Governor-elect Mikie Sherrill is going to inherit a budget full of hidden dangers. On the surface, the state’s finances appear healthy: historic cash reserves, an improved credit rating, and on-target revenues. But beneath these gains lie budget time bombs that threaten the state’s fiscal stability and any new spending proposals.[1]
At a time when low- and middle-income families face rising costs and housing shortages, each of these time bombs will limit the state’s options for addressing residents’ needs.[2] These risks come on top of economic uncertainty, including a potential recession, which would reduce revenues and increase state costs.[3]
1. Existing structural deficit
Responsible budgeting requires sufficient revenue to fund schools, health care, and other essential services. In Fiscal Year (FY) 2026, New Jersey will generate $1.5 billion less in revenue than it needs to cover expenses.[4] As a result, the state will have to spend down its cash reserves, which have fallen each year from $10 billion in FY 2024 to less than $7 billion projected for FY 2026.[5] This imbalance means Governor-elect Sherrill will need to raise revenues or cut services simply to keep the state from going deeper into deficit.
Several factors drive this shortfall. State spending on property tax relief programs has grown from less than $1 billion to more than $4 billion in FY 2026, with future increases in Stay NJ (see below).[6] Expansions to economic development tax credits also reduce revenues. These credits give state tax dollars to corporations such as film studios or AI data centers for operations in New Jersey and remove billions in expected revenues.[7] Other increases in funding are mandatory to meet the state’s obligations to its pension funds and schools.[8]
NJPP has long advocated for increased progressive revenues to help close this gap.[9]
2. Ballooning Stay NJ costs
Housing affordability is a concern for seniors on fixed incomes. But Stay NJ, a new homeowner tax credit, threatens to dramatically increase the FY 2027 budget without targeting those who need help most. Stay NJ provides credits to homeowning seniors over age 65 with incomes up to $500,000.[10] In FY 2026, Stay NJ required only $280 million in state appropriations, despite an annual estimated cost of $1.2 billion.[11]
The cost was artificially low for two reasons:
- The state had saved $320 million from prior years; and
- FY 2026 only covers one half of calendar year 2026, meaning only half a year’s worth of payments will go out.
In FY 2027 neither condition will exist. The full $1.2 billion cost of the program will come due with no additional funding source.[12]
NJPP has identified potential savings by capping income for Stay NJ recipients to limit the program to seniors in need, rather than wealthy households.[13] These changes would reduce the program cost by more than $500 million.
Without reform, the Sherrill administration and legislature will face more than $900 million in additional Stay NJ costs in FY 2027.
3. School funding costs beyond inflation
New state requirements on schools have increased per-pupil funding needed to meet “adequacy,” the state’s standard for a thorough and efficient education.[14] Beyond these existing changes, voices from across the political spectrum have called for updating the school funding formula to more accurately reflect the cost of state standards and educating students from low-income families and who are multilingual learners.[15]
School funding represents the largest single expenditure in the state budget, with formula payments totaling $12 billion.[16] Even small changes in funding per pupil can result in large cost increases for the state.
School safety and mental health requirements are driving costs higher. The state’s 2026 Education Adequacy Report outlines changes that will increase funding needs.[17] Rising school safety concerns and concerns about youth mental health have driven the need for $14,972 in per-pupil funding for elementary students, an increase of more than seven percent from FY 2025 and 20 percent from FY 2023.[18] These increases fund one security guard per elementary school and mental health support for students.[19] Although these costs were included in the FY 2026 school aid calculations, many districts hit the six percent cap on aid increases, pushing additional costs to FY 2027.[20]
4. Loss of remaining pandemic-era funding
The fiscal cliff of expiring federal pandemic-era funding is creating funding gaps that the state will need to cover. For example, the expiration of federal funding for New Jersey Transit led to an enormous projected deficit that required the creation of the Corporate Transit Fee.[21]
Programs ranging from infrastructure to child care will lose federal funds when funding expires at the end of 2026.[22] These expirations have real effects, as the state’s child care subsidy programs were temporarily closed to new enrollees due to lack of funding and only recently began accepting new applications.[23]
New Jersey has also exhausted the last of its Debt Defeasance and Prevention Fund, a $10 billion reserve created to refinance high-interest debt during the pandemic.[24] The state used the fund for debt retirement and new capital improvement projects. But the state budget also transferred $1.1 billion to patch the structural deficit.[25]
With the fund empty, that revenue will not be available in future years, limiting the
state’s options.
