NEW YORK (S&P Global Ratings) Sept. 9, 2020--S&P Global Ratings said today that the recent New Jersey executive budget proposal for the remaining nine months of fiscal 2021 uses reasonable economic assumptions and would leave the state with what we would view as an adequate fund balance, but also contains what we view as a large structural budget deficit.
- The New Jersey governor's budget proposal for fiscal 2021 contains a large structural deficit, which we calculate at about 15% of proposed 12 month appropriations, largely due to $4 billion of deficit bonds and shortfalls in full actuarial based pension contributions.
- Appropriations in fiscal 2021 would increase over the prior year, which we see as evidence of the state's political and practical difficulty in cutting expenditures, in large part due to rising pension, debt service, and Medicaid costs.
- We will review the final enacted budget when it is adopted by the end of September for its long-term effect on the state's structural deficit, as well as its relation to rising debt and pension liabilities. The state's Office of Legislative Services has forecast significantly higher fiscal 2021 revenue, which may result in a different budget than that proposed by the governor.
Significant Structural Deficit
We calculate the proposal's structural deficit for the 12-month period ending June 30, 2021, at about 15% of proposed appropriations, representing the mismatch between ongoing revenues and spending. In our view, the major components of the structural deficit include $4 billion of proposed deficit financing bonds, or about 10% of proposed appropriations, and the $1.2 billion difference between proposed annual pension contributions equal to 80% of actuarially determined contribution (ADC) and full ADC, or about 3% of proposed appropriations. If one netted out the proposed $523 million increase in fund balance, funded in part from the deficit bonds, the structural deficit from deficit bonds and actuarial shortfalls would decline slightly to 12%. In addition, officials have indicated that other one-time budget measures total slightly over 3% of the proposed budget, bringing the total structural deficit to about 15%.
The state's OLS has forecast 12-month fiscal 2021 revenue about 3.8% higher than the governor's proposal, amounting to a difference of $1.37 billion. If the OLS forecast proves more accurate, we calculate the structural deficit would be slightly lower, although still large, at about 12%.
The proposed general fund budget would leave the state with an operating deficit for the 12-month period ending June 30, 2021, of $3.5 billion, or a large 8.7% of proposed 12-month appropriations (see table 1). This would be offset by $4 billion of deficit bonds (the state has authorized up to $9.9 billion of deficit bonds, if necessary), which would raise the fund balance to $2.2 billion, or an adequate 5.6% of appropriations, up from 4.4% the year before. The state has indicated a need to raise the fund balance to be able to cover a potential second wave of COVID-19 infections.
The state's revenue forecast was raised somewhat compared to its enacted three-month interim budget passed in July, but the proposed budget still anticipates a temporary 10-day deferral of about $2 billion of cash payments from the end of September's extended fiscal year 2020, to early October for cash flow purposes, when the state can arrange a new within-the-fiscal-year cash flow facility. The governor's new budget proposal covers the nine-month period from Oct. 1, 2020, to June 30, 2021.
The state estimates general fund revenues decreased 0.8% in fiscal 2020, despite imposition of a temporary corporate tax surcharge, and projects a further 4.3% revenue decrease over the 12-month period ending June 30, 2020, assuming a proposal by the governor to impose a "millionaire's tax" is enacted, as well as the extension of the corporate tax surcharge for another year, and an increase in the cigarette tax. Revenue enhancements would total $1.0 billion and could potentially be recurring. The higher OLS fiscal 2021 revenue forecast would indicate only a 0.7% decrease in general fund revenue, assuming the governor's revenue raising proposals were adopted.
General fund appropriations decreased 1.2% in fiscal 2020, if lapsed appropriations and GAAP adjustments were deducted from appropriations, and the budget proposal projects a 4.4% increase in 12-month fiscal 2021 appropriations, again netting out lapses and GAAP adjustments. Despite the proposed overall increase in 2021 appropriations, the state has indicated that it has cut $1.2 billion from the budget, of which several hundred million would be considered ongoing.
The governor is proposing no cuts in K-12 education compared to the prior year, and only minor cuts in higher education. We view the proposed increase in overall appropriations, despite the current recession, as evidence that the state's cost structure may be less flexible than that of other states. The executive proposal even contains a new program to provide $1,000 in savings bonds to every low income baby born during the year, although this would cost only a modest $40 million in fiscal 2021, and more in future years. Twelve-month OPEB, debt service, Medicaid, and the 80% ADC pension contributions paid from the general fund are expected to total about $15.3 billion for the 12 months ended June 30, 2021, or about 38% of proposed appropriations, up from $14.0 billion the year before, which we view as fixed costs. Not included in this total are $1.08 billion of additional pension contributions expected to be paid from fiscal 2021 lottery revenues, and the $1.2 billion representing the difference between full ADC and the 80% of ADC that will be paid.
The new 9-month fiscal 2021 budget must be adopted before the end of September, at which time we expect to review its credit implications. It is possible the final adopted budget could vary in important respects from the governor's proposal. The governor's millionaire tax proposal has been rejected by the legislature multiple times before, although it may receive a warmer reception as a result of the recession. There is a good chance that the legislature could use the more optimistic OLS revenue forecast, which could be used to reduce the amount of proposed deficit borrowing, roll back some of the cuts, or to avoid some of the proposed tax increases. The legislature may also target a lower fund balance at a time when state agencies are having to implement budget cuts. Our review of the final enacted budget will particularly focus on the ultimate size of the structural budget deficit and how it might persist into future fiscal years. We will also be evaluating the state's liability structure in light of the adopted budget's amount of new bonding. Besides the deficit bonds, the state expects to issue about $2.5 billion of capital financing bonds in fiscal 2021.
|New Jersey Financial Results|
|--12-mo. anualized fiscal year ending 6/30/21--|
|8/25 gov. proposal|
|Budgetary basis operating funds|
|Lapsed appropriations and GAAP adjustments||353||1,387||420||508||820|
|Net deduction for Open Space Reserve from corporation tax||(151)||4||N/A||N/A||N/A|
|Net operating surplus||(3,477)||4||721||273||304|
|Net operating surplus as % of appropriations||(8.7)||0.0||1.9||0.6||0.9|
|Deposit to Surplus Revenue Fund (Rainy Day Fund)||0||(421)||421||0||0|
|Ending budgetary fund balance*||2,239||1,716||1,291||991||718|
|Combined budgetary and Rainy Day Fund balance||2,239||1,716||1,712||991||718|
|Combined budgetary and Rainy Day Fund balance as % of appropriations||5.6||4.4||4.6||2.8||2.1|
|New Jersey Interim Budgets|
|(Mil. $)||-- 9-mo. proposed supplemental 9/30/20-6/30/21--||-- 3-mo. enacted supplemental 6/30/21-9/30/21--|
|Budgetary basis operating funds|
|Lapsed appropriations and GAAP adjustments||N/A||353|
|Net deduction for Open Space Reserve from corporation tax||(118)||(33)|
|Net operating surplus||(3,842)||(12)|
|Deposit to Surplus Revenue Fund (Rainy Day Fund)||0||0|
|Ending Combined budgetary and rainy day fund balance*||2,132||1,974|
|*Does not include constitutionally dedicated Open Space Reserve or Surplus Revenue Fund. N/A--Not applicable.|
This report does not constitute a rating action.
|Primary Credit Analyst:||David G Hitchcock, New York (1) 212-438-2022;|
|Secondary Contact:||Geoffrey E Buswick, Boston (1) 617-530-8311;|
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