N.J. Sees Red Despite Rising Revenues

With state budgets around the country sprouting surpluses and governors talking about tax cuts or beefed-up spending on long-neglected schools or capital projects, New Jersey seems to have missed out on the party.

Newly sworn Gov. Jon S. Corzine’s first budget would increase taxes by $1.5 billion, slash aid to public universities, and renege on a campaign promise to raise homeowners’ property tax rebates.

“Our problem is simple,” Corzine (D) told the Legislature during a somber budget address March 21 . “We have been spending more than we take in.”

The bulk of Corzine’s proposed tax increase would come from raising the base sales tax rate from 6 percent to 7 percent and expanding it to cover such things as music downloads and health club memberships. He also proposed higher liquor and cigarette taxes, a new water tax, and a surcharge on registering luxury cars and gas-guzzlers.

The old-fashioned prescription of tax hikes and spending cuts proposed by Corzine, a former chief executive of the Goldman Sachs investment firm, is a sign that a long-predicted day of reckoning for New Jersey’s finances may have arrived. Polls have shown the public was aware that the state was in dire fiscal shape, but people are not happy with Corzine’s answers. Many feel he did not try hard enough to cut spending before he resorted to tax hikes.

With no state offices on the ballot this year, the governor’s tax proposals are most likely to reverberate in the November race for the U.S. Senate seat that Corzine previously held.

The race likely will be between state Sen. Thomas H. Kean Jr. (R), the son of a popular former governor, and Democrat Robert Menendez, the former House member Corzine appointed as his replacement in January. Kean already has challenged Menendez to denounce the tax increases , but Menendez has praised Corzine for making tough choices – though he also urged the Legislature to look for more spending cuts before raising taxes.

The governor’s fellow Democrats, who control the Legislature, have said they will look for more savings. Some Democrats have floated ideas that had been discussed and rejected in the past, such as leasing the New Jersey Turnpike to investors. But Corzine has said that if there’s any new revenue, he wants to reverse cuts to state universities first, not abandon the sales tax increase.

New Jersey’s budget woes can be traced back nearly a decade.

In 1997, then-Gov. Christine Todd Whitman (R) plugged a budget shortfall — caused in part by her tax cuts — by issuing $2.8 billion in bonds to cover long-term liabilities in the pension system. The bond proceeds were deposited into pension funds and then invested in the stock market just as the dot-com bubble began to inflate.

The assets in the pension funds mushroomed, allowing the state to skip annual payments of more than $600 million for employee benefits. The Legislature also approved a huge increase in pension benefits for workers and retirees in 2001 based on analyses that there were sufficient assets to pay for them with no additional cost to taxpayers.

But when the stock market tanked and asset levels fell to the point where the state was required to resume making payments, state revenues also had tanked. There was no money to make the payments, which by that point were more than $750 million a year.

To understand the impact, imagine if a family could skip monthly mortgage payments for several years. The family would get used to spending the money on other things, and when mortgage payments had to resume, the shock would be tremendous.

But that was only part of New Jersey’s problem.

The stock market run-up in the late 1990s also had poured money into state coffers, since the state’s graduated income tax is weighted heavily toward high-income residents. Essentially, the state was receiving a cut of investors’ capital gains and the year-end bonuses of Wall Street traders and executives who live on the New Jersey side of the Hudson River.

New Jersey not only spent that money, it created new programs that would steadily grow in cost. Whitman complied for the first time with a decades-old series of state Supreme Court rulings mandating that the state fund low-income school districts at the same per-pupil level as the state’s wealthiest districts. Whitman also launched a new property-tax rebate program for homeowners that was to grow in size by $200 million a year, and enacted an $8.6 billion program for school construction.

When the capital gains and stock-trader bonuses disappeared almost overnight, and the economy was shocked by the Sept. 11, 2001, terrorist attacks, state revenue plummeted. Income tax collections in fiscal 2002 were $1 billion lower than they were in fiscal 2001, for example.

These problems were inherited by Gov. Jim McGreevey (D) in January 2002. McGreevey made some cuts to spending, and raised some taxes, including a $1 billion restructuring of corporate income taxes in 2002 and an income tax surcharge on those making more than $500,000 in 2004.

But for the most part, McGreevey used short-term patches to plug budget holes. He securitized the state’s entire tobacco lawsuit settlement and spent it all in his first two years in office. In 2004, he balanced the budget primarily with the proceeds of bonds backed by future collections of cigarette taxes and motor vehicle fees, a move the state Supreme Court later ruled violated the state Constitution’s balanced-budget clause.

“Up until last year’s budget, when New Jersey started to reduce the structural gap between revenues and expenditures, the state used one-time actions on a consistent basis,” said Richard Marino, an analyst for credit-ratings agency Standard & Poors. “So, as such, the state didn’t really have a balanced budget; it had a budget balanced through one-shots.”

In addition to tax increases, Corzine has proposed a $1 billion increase in contributions to public employee pension systems. Still, he’s providing only 70 percent of what actuaries say the state should be contributing. If revenues and spending continue at their current pace, budget documents project a deficit of $1.5 billion for fiscal 2008, including more than $1 billion for employee benefits and pensions.

The gap exists even though revenues are coming back. Corzine’s budget reports that total income in the state increased by 9.5 percent in 2004, 8.9 percent in fiscal 2005, and is projected to grow by 8.3 percent in 2006. The state expects to collect $1 billion more in income tax in the next fiscal year than it will this year.

But while revenues have grown, spending obligations have grown even faster. In addition to making pension payments and replacing one-time revenues that propped up past budgets, Corzine had to provide an additional $450 million for debt payments. Those payments cover a variety of old debts, including Whitman’s pension bonds, a steadily growing mountain of transportation debt, and the huge school construction program.

 “To those who thought my financial background would mean I had some magic bullet in my holster to balance the budget, I am sorry to disappoint you,” Corzine said in his budget speech. “My answer is as simple as old-fashioned arithmetic. We can’t keep spending more then we take in. The solution is simple – stop! We must and we can.”

Herb Jackson is Washington correspondent for The Record of Bergen County, N.J.