Analysis: $800 Million budget gap leaves Gov Christie with few choices

With Treasurer Andrew Sidamon-Eristoff’s shocking announcement that New Jersey is facing an $800 million current-year budget gap, he and Gov. Chris Christie now face the daunting task of figuring out how to close such a substantial deficit when most of the state budget — with the exception of a promised $1.5 billion pension payment — has already been spent.

The need to close such a large budget shortfall with just two months remaining in the fiscal year gives Christie little choice but to take on Senate President Stephen Sweeney (D-Gloucester) and the Democratic legislative leadership in a showdown over pension funding that Christie has been talking about for months, but would have preferred to put off until next year.

The battle of wills could pit Christie’s willingness to take unilateral action to reduce state pension payments against Sweeney’s threat to shut down the government if Christie fails to make the pension payments required under legislation he signed into law in 2011.

The plunge in income tax payments by wealthy taxpayers that was this year’s “April surprise” will require not only $800 million in almost immediate cuts in the current Fiscal Year 2014 budget, but also substantial reductions in both projected revenue and spending in the upcoming FY15 budget bill.

“The problem is not next year, it’s this year,” said David Rousseau, a former Democratic state treasurer. “The question is where you find the money to make up such a significant shortfall when you’re so close to the end of the fiscal year.”

With just two months left to go in the fiscal year, most of the $32.6 billion allocated for this year’s budget has already been spent, and Sidamon-Eristoff had to resort to such an array of fiscal gimmicks to fill an earlier $694 million budget gap in March that Standard & Poor’s downgraded New Jersey’s credit ranking for the second time on Christie’s watch. If there were easier spending cuts to make, Sidamon-Eristoff would already have used them then.

Sidamon-Eristoff will comb state accounts for additional cuts, but it will be hard to find big savings in what’s left of the state’s operating budget, and this year’s homestead rebates, municipal aid, and most school aid has already been paid out.

The only large budgeted appropriation that has yet to be spent is the $1.582 billion payment to the pension system that the state is expected to make in the last week of June — a payment that was already cut retroactively by $93.7 million from the originally budgeted $1.676 billion as part of Sidamon-Eristoff’s earlier budget cuts.

The simplest solution for the Christie administration would be to create a “one-shot” budget saving by canceling a portion of the pension payment or more likely pushing part of the $1.582 billion payment — as much as is needed to fill the $800 million gap after Sidamon-Eristoff uses up other available savings — out of the current fiscal year that ends June 30 and into the following fiscal year.

This would be similar to the one-shot budget savings that Sidamon-Eristoff used to fill an FY2012 budget gap by pushing back the payment of $392 million in homestead rebates from May 2012 to August 2012, making the rebate payments part of the FY2013 budget.

Just as Christie argued that the three-month delay in rebate checks was relatively inconsequential, he could contend that delaying $600 million, for example, of the pension payment by a couple months each year would have a relatively small impact on the pension system’s overall unfunded liability. As with the homestead rebates, the deferred portion of the pension payment would have to be delayed in future years as well to avoid creating a doubled burden in a future budgets.

Christie has been setting the stage politically for a cut or deferral of the state’s pension payments since January, complaining vociferously in speeches, town hall meetings, and on radio broadcasts that rising pension, retiree healthcare, and debt-service costs have been eating up 94 percent of the annual increase in state revenues and preventing the state from investing in K-12 education, colleges, drug treatment, and other needed programs.

The governor has threatened to take unilateral action if Democratic legislative leaders do not force public employee unions to contribute more toward pensions and retiree healthcare. But Senate President Stephen Sweeney (D-Gloucester) and other Democratic legislative leaders have told Christie they expect him to honor his agreement to keep adding some $600 million a year more to the pension system each year until the state reaches the actuarially required funding level of $4.8 billion in FY18.

Yesterday’s announcement that an unexpected drop in April income tax revenues had produced an $800 million FY14 budget gap not only jeopardizes that pension payment schedule for the current budget year, but possibly for future budget years as well.

The $700 million plunge in income tax revenues that makes up most of the deficit is due not to unexpected weakness in the New Jersey economy, but to the fact that the wealthiest New Jerseyans pushed more taxable income than expected into 2012 to avoid an increase in the top federal income tax rate from 35 percent to 39.4 percent that took effect January 1, 2013, which reduced the taxable income for 2013 they would have paid this month.

