New Jersey might not have enough money to pay the bills this summer

New Jersey has a cash flow problem. It has already caused the state Treasurer to order a hiring and spending freeze, and it could grind state services to a halt this summer if leaders don’t act soon.

Without a fix, everything from the State Police to caseworkers for children in foster care, and from payments into the pension system to reimbursements for hospital charity care, could be rolled back.

Officials in the administration of Democratic Gov. Phil Murphy have been warning lawmakers for months that there is a massive imbalance in the state budget, exacerbated in recent years by controversial deals reached between Democrats and former Republican Gov. Chris Christie.

But amid larger negotiations over Murphy’s proposed $37.4 billion budget, which includes nearly $1.7 billion in new taxes and fees that key Democrats oppose, the Legislature has kicked the can down the road, threatening essential state services in the process.

Years in the making

Here’s the problem: Every dollar collected in state income taxes must go to programs identified as "property tax relief," because of the constitutional mandate that created the tax in 1977.

For decades, state officials have said that includes money for public school funding and other programs that impact local property taxes — almost half of what the state spends each year.

The income tax is generally the state's biggest source of revenue, followed by the sales tax and the tax on corporations.

NJ NEWS: How many unaccompanied migrant children have come to New Jersey?

UNINCORPORATED COMMUNITIES: Sorry, your New Jersey hometown may not be a town at all

This year, however, the state’s income tax collections have been strong, while the corporate business tax has underperformed. That means less money available for the state to spend on things like salaries, public safety and courts that aren't considered property tax relief.

To make matters worse, Democrats reached a deal with Christie in 2016 to raise the gas tax in exchange for slashing the sales tax by three-eighths of a percent and eliminating the estate tax, which also fed into the state's more flexible "general fund."

Then, last year, lawmakers agreed to transfer proceeds from New Jersey’s roughly $1 billion lottery to the state’s beleaguered pension system, depriving the general fund of even more revenue.

The trend has reached a breaking point. Treasurer Elizabeth Muoio told lawmakers last month that due to the "perfect storm" of factors, the state is on track for a general fund deficit of $2.4 billion in the fiscal year that begins July 1.

“We must take action,” she said. “Otherwise, everyone must be prepared to get out the red pen and make draconian cuts.”

Proposed solution

Without a fix, Muoio warned, the services supported by the general fund, which amount to 55 percent of state functions, are at risk of being suspended. On June 1, she ordered state cabinet and agency heads to freeze all hiring, promotions and discretionary spending indefinitely.

Muoio has proposed an “accounting adjustment” to shift $788.5 million from a stand-alone, “off-budget” account to the general fund in each the current and coming fiscal years.

Murphy also wants to restore the state sales tax to 7 percent, as much to pay for priorities like NJ Transit and public education as to shore up the general fund. That tax increase, he says, would yield an additional $581 million at the cost of roughly $85 a year for a household earning between $75,000 and $125,000.

Both changes require approval by the Legislature.

Nightmare for municipalities

But Muoio’s “adjustment” could put taxpayers at risk.

The money she’s proposing to move comes from Energy Tax Receipts. They are sales taxes on energy utility bills and corporate business taxes that utility companies pay for the right to use public rights of way.

Under existing law, the state must remit energy tax receipts it collects back to municipalities for use in their budgets.

The New Jersey League of Municipalities, however, is terrified that should those receipts be moved into the general fund — and towns would instead be paid out of the funds marked for property tax relief — there will be nothing to guarantee that future legislatures and governors don’t divert the money towns are owed to plug other budget holes.

That was long the habit of policymakers before 1997, when municipalities successfully lobbied for a law to safeguard a portion of the energy tax receipts.

Municipalities have already received the $788.5 million they were budgeted this year, and Muoio has said that her proposal will have “no impact on the locals,” which are due to receive the same amount next year.

But Michael Cerra, assistant executive director at the League of Municipalities, said before he can support the changes, towns need assurances that they won’t lose money in the future.

“They’re tinkering with what has been a lockbox for property tax relief, and could lead to even further reductions in property tax relief in future years,” Cerra said. “The surety that we need to hear is that this is not a permanent solution.”

Let's make a deal

In other words, a fix to New Jersey’s cash flow problem will require a compromise between municipalities, lawmakers and the Murphy administration in the midst of already-tense budget negotiations.

And it won’t come without a little New Jersey-style horse trading.

A spokesman for Senate President Stephen Sweeney, D-Gloucester, declined to comment on the issue last week. But Sweeney previously told NJ Advance Media that if the Murphy administration wants a cure for the general fund, it will have to give up something in return.

“The administration needs to do what they need to do. We’re not saying no. We’re just saying, ‘Listen, you’ve shown us your priorities. We’d like a commitment on our priorities,’” Sweeney said. “It's part of a negotiation.”

Email: pugliese@northjersey.com