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N.J. prepares to ‘beg’ for federal bailout as financial disaster looms

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New Jersey Gov. Phil Murphy

New Jersey Gov. Phil Murphy delivers a coronavirus briefing on Wednesday, April 8, 2020. (Pool photo by Michael Mancuso | NJ Advance Media for NJ.com)

Should the coronavirus pandemic devastate state revenues across the country, as is widely expected, New Jersey will be among the states most dependent on federal aid to keep itself running.

That precarious position — relying on a president and Congress who have been willing to let New Jersey bleed money in the past — is the product of decades of poor financial planning and spending instead of saving.

“Our fate is basically in the hands of the federal government,” Senate President Stephen Sweeney, D-Gloucester, said this week. “Like a lot of states, but more so because of our financial position, we’re going to really be on our knees with the federal government begging for help.”

If that federal aid does not come through, the alternative is deep cuts to state programs, higher taxes, or both.

Among New Jersey’s time-honored political traditions, alongside corruption and an obsession with home rule, is taunting governors who dare put too much revenue into savings.

Sweeney himself has been involved in several of those disputes, including one last summer when Gov. Phil Murphy decided to freeze spending on South Jersey cancer research — among other programs — instead of dipping into the state’s surplus account.

“This is Bridgegate on steroids,” Sweeney declared, referring to the notorious lane-closure scheme that ended in two convictions for allies of former Gov. Chris Christie.

Sweeney clarified this week that he was opposed to what he saw as the political motivation for the governor’s spending freeze, not the decision to save money per se.

But the exchange points to a generations-long dynamic in New Jersey politics that could now prove damning as the coronavirus pandemic causes unprecedented economic disruption: With so much else to spend money on, state policymakers have been reluctant to save.

Even with a newfound commitment under the Murphy administration to ramp up the state’s surplus — buoyed until recently by a strong economy — New Jersey still lags far behind what other states have to protect against hard times.

The Garden State had enough money socked away at the end of the last fiscal year to cover operations for about 16 days, according to an analysis by The Pew Charitable Trusts. The national average was nearly 50 days.

Murphy, a Democrat, had been poised to set aside $1.5 billion into surplus by the end of the current fiscal year on June 30.

“It’s not enough to have the resources to meet the challenges of today,” Murphy said in remarks during his latest budget address in February, eight days before New Jersey saw its first case of coronavirus. “We must ensure we can meet the unseen challenges yet to come.”

That $1.5 billion would have been nearly 4% of the state’s roughly $40 billion budget — a larger share than any year since before the Great Recession in 2007, according to figures provided by the state Treasury Department. The only exception is last year, when surging revenues caused the end-of-year surplus to swell.

David Rousseau, a longtime budget expert who was serving as State Treasurer under Gov. Jon Corzine when the Great Recession hit, said most administrations going back to Gov. Tom Kean in the 1980s aimed to set aside a paltry 2% of their annual budget as surplus.

“In a state like New Jersey, there were so many unmet needs,” Rousseau explained. “Property taxes being so high, people wanted to make sure more money was going to schools, more money was going to towns, more money was going to rebates.”

Leonard Lance, a longtime state lawmaker and former congressman who built a reputation as a fiscal watchdog who would even buck his own party’s leaders over budget gimmicks, had a simpler reason why New Jersey hasn’t been able to build its surplus: pensions.

“This is a system that has caused tremendous dislocation in our state budgets,” he said.

Over 20 years, consecutive governors and legislatures dodged full payments for public employee pensions, effectively bankrupting a once-flush system. It’s now $130 billion in the hole.

That means the recommended amount the state should be putting toward pensions each year has ballooned. As Christie and Murphy have tried to follow experts’ advice and ramp up to that amount, other priorities have been crowded out, including the surplus.

“Our pension payment should be about $800 million” a year if the system were fully funded, Sweeney said. But due to past neglect, the recommended annual payment is now more than $6 billion.

Just how painful the coronavirus pandemic will prove for the state budget — and New Jersey’s 9 million residents — remains to be seen.

State Treasurer Elizabeth Muoio last month described the potential impact as “unpredictable and rapidly changing,” but she predicted “precipitous declines” in everything from income tax revenue to lottery sales as she froze nearly $1 billion in state spending, including a large chunk for property tax relief.

The federal government has provided some financial assistance, including an estimated $810 million in enhanced Medicaid funding and $3.4 billion through the CARES Act for New Jersey’s coronavirus response.

Murphy said the CARES Act package was “a very good step in the right direction,” but that “we certainly will need billions more.” Murphy had previously joined with the governors of Pennsylvania, New York and Connecticut to ask President Donald Trump and congressional leaders for $100 billion in cash assistance.

For comparison, Rousseau estimated the Great Recession blew a $6 billion hole in the fiscal year 2009 budget. Federal aid helped fill about half of that, but the Corzine administration also had to freeze spending, skip a pension payment and drain a special surplus account known as the rainy day fund.

The record-breaking number of Americans filing for unemployment benefits suggests the current economic crisis — layered on top of a health crisis — could be even worse.

Lance and Rousseau both said they didn’t think any reasonable surplus in New Jersey could have fully covered the financial toll of the coronavirus pandemic.

“No state in this country can withstand the revenues losses they had in 2008 and 2009, and the revenue losses they will likely have out of this, without significant money from the federal government,” Rousseau said.

But they also said a larger surplus would have helped dampen any financial shock.

Sweeney, meanwhile, remains stunned by how quickly New Jersey’s fortunes reversed.

“It’s like the music stopped,” he said. “Like musical chairs, you know, the music stopped and there’s nowhere to go.”

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