Ironically, it was that rush of wealthy taxpayers cashing out before the federal tax hikes and cashing in on a bull market that produced an “April surprise” last spring that sent state income taxes soaring $400 million above projections and bailed out Christie’s FY13 budget, which until then had been running well in the red. This year, the drop in expected FY14 budget revenue from $32.6 billion to $31.8 billion will undoubtedly require Sidamon-Eristoff to lower next year’s $34.4 billion revenue forecast by some portion of that $800 million decline, and force additional cuts in the FY15 budget as well.

Sidamon-Eristoff said he would announce the “specific changes” he would be making to the FY15 budget when he testifies before the Assembly and Senate budget committees on May 21 and 22. His announcement of the projected $800 million shortfall, however, left little doubt that he regards it as the executive branch’s prerogative and responsibility to close the current-year budget gap, and that the governor’s powers include cancelling or postponing scheduled appropriations.

“The State will take any and all actions necessary to offset the reductions in anticipated revenues, including the identification of additional lapses and savings opportunities, as well as the exercise of the full range and scope of executive authority, including, but not limited to, reserving and/or impounding budgeted appropriations,” Sidamon-Eristoff said.In a nod to the bond-rating agencies that have criticized the state’s surplus as insufficient, Sidamon-Eristoff said that the state would not cut the $280 million surplus it plans to take into FY15 in order to balance the FY14 budget. Rumors of the budget shortfall circulated within Statehouse circles a few hours before the Treasury Department issued its late afternoon press release, with one source describing the revenue drop as “catastrophic.” Rousseau characterized it as “very challenging,” noting that the magnitude of the shortfall didn’t approach the budget deficits faced by Democratic Gov. Jim McGreevey, who took office after 9/11, and Gov. Jon Corzine, whose revenues plunged in 2009 in the depths of the Great Recession.

Assembly Speaker Vincent Prieto (D-Hudson) yesterday said the treasurer’s announcement “is very concerning news that re-emphasizes the need for everyone to put their catchphrases and slogans aside and work together to find a solution.

“This is everyone’s problem to solve, and we’re now going to have to roll up our sleeves and get to work solving this without damaging the valuable programs needed by residents,” Prieto said.

Prieto’s statement did not criticize Sidamon-Eristoff for missing the mark on his revenue targets, as Democrats have repeatedly done in the past. While David Rosen, budget officer for the nonpartisan Office of Legislative Services, projected four weeks ago that state revenues would come in $216.6 million lower in FY14 and $309.4 million below administration forecasts in FY15, his estimates also missed the impact of the income tax plunge.

“This isn’t an issue of Treasury overestimating revenues for political purposes. There’s no politics involved,” emphasized Rousseau, the budget analyst for New Jersey Policy Perspective who has been a frequent critic of both Christie and Sidamon-Eristoff. “OLS and Treasury both agreed that about $250 million in income tax was shifted into 2012 to avoid the fiscal cliff. They were both wrong, but so was everybody else. Connecticut just announced that it’s facing a $400 million shortfall too.”

Just a few hours before Sidamon-Eristoff issued his press release, Connecticut Democratic Gov. Daniel P. Malloy yesterday announced that the loss of about $330 million in expected income tax revenue would force him to cancel a planned $55-per-person tax refund and eliminate a planned $100 million payment into his state’s pension system.

Both the New Jersey and Connecticut income tax dives — which are expected to be matched by similar reductions in income tax collections by the federal government, New York City, New York State, and other affluent states — stemmed from a similar underestimate of the impact of wealthy taxpayers trying to avoid higher federal income taxes going into effect in 2013.

Treasury Department officials said the “full scope of the unanticipated revenue shortfall was only detected in the course of tabulating collections after the April 15 income tax deadline.”

“Typically, a significant portion of April income tax receipts come to the State in the form of physical checks mailed by extremely high-income taxpayers,” Treasury explained in a press release. “These payments, which are not normally received until some days after the April 15 deadline for final settlements and extensions, are heavily affected by swings in capital gains and business income, which are volatile and difficult to predict prior to processing.

“New Jersey’s highly progressive income tax is notoriously volatile due to its extreme reliance on a relative handful of taxpayers” Treasury continued. “In recent years for example, just 400 taxpayers have accounted for almost 10 percent of New Jersey’s Gross Income Tax, the top 1 percent of state income taxpayers accounted for almost 40 percent, and the top 10 percent of all income taxpayers accounted for approximately 70 percent of total income tax revenues.”

While corporate and sales tax revenues are also expected to be down for April, $700 million of the total $807 million shortfall is attributable to the decline in income tax revenues, Treasury officials said.

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