by David Rousseau | Published in NJPP Blog: As a Matter of Fact ...
Last week’s presentations to the budget committees by the treasurer and the Office of Legislative Services (OLS) complete the legislature’s public review of the governor’s proposed FY 2013 budget, and they will provide the framework for negotiations between the administration and legislators leading up to the June 30 budget deadline.
So what do the new revenue projections and spending updates mean for next year’s budget? The answer to that lies in the answer to a number of key questions:
What is the significance of the more than $600 million revenue difference between OLS ($1.3 billion shortfall) and the Christie Administration ($676 million shortfall)?
Based on the history of revenue estimating, it is safe to assume that both updated revenue estimates will be wrong. The questions will be by how far and in what direction.
In periods of economic recovery, the administration and OLS generally both underestimate actual revenue. This year, however, with the difference being so large, the actual collections could fall in between the two estimates.
While the more than $600 million difference in projected revenue represents only a 1 percent difference in revenue over a two-year period, it does represent the largest difference since 2001 when OLS was nearly $1.6 billion below the DiFrancesco administration’s estimates. The 1 percent differential is also similar to 2009, when OLS was $574 million below the estimates of the Corzine administration.
Despite its statistically small size, the difference is significant since it represents more than double the amount of the surplus estimated in the budget.
What are the potential consequences of using the OLS estimates?
If legislative leaders decided to adopt the non-partisan revenue estimates that are $628 million lower than the administration’s revised estimates, they would have to a similar amount in additional spending reductions and/or revenue to offset the loss. Due to the cuts that have been made by the Corzine and Christie administrations there are not many – if any – additional spending reductions that would not have substantial impact on state programs and residents.
An easy way to make up some of that money would be to nix the tax cut plans, at least for this year. But even doing that would only save the state $183 million next year – or less than 30 percent of the overall shortfall. The legislature would still need to find an additional $444 million in budget reductions or new revenues. This would not be an easy task.
Using the OLS numbers would severely impact the legislature’s ability to deal with other concerns in the governor’s budget. In fact, addressing some of the major concerns in the governor’s budget would likely be improbable since the legislature would first have to find the $627 million to cover the OLS shortfall, and then find additional reductions or revenue to fund any policy changes they may want to make to the budget.
It is interesting to note that the FY 2013 impact of the “millionaires’ tax” that was vetoed by the governor last year is about $800 million. If Democrats wanted to cover the shortfall this year, a similar proposal could easily do so, while providing an extra $180 million to address other policy concerns. But don’t hold your breath; even if the measure didn’t face a certain veto, Democrats would want any “fair share” tax to help fund popular programs like property tax relief or education, not to cover a revenue shortfall.
If the legislature adopts the OLS revenue estimates, and actual revenue collections during the year are closer or even above the administration estimates, the governor would then have this additional revenue to use in the FY 2014 budget (the possible reelection budget). In other words, the legislature would take the heat for any cuts or other actions they took to offset the shortfall, and the governor might get extra revenue for politically driven election-year proposals.
And if the legislature adopts the OLS estimates and they turn out to be on point, there is still no major downside for the administration, as it won’t have to make any cuts or adjustments – that dirty work will have already been done by legislators.
What are the potential consequences of using the administration’s estimates?
There are relatively no short-term negative consequences to using the administration’s revenue numbers, even though they are $628 million more optimistic than OLS’s. The administration is willing to risk that its numbers will be correct; if they aren’t, it won’t likely have to be dealt with – or even acknowledged – until the governor prepares his FY 2014 budget next February.
Politically, using the higher revenue estimates allows the administration to keep the same growth rates it had assumed in February, thus maintaining the illusion of stronger economic growth as part of the “New Jersey Comeback.” It also allows the administration to continue to push for its tax cuts, since it has already covered the shortfall in its revised plan.
If the actual collections are lower than the estimates, the administration will need to make adjustments to the budget to address the additional shortfall. Unless there is a major negative change in the economy in the next six months, any shortfall will likely not materialize until the second half of the year, and would be dealt with as part of the FY 2014 budget.
In the short term, the administration will have to defend these revenue projections to the rating agencies as they prepare their annual review of the state budget and make pronouncements on the state’s fiscal health. It should be noted that Moody’s recently stated that they expect revenue growth for FY 2014 would be similar to the growth in the current year. If that pans out, OLS says, there could be a total revenue shortfall of over $2 billion.
What estimates are likely to be used for the budget?
Even though the Democratic leadership jumped to the estimates of OLS last June you should not bet the mortgage on the Democrats being consistent. Last year OLS had projected more revenue than the administration, so the use of those estimates allowed the Democrats to propose additional spending.
But “consistency” is not an adjective that can be used to describe decision-making by legislators. It is highly likely that this year, they will defer to the governor and use the estimates presented by the state treasurer.
Unless the administration reduces its estimates further based on collections over the next few weeks, the budget will likely be based on the administration’s numbers. With more money to play with, legislators can move forward with their own tax-cut plans, and possibly address other minor concerns that have bubbled up during the budget hearings.
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