5. Increasingly expensive state health benefits
The State Health Benefits Program provides health insurance for state and local government employees, with costs shared by employees and employers.[26] State actuarial reports recommend premium increases that would raise costs by 20 percent or more.[27] Even if proposed savings materialize, the state budget will face employee health benefit cost increases above inflation.[28]
Health benefits for active state employees and higher education employees cost $2.0 billion annually. Even small percentage increases can have large budget effects: a 10 percent increase in FY 2026 raised costs by over $180 million.[29]
Local government health plans face even steeper increases, creating potential state liability.[30] Although local government costs are not the state’s direct responsibility, problems with the local government health plan have previously required a temporary state bailout.[31]
One big unknown: the impact of federal cuts
Federal cuts present the largest uncertainty to the state’s budget. Some costs will fall to the state, even if the exact amount is unknown. For example, the state will have to implement a work requirement program for Medicaid by January 2026, which will require substantial appropriations and infrastructure.[32]
The state will also pay an additional $90 million in administrative costs for SNAP, with $78 million of those costs covered by counties, which administer SNAP in New Jersey.[33]
The Department of Human Services estimates that reductions in federal funding and federal restrictions on state health care revenues will result in $360 million in annual lost funding.[34] These policies will also force more residents to lose health care coverage. The result: a $3.3 billion annual cut in funding to hospitals and public health, which the state may have to backfill through charity care or other means.[35]
Beyond the tax and budget bill, the state faces decisions about whether to backfill federal cuts in other priorities. Keeping New Jersey at the forefront of scientific research may require state investment in cancelled federal biomedical research projects.[36] Delays in funding the Gateway tunnel project may lead to cost overruns and harm New Jersey’s economic growth.[37]
Conclusion
Governor Sherrill will inherit a budget full of time bombs. Despite steps by the Murphy administration to correct for the fiscal shortsightedness of past administrations by fully funding schools and pensions, the FY 2027 budget will face serious revenue shortfalls absent new revenues or drastic cuts. Depleting the state’s limited cash reserves will only deepen the crisis in future years.
There are solutions. NJPP has identified key revenue raisers that focus on concentrated wealth in individuals and large corporations.[38] Expensive tax credit programs that overwhelmingly benefit the already-wealthy can be reduced to increase revenue. New revenue, such as a wealth proceeds tax on net investment income, would also generate funds from wealthy individuals.[39]
Without new revenues, these budget time bombs will make maintaining current funding difficult, let alone any new initiatives the next governor may propose.
End Notes
[1] Ambrose, A. et al. New Jersey Policy Perspective. Sleepwalking Into Catastrophe. July 8, 2025.
[2] O’Dea, Colleen. NJ Spotlight News. NJ’s housing costs are skyrocketing. What will the next governor do? Oct. 20, 2025.
[3] Foster, S. Bankrate. The U.S. economy is slowing — and the nation’s top economists don’t expect it to improve much over the next year. Oct. 23, 2025.
[4] New Jersey Legislature. FY 2026 Appropriations Act Scoresheet. July 2, 2025.
[5] Total opening balance was $10.282 billion in FY 2024. New Jersey Legislature. FY 2024 Appropriations Act Scoresheet. July 19, 2023. Closing unreserved balance in FY 2026 is projected for $6.7 billion. New Jersey Legislature. FY 2026 Appropriations Act Scoresheet. July 2, 2025.
[6] Murphy, P., The State of New Jersey Budget in Brief, Summary of Budget Recommendations Fiscal Year 2026, Feb. 2025, pp. 12-13.
[7] State of New Jersey. Tax Expenditure Report, Fiscal Year 2026. 2025. pp. 10-11.
[8] The pension fund actuarial determined contribution has continued to increase. See New Jersey Legislature Office of Legislative Services. Analysis of the New Jersey Budget Interdepartmental Accounts Fiscal Year 2025-2026. May 2025. P. 6. School funding payments are adjusted by inflation and the Education Adequacy Report discussed below.
[9] Chen, P. New Jersey Policy Perspective. Fair and Square: Changing New Jersey’s Tax Code to Promote Equity and Fiscal Responsibility. Nov. 14, 2024.
[11] S. 2026 (2025) pp. 280-282. Murphy, P. The State of New Jersey Budget in Brief, Summary of Budget Recommendations Fiscal Year 2026. Feb. 2025. pp. 12-13.
