Fixing New Jersey's busted budget: Four steps to put the Garden State's fiscal house in order
Tom Healey and Thad D. Calabrese
November 15, 2021
As New Jerseyans have re-elected their governor, the state’s spending spree continues unabated, even as it tries to recover from a devastating pandemic. The state is expected to spend more than $46 billion in the current fiscal year—a 10 percent increase over last year. Helping to control the damage is $6 billion of one-time federal relief, as well as $4 billion of debt. But in return for this largesse, New Jersey is offering Washington little reassurance about fiscal stability. New Jersey citizens continue to shoulder the third-highest income and property tax rates in the nation, a decidedly inhospitable business climate, failing infrastructure, and poorly funded pension systems struggling to maintain the promises made to public employees.
The current budget falls flat when it comes to securing the state’s financial health. Governor Phil Murphy and legislators want accolades for making a $6 billion contribution to the state pension system earlier this year, but this only represents what actuaries say the state should be putting in every year. To ensure sufficient pension funding, New Jersey would need to make an even larger payment not just next year but for many years to come—a daunting challenge for a state with so many fiscal frailties.
Our recent report for The Garden State Initiative, Toward a Fiscally Sustainable New Jersey: Analysis & Recommendations, follows the 2012 State Budget Crisis Task Force analysis, directed by former Treasury secretary Paul Volcker and former New York lieutenant governor Richard Ravitch. Our report urges New Jersey politicians to take the critical steps needed to put the state on a sustainable fiscal path. In particular, we make four recommendations.
New Jersey must hold the line on taxes. Tax rates are already sky high, and the business climate is poor. New Jersey’s fiscal problems stem not from collecting too little revenue but from spending too much. Among the state’s greatest priorities is ensuring that the out-migration of high-income individuals does not persist. Taxpayers earning more than $100,000 annually make up about 24 percent of tax returns filed and pay about 86 percent of all income taxes. If these residents continue to flee, New Jersey will face the alarming prospect of lower income tax revenues and a population unable to support the state’s current spending.
State leaders must not be fooled by optimistic 2020 census data showing population growth. An analysis by The Garden State Initiative earlier this year found several factors that may have increased the state’s population, but these won’t persist, and they will have little or no impact on the state’s general economic climate. And even this one-time population boost was significantly smaller than similar increases in other parts of the country.
New Jersey leaders must work vigorously to reform the state’s ailing public-pension and retiree health-care systems. Notwithstanding this year’s $6 billion payment, over the last two decades, the state—under the control of both Democrats and Republicans—has consistently failed to fund its pension systems at levels recommended by actuaries. As a result, New Jersey has the second-worst funding ratio (assets to liabilities) in America. Perhaps most disturbing, pension liabilities are growing faster than the New Jersey economy itself. The more resources the state taps for the pension system, the fewer will remain for other essential government initiatives. The state has missed the opportunity to reform the pension systems to ensure long-term fiscal sustainability. Political leaders must now negotiate with labor to enact major reforms reducing the size of the liability.
Among the measures the state should consider are raising the benefit-eligible retirement age of public employees and increasing their contributions. Retiree health-care programs are also in dire need of change. Reforms might include modernizing the present share of health-care costs between beneficiaries and the state and transitioning to a defined-contribution system for health-care benefits, in which retirees would receive a predetermined amount of money to purchase whatever benefits they choose.
The state must meet the need for an estimated $50 billion in infrastructure spending over the next decade. Infrastructure improvements are crucial to economic development and an enhanced quality of life for millions of citizens. But the state faces a serious problem: construction costs to underwrite infrastructure repairs are between four to six times higher in New Jersey than the national average, and substantially higher than those of neighboring New York and Pennsylvania.
New Jersey leaders should carefully analyze the entirety of the state budget. The goal would be to determine which service areas are less critical and how to improve efficiencies to ensure the greatest return to taxpayers. For example, New Jersey has one of the nation’s best public school systems, but it spends significantly more than states like Massachusetts that also boast top-ranked schools. The state should investigate whether it could save money, for example, through shared back-office and business operations.
New Jersey’s annual budget has grown nearly 140 percent over the past 20 years, while its economic activity, measured by gross state product, has expanded by less than 1 percent annually on average since the Great Recession. No one expects decades of fiscal mismanagement to be turned around in a single year, but state leaders need to consider ways to remove the structural deficit—that is, spending that exceeds revenues even when the economy is strong. More than ever, New Jersey needs elected officials with the ability and determination to put the state’s fiscal house in order.
Thad Calabrese is Associate Professor of Public and Nonprofit Financial Management at the Robert F. Wagner Graduate School of Public Service at New York University, where he is currently head of the finance specialization. Thomas J. Healey is the Founder and Managing Partner of Healey Development LLC and founder of several investment funds. He served as Chair of the New Jersey Pension and Health Benefit Study Commission and was Assistant Secretary of the Treasury for Domestic Finance under President Ronald Reagan and is a Senior Fellow at Harvard University’s John F. Kennedy School of Government.