articles Ratings /ratings/en/research/articles/200909-bulletin-new-jersey-governor-s-budget-proposal-contains-large-structural-deficit-11643765 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List
NEWS

Bulletin: New Jersey Governor's Budget Proposal Contains Large Structural Deficit

COMMENTS

U.S. Charter Schools Rating Actions, Third-Quarter 2020

COMMENTS

Cyber Risk In A New Era: Disruptions And Distractions Increase Challenges For U.S. Public Finance Issuers

COMMENTS

U.S. Public Finance Report Card: The Not-So-Secret Sauce In State Housing Finance Agency Programs' Stability

COMMENTS

U.S. Higher Education Rating Actions, Third Quarter 2020


Bulletin: New Jersey Governor's Budget Proposal Contains Large Structural Deficit

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.

Highlights

  • 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.

Revenue Proposals

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.

Appropriations

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.

Conclusion

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.

Table 1

New Jersey Financial Results
--12-mo. anualized fiscal year ending 6/30/21--
8/25 gov. proposal
(Mil. $) 2021p 2020E 2019 2018 2017
Budgetary basis operating funds
Revenues 36,391 38,027 38,316 35,786 34,120
Appropriations 40,070 39,414 38,014 36,021 34,704
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
Deficit borrowing 4,000 N/A N/A N/A N/A
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

Table 2

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
Revenues 28,690 7,701
Appropriations 32,414 7,656
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)
Deficit borrowing 4,000 0
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;
david.hitchcock@spglobal.com
Secondary Contact:Geoffrey E Buswick, Boston (1) 617-530-8311;
geoffrey.buswick@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.


Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back