REVENUE PICTURE IMPROVED, BUT CAUTION RECOMMENDED

by David P. Rebovich

Legislators and the still-mending Governor breathed a sigh of relief last week. Treasurer Bradley Abelow and the Office of Legislative Services announced that state revenues were meeting the Administration’s projections, thanks to strong yields from the corporate business and personal income taxes. As such, there willno need to make big cuts in Corzine’s budget proposalfor the new fiscal year that starts July 1st. But the Treasurer, OLS, and some veteran lawmakers on both sides of the aisle are recommending that legislators exercise caution in how they deal with the good financialnews.

Let’s hope this advice is taken seriously not only by the legislature but by the Governor himself. After all this year’s budget season is starting to follow a familiar script. A governor proposes a budget that does not satisfy everybody, evensome of the key constituent groups in his own party. He warns that fiscal restraint is required for two reasons. The state’s immediate revenue situation is uncertain and long-term obligations like pensions anddebt servicepaymentsjeopardize its ability to balance future budgets. However, if the revenue picture improves before the new budget must be approved, legislators will be eager to spend more on programs for constituents, especiallysince its anelection year. And,the governor is likely to go along.

Will this script play out this budgetseason? Well, even if they decide to be cautious, the Democrats who control both chambers of the legislature are likely toget some kudos from some constituents. After all, the new budget will include considerable direct property tax relief for most New Jerseyans. Non-Abbott school districts and municipalities will receive more state aid for the first time in five years. Colleges an universities will also get more money after taking a big hit in the current budget. And, the Governor is proposing funds for new initiatives in stem cell research and autism.

Corzine’s proposal is not a bad election year budget, especiallybecause it contains no new taxes and considerable direct and indirect propertytax relief. But now that the state’s revenue situation looks better, some Democratswant to add tothe Governor’s spending recommendations. More money for hospitals in urban areas, for nursing homes, and foremployees who serve the disabled are high on the list of Assembly Budget Committee chair Louis Greenwald. And Joe Roberts, the Speaker of the Assembly, wants legislators to consider putting on the ballot a constitutional amendment to dedicate all the revenue fromthe one-cent increase in the sales tax to property tax relief.If approved this amendment would earmark another $700 million in state revenue tohomeowners, school districts, and towns.

Such a plan may be good politics. It is also consistent with the Governor’s commitment to decreasing the state’s dependence on property taxes to fund schools, municipalities, and counties. But earmarking so much moremoney in a budget that is already dominated by mandated state aid and spending programs may jeopardize the state’s ability to balance future budgets or achieve long-term fiscal integrity, another Corzine goal.

Treasurer Abelow made these very points last week. He reminded legislators about the state’s structural deficit which, even with the more responsible fiscal policies of the current Administration, will be $2.5 billion next year. In addition, there are payments that have to be made to the public workers pension fund that despite receiving a boost froma bullish stock market is still under-funded by billions of dollars. The state also needs to budget some $3 billion annually for debt service payments for the $30billion it has borrowed over the years. Other spending pressures include the need to pay for new school construction inthe Abbott districts, transportation maintenance and improvements, and more classrooms and residence halls for state colleges and universities.

These obligations and pressures are the reasons why Republican legislators are asking whether the new property tax relief plan is sustainable and why the Governor would recommend any new spending proposals at this time. And why NJPIRG wants the Governor to sign a pledgeto not use any funds from “asset monetization” – the leasing or selling of state facilities – for operating expenses. NJPIRG argues that too oftenlawmakers use new revenues for new spending programs and in the process give citizens the impressionthat state government canalways figure out a way to pay for new programs. The windfall provided bymonetizing the New Jersey Turnpike wouldtempt lawmakers tospend more on politicallypopular programs andnew policy initiatives. But, according to NJPIRG,giving into that temptation would be fiscally irresponsible.

While Corzine has said hisbusiness background was good preparation for the governorship, he alsoinsists that he is not a financial magician.He has insisted, however, that heis committed to restoring fiscal integrity to state government. In regard to “asset monetization,” Corzine claims that he will not sell a toll road and wants to use any cash gained from asset monetization to pay down the state debt and for capital projects. Paying off half of the state’s debtcan saveabout $1 5 billion, which is a big chunk of that $2.5 billion structural deficit that Abelow warned the legislature about.

The problem is that a majority of New Jerseyans do not support leasing the Turnpike or other toll roads. Many are concerned that tolls will be ratcheted up, the state will lose control of a vital asset, and the transportation network will decline. When the Governor is fully recovered, he will have to stump the state to convince residents that asset monetization can be done with appropriate controls to protect the state, maintain services, and control toll prices. He will also have to convince folks that the state’s fiscal situation is so serious that something as extreme as leasing the Turnpike is necessary.

After all, if the state is on the brink of fiscal disaster, why would it give property taxpayerssome $1.4 billion in credits and rebates? Why woulda Governor committed to restoring fiscal integritypropose new spending initiatives, even modest ones? Why do some Democratic legislators want to dedicate more sales tax revenuesfor property tax relief when the state still can’t be sure that it will be able to balance its 2009 budget? The answer is obvious. Political considerations trump policy ones, especially in an election year. But then lawmakers should notbe surprised that when they really do need citizens to accept controversial new policies or tosacrifice for the state’s or their ownlong-term good,those lawmakers aren’t taken seriously. The Governor may want to keep this in mind.

David P. Rebovich, Ph.D., is Managing Director of the Rider University Institute for New Jersey Politics. He also writes a regular column, “On Politics,” for NEW JERSEY LAWYERand monthly reportson New Jersey for CAMPAIGNS AND ELECTIONS Magazine.