. Many are also heavily dependent on federal dollars. When the Governor and Legislature try to deal with spending demands that will inevitably arise from these and other departments, they will have less money to respond to cuts of the magnitude that the balanced budget agreement prescribes.
  • The surge in debt-service spending as a share of the state budget. Outstanding state debt increased to $9.2 billion in 1997 from $3.96 billion in 1991. Not only do New Jerseyans carry the 8th highest debt level out of 50 states, but they must make payments on it each year. During the implementation of the balanced budget agreement, the state’s debt service will rise to $1.198 billion in 2002. As paying off the debt claims an ever-increasing share of state tax collections, policy-makers will have less for essential services and dealing with unanticipated needs. These financial limitations could be even more troublesome as the balanced budget agreement is implemented.

Conventional wisdom once held that one large, 300-foot gash in the hull of the Titanic caused the ship to sink after it hit an iceberg in 1912. More recent research shows that six small, well-placed slits actually sank the “unsinkable” vessel. This story may well describe the balanced budget agreement’s impact on New Jersey. The agreement does not cut New Jersey’s federal funds with one major strike. It does, however, make several crucial cuts, which could cause the state’s residents to think about the location of the lifeboats.