Even robust FY14 tax growth won’t be enough to cover pensions, revenue shortfalls, overreliance on one-shots, and other fiscal needs

It’s a problem no governor wants to face in a reelection year budget, even a governor like Chris Christie riding a post-Sandy wave of 70 percent approval ratings.

With less than a month to go before his annual Budget Address, Christie is facing a structural deficit of at least $2.5 billion that could top $3.5 billion by the June 30 end of the current budget year.

The gap is too large to cover even with record revenue growth, as NJ Spotlight shows.

For the past six months, Democratic legislative leaders have focused on the growing budget gap created by the Christie administration’s failure to meet its aggressive revenue targets — a shortfall that stood at $548.8 million as of January 1.

Fearing that the revenue shortfall would grow to $1 billion or more by the end of the year, Senate Budget Committee Chairman Paul Sarlo (D-Bergen) called upon Christie’s treasurer, Andrew Sidamon-Eristoff, to explain the shortfall and lay out a contingency plan for midyear budget cuts. Sidamon-Eristoff refused, saying the Legislature would have to wait for Christie’s February 26 Budget Address.

Treasury Department officials failed to respond to requests for interviews last week.

But the $548.8 million revenue shortfall is actually only a fraction of the looming fiscal crisis facing Christie and Sidamon-Eristoff as they seek to balance the current $31.2 billion Fiscal Year 2013 budget and craft a spending plan for Fiscal Year 2014, which begins July 1.

State revenues would have to grow $2 billion in FY14 just to cover the increased cost of the state’s pension contribution, the next stage of Christie’s business tax cut, and the various one-shot nonrecurring revenues built into this year’s budget. And even with a huge income tax surge in December, state revenues only grew $147 million in the first six months of this fiscal year compared with the same July-December period in 2011.

Christie’s combined structural deficit for the current and upcoming fiscal year falls into four categories:

Making Up The One-Shots: Christie’s current budget is built on $1.115 billion in nonrecurring revenues, including such controversial one shots as spending down $280 million out of an already meager surplus and commandeering $261 million in New Jersey Turnpike toll money to replace state matching funds that were shifted from the Transportation Trust Fund to plug a budget gap.

Fulfilling Budget Obligations: Christie has to increase funding for the pensions by $690 million under the terms of the law he signed in 2011, find $194 million for the third year of his business tax cut, and come up with an extra $110 million for built-in transportation debt service increases and the pay-as-you-go transportation capital program he has promised. That does not include any increase in the school funding formula, normal inflationary increases in government expenses, or any money to fund the immediate income tax cut he was pushing for last year.

Covering the Revenue Shortfall: Tax revenues came in $123 million short for the FY12 fiscal year that ended June 30 and are currently down $425.8 million through December, which was the first month since last February that revenues actually met or exceeded Christie administration projections. Income tax revenues are likely to continue strong through the spring, which means that the final revenue shortfall will probably be closer to $500 million than the to $1.2 billion to $1.5 billion that Democrats projected.

Managing Current-Year Budget Problems: The Christie administration has acknowledged in bond documents that as much as $200 million in anticipated savings in Medicaid and Social Security costs may not come in. In addition, the $200 million in affordable housing money the Christie administration planned to take away from municipalities is down to a contested $142 million. And the administration is awaiting high-court rulings on the legality of its elimination of the Council on Affordable Housing and the transfer of the money to the general budget.

It all adds up to a $2.5 billion to $3.5 billion structural deficit that clearly exceeds logical revenue growth projections for next year, and Democratic legislative leaders are increasingly frustrated by the Christie administration’s refusal to discuss the fiscal crisis.

“We’ve heard nothing at all,” Senate President Stephen Sweeney (D-Gloucester) said impatiently. “We’ve asked. We’ve tried to talk about it, but they say we have to wait for the budget speech.”

“They have not given us any glimpse on what they’re planning to do,” Assembly Speaker Sheila Oliver (D-Essex) added.

Sweeney made it clear, however, that two options are off the table. “Honestly, we don’t want to see any of the Sandy relief money diverted by the governor to balance the budget, when so many people and businesses need help,” he said. “And that pension payment has to be made. It is required in the legislation, and I won’t do anything to change it.”

The Budget Backlash

Democratic leaders, including Sen. Barbara Buono (D-Middlesex), the presumptive Democratic challenger to Christie in next November’s election, see the upcoming budget crisis as an issue that could cut into Christie’s astronomical popularity ratings, but political experts aren’t convinced.

“We’ve had nearly 20 years of governors of both parties balancing their budgets on one-shots and gimmicks without having to pay a price at the polls,” said Patrick Murray, Director of the Monmouth University Polling Institute. “Unfortunately, I don’t expect this year to be any different.”

Ben Dworkin, director of Rider University’s Rebovich Institute for New Jersey Politics, agreed. “Even if there are midyear cuts to be made as well as reductions in state spending in an election year,” Dworkin said, “Christie can come out on top by continuing to portray himself as the guy who had the courage to make the tough decisions, even if Democrats argue that it was Christie himself who caused these problems.”

Indeed, much of the current fiscal crisis stems directly from Christie’s premature declaration in last February’s Budget Address that “our fiscal house is in order,” that his “New Jersey Comeback” would generate a record $2.2 billion surge in state revenues the following year, and that the state could afford the first $183 million phase of a four-year $1.4 billion income tax cut.

Christie, then a leading contender for the GOP vice presidential nomination, touted his income tax cut from coast to coast, and denounced David Rosen, chief budget officer for the nonpartisan Office of Legislative Services, as the “Doctor Kevorkian of the numbers” for questioning his revenue estimates. But by mid-May, Sidamon-Eristoff was forced to concede that revenues were coming in $676 million below expectations.

