The New Jersey Assembly on Thursday voted to do something most policy experts usually think is a bad idea – borrow money to fund general operating expenses. Ordinarily, NJBIA would oppose such a move as one that contributes to the state’s fiscal cliff financial problems. These are hardly ordinary times, and a more nuanced view of borrowing may be appropriate in which NJBIA understands the potential necessity of more limited borrowing after significant spending cuts and structural reforms while still having great concern.
NJBIA budget expert Chris Emigholz looked at the pros and cons of such borrowing during the pandemic emergency and shared his insights with the Assembly Budget Committee earlier this week on how to do it responsibly.
New Jersey’s constitution generally prohibits borrowing without voter approval, but it does leave room for emergencies. Whether it ever allows borrowing for operational expenses as is being contemplated is a legal debate that will probably occur in the near future.
A-4175 (Pintor-Marin, D-29) is the “New Jersey COVID-19 Emergency Bond Act,” which authorizes the issuance of potentially $14+ billion in bonds, some with a 35-year maturity.
Emigholz said such “borrowing can be a useful and important fiscal tool in a crisis like we are in, but we have concerns that it be done the right way to protect taxpayers now and into the future.”
Three months of a nearly complete economic shutdown have devastated government finances, creating a $9.9 billion state budget deficit for the current and next fiscal years. Gov. Phil Murphy’s policy of recapitalizing the state’s “rainy day” fund of reserves will play an important role in balancing the budget going forward, but won’t be enough by itself.
So what should New Jersey do to make the borrowing plan workable without unduly burdening taxpayers in the future?
Restraint is the key. Emigholz says it’s too soon to borrow billions under these terms. New Jersey should wait until it knows what federal budget assistance will come to our State and what annual tax revenues will look like after July 15 to understand how much is really needed. Additionally, borrowing for operating expenses should be done on much shorter terms, such as the Federal Reserve’s Municipal Liquidity Facility program instead of typical 35-year general obligation bonds, Emigholz said.
Borrowing should be a last resort, so the state should maximize budget cuts first. The Murphy administration took a good first step two weeks ago when it announced its initial plan for closing the deficit. He proposed $1.3 billion in “de-appropriations” and another $3.2 billion in cuts or delayed appropriations after June 30. The governor also withdrew nearly $900 million in new spending he proposed before the pandemic hit.
Emigholz notes, however, that Murphy has increased spending by $4.8 billion since taking office in 2018, so more cutting for FY 2021 is justified and achievable.
Ultimately, it’s the state economy that needs to improve for state finances to recover. To that end, reopening the economy takes on even greater importance.
“State revenues will continue to decline as long as the very businesses that generate that desperately needed tax revenue are closed by state government, so businesses need clear reopening metrics and guidelines,” Emigholz said. “This borrowing is not for COVID-19 related expenditures but to fill a revenue hole – a hole that would not be so deep and need borrowing and spending cuts if we were not one of the last states to have an orderly reopening plan.”