[12] Sobko, K. NorthJersey.com. Could federal budget chaos upend StayNJ property tax program for NJ seniors? (“Treasury officials confirmed there is no “buildup plan” for fiscal year 2027, estimated to cost $1.2 billion annually.”)
[13] Chen, P. New Jersey Policy Perspective. Course Correction: Preserving Senior Housing Affordability While Cutting Costs. Jun. 17, 2025.
[14] N.J. Stat. 18A:7F-46 (2025).
[15] Weber, M. New Jersey Policy Perspective. Resetting School Funding for New Jersey’s Next Decade. Oct. 24, 2025; Kudisch, B. NJ.com. Give N.J. schools more money to teach undocumented immigrants, county says. Feb. 16, 2025.
[16] Murphy, P. The State of New Jersey Budget in Brief, Summary of Budget Recommendations Fiscal Year 2026. Feb. 2025. pp. 15.
[17] New Jersey Dep’t of Education. FY2026 Education Adequacy Report. 2025.
[18] New Jersey Dep’t of Education. FY2026 Education Adequacy Report. 2025. pp. 4-5.
[19] New Jersey Dep’t of Education. FY2026 Education Adequacy Report. 2025. pp. 4-5.
[20] Kausch, K. & Kudisch, B. NJ.com. N.J. is pouring $12B into schools this year. See if your district is a winner — or facing cuts. Sep. 3, 2025.
[21] Reitmeyer, J. NJ Spotlight News. NJ Transit strike halted but financial questions remain. May 20, 2025.
[22] For a full list of spending, see New Jersey Recovery Plan, State and Local Fiscal Recovery Funds, 2025 Report.
[23] New Jersey Dep’t of Human Services, Division of Family Development. Child Care Assistance Program – Important Update. July 2025.
[24] Reitmeyer, J. NJ Spotlight News. Special reserve fund, set up to ease NJ’s bonded debt, runs dry. Aug. 11, 2025.
[25] Reitmeyer, J. NJ Spotlight News. Special reserve fund, set up to ease NJ’s bonded debt, runs dry. Aug. 11, 2025.
[26] New Jersey Division of Pensions and Benefits. Summary Program Description Guidebook For the State Health Benefits Program (SHBP) and the School Employees’ Health Benefits Program (SEHBP). Sept. 2025.
[27] New Jersey Dep’t of the Treasury. Press Release: AON Releases Recommended Rate Increases for State Health Benefits Plans for Plan Year 2026. Jul. 9, 2025.
[28] See Memorandum of Agreement between the Unions and the State of New Jersey. Sept. 4, 2025.
[29] New Jersey Legislature, Office of Legislative Services. Analysis of the New Jersey Budget: Interdepartmental Accounts. May 2025. pp. 25-27.
[30] New Jersey Dep’t of the Treasury. Structural and Financial Challenges in the State Health Benefits Program for Local Government. May 2025.
[31] P.L. 2024, c. 86.
[32] Hinton, E., Diana, A., and Rudowitz, R. KFF. A Closer Look at the Work Requirement Provisions in the 2025 Federal Budget Reconciliation Law. July 30, 2025.
[33] Department of Human Services, Division of Family Development. 2025 House Budget Bill Implications for the New Jersey Supplemental Nutrition Assistance Program (NJ SNAP). June 2025. P. 6.
[34] New Jersey Dep’t of Human Services, Statement from Human Services Commissioner Sarah Adelman on Impact of Medicaid and SNAP Cuts on NJ. July 3, 2025.
[35] New Jersey Dep’t of Human Services, Statement from Human Services Commissioner Sarah Adelman on Impact of Medicaid and SNAP Cuts on NJ. July 3, 2025.
[36] Stainton, L. NJ Spotlight News. Fears of Devastation Across NJ Health, Scientific Research if Trump Cuts Proceed. Feb. 12, 2025.
[37] Biryukov, N. New Jersey Monitor. Trump administration delays massive Hudson River rail project. Oct. 1, 2025.
[38] Chen, P. New Jersey Policy Perspective. Fair and Square: Changing New Jersey’s Tax Code to Promote Equity and Fiscal Responsibility. Nov. 14, 2024.
[39] Austin, S. and Davis, C. Institute on Taxation and Economic Policy. The Wealth Proceeds Tax: A Simple Way for States to Tax the Wealthy. Oct. 30, 2025.