Instead of cutting spending or agreeing to delay the tax cut, Christie essentially doubled down on his New Jersey Comeback bet. Despite criticism from the bond-rating agencies, the administration propped up its shaky budget by increasing its reliance on one shot nonrecurring revenues by $450 million.

Borrowing From Peter to Pay Paul

Politically, Christie had no choice. Drastically lowering his revenue estimates would have required program cuts and cast doubt on his insistence that the state could afford not only the first $183 million tax cut this year but also a $576 million second installment in FY14.

Christie covered his FY12 budget gap with $200 million in Clean Energy utility surcharge funds that were supposed to go to clean energy programs and energy assistance for low-income homeowners. He then filled the hole in his FY13 budget by using $260 million in New Jersey Turnpike money to replace promised pay-as-you-go state funding for the Transportation Trust Fund, by anticipating $108 million in debt service savings and by grabbing another $79 million from the Clean Energy Fund.

The $447 million in new FY13 one-shots brought total nonrecurring revenues for the current fiscal year to $1.115 billion. Christie’s original budget plan already included the diversion of $280 million from the surplus, $200 million set aside for municipalities to fund affordable housing programs, $111 million from the planned privatized management of the New Jersey Lottery, and $75 million from the National Mortgage Servicing Act.

Finding ways to replace that $1.115 billion in one-shot revenue to keep spending at the current level in the FY14 budget is the biggest challenge Christie and Sidamon-Eristoff face, but the $994 million in built-in budget demands comes in a close second.

Pension Battles

The biggest single funding increase in the FY14 budget is the estimated $690 million hike in the cost of state pension payments from $1.06 billion this year to almost $1.7 billion next year. The increase represents the third step of a seven-year phase-in to full funding of the state’s pension system required under the controversial pension and health benefits overhaul sponsored by Sweeney and signed into law by Christie in 2011.

Sweeney’s insistence that he would not consider anything less than full compliance with the pension law was a warning shot to Christie not only for FY14 but also for the current FY13 budget. The state is not expected to make its required $1.06 billion contribution for FY13 until the end of June, just before the fiscal year ends. If Christie comes up short on his FY13 budget, Sweeney does not want the governor to think he can push some or all of his FY13 pension obligation into the following budget year, which would be an easier political decision than delaying property tax rebate payments in an election year.

In addition to the pension obligation, Christie needs $194 million more in FY14 to fund the third year of the business tax cuts he pushed through in 2010, $60 million more for interest payments on Transportation Trust Fund bonds, and an additional $50 million for his promised pay-as-you-go transportation capital funding program.

Before Christie and Sidamon-Eristoff deal with the FY14 budget, however, they have to resolve close to $1 billion in current-year budget issues, as Sarlo pointed out in a Senate Budget Committee hearing a month ago.

First, the state has acknowledged that it is expected to come up $58 million short of the $200 million it anticipated from the diversion of affordable housing funds from municipalities. However, a bigger problem is a pair of lawsuits challenging the authority of the governor to eliminate the bipartisan Council on Affordable Housing and give his Department of Community Affairs the power to seize the remaining $142 million.

Second, the state acknowledged in a prospectus issued to potential bond purchasers that it is facing a potential $200 million shortfall in expected savings on Medicaid and Social Security payments, Sarlo noted.

Those potential unrealized savings are on top of the $548.8 million combined shortfall in the Christie administration’s FY12 and FY13 revenue projections that have been subject of heated debate between the Republican governor and Democratic legislative leaders since the governor delivered his Budget Message last February.

Rosen reported in August that the Christie administration’s revenue projections for FY12 were coming in about $250 million short, but Sidamon-Eristoff was able to reduce the final shortfall to $123 million through a combination of spending freezes, budget lapses, and program cuts.

In addition, revenues for the first six months of the current fiscal year were running $425.8 million behind the administration’s revenue projections through the end of December.

December 2012 was actually the first month since February 2011 that the Christie administration met or exceeded revenue estimates, but what is critical is that the gain was almost entirely in the state income tax.

The wealthiest 1 percent pay almost 40 percent of New Jersey income taxes, and the sudden surge in income tax revenues was probably due largely to wealthy taxpayers moving income into 2012 to avoid paying higher federal income tax and capital gains taxes as a result of the federal fiscal cliff negotiations between President Obama and Congress.

December 2012 income tax collections totaled a whopping $1.066 billion — 19.8 percent higher than the $890 million collected in December 2011 and 14.1 percent higher than the $934.5 million that the Christie administration anticipated last May.

The $131 million windfall in anticipated income tax collections in December more than made up for the 13 other major taxes coming in $106 million below projections, continuing a year-long trend.

Moreover, January income tax collections are following the December pattern, and it is likely that income tax collections in April — the most important month for the state budget — will build on that trend.

While the shift of bonuses from January to December does not mean a net increase in revenue for the Treasury, it is likely that the state will receive a cumulative net windfall of at least $250 million or more in state income tax revenue as a result of the federal fiscal cliff.

That income tax windfall from the wealthy could be a boon for the Christie administration, which now needs 9.9 percent revenue growth over the final six months to hit its $31.2 billion revenue target — which is highly unlikely, even with an income tax surge, considering that revenues grew just 1.5 percent in the first six months.

Nevertheless, the surge in income tax collections could help keep the current-year revenue shortfall in the $500 million to $700 million range — averting the $1.5 billion shortfall that Democratic lawmakers feared if revenue trends for the first five months of the fiscal year had continued.

The surge in income taxes this year does nothing to avert next year’s revenue crisis, however. In fact, any increase in FY13 income tax collections from the wealthy due to the federal fiscal cliff constitute yet another one-shot nonrecurring revenue that would have to be covered in next year’s budget.