The dire warnings began when New Jersey was most vulnerable.
Starting in March and continuing over the turbulent weeks that followed, Gov. Phil Murphy predicted the coronavirus pandemic would plunge the state into fiscal and economic peril.
New Jersey could lose $20 billion in revenue, maybe even $30 billion, the governor said. The state could run out of cash by fall. Two-hundred thousand public workers might be laid off. And, in the absence of a second federal stimulus package, funding for public schools may be slashed by $1 billion.
There was reason for New Jerseyans to be concerned. With hundreds of thousands of workers losing their jobs each week, most in-person shopping banned, and a crackdown on indoor and outdoor dining, the state’s largest sources of tax revenue were shrinking.
But nine months into the crisis, some of the governor’s alarming prophecies — forecasts that helped his administration win approval to borrow up to $9.9 billion — have proven wrong.
Even viewed in the most generous light, Murphy’s initial prediction for the state’s revenue loss was four times higher than what’s transpired to date. His administration’s cash flow projection missed the mark by billions. The number of public workers known to be laid off so far is a fraction of what the governor warned. Murphy’s threat that he could be forced to slash $1 billion in school aid? Mentioned once and seemingly never again.
“Not only did they not happen, they weren’t even close,” state Sen. Declan O’Scanlon, R-Monmouth, said of the administration’s predictions.
Forecasting the pandemic’s effect on any state’s bottom line is extremely difficult, in part because economic fallout is linked to the unpredictable spread of COVID-19, fiscal experts say.
Yet state lawmakers from both parties have been puzzled by the math behind the governor’s bleak outlook.
Some suggest Murphy threw out big numbers to get Washington’s attention and ratchet up pressure for more federal aid. Republicans on the Senate Budget and Appropriation Committee accused the governor of exaggerating the pandemic’s impact in order to borrow more money than necessary, helping bolster the state’s short-term finances in time for his 2021 re-election campaign.
Murphy’s administration contends the projections were made with the best intentions. The fiscal maneuvering really did improve New Jersey’s financial position, and success limiting COVID-19 outbreaks over the summer contributed to better than expected financial performance, officials said.
“It has been incredibly challenging to forecast in this environment because the health of the New Jersey economy, and thus tax revenues, has depended on the path of a novel coronavirus that we knew little about last March and April and that we are still learning about,” Treasurer Elizabeth Muoio said in a statement to NJ Advance Media.
Senate President Stephen Sweeney, D-Gloucester, thinks the administration was being characteristically cautious and planning for the worst-case scenario.
“You can’t plan for half a catastrophe,” Sweeney said. “If you don’t plan for the worst and the worst happens, then you’re really in trouble … the way the pandemic had hit, you could see things going south real fast.”
New Jersey isn’t out of the woods yet. Muoio said the “big question” is how badly the virus’s second wave will hurt the state’s coffers.
“The uncertainty behind what a winter surge will look like and how it may affect businesses that are already hurting has been a driving factor behind our cautious revenue forecasts throughout this crisis,” she said.
Yet even if New Jersey’s finances worsen, several of Murphy’s most high profile predictions still seem unlikely to come true, critics said.
New Jersey’s financial outlook seemed to reach peak crisis level when Murphy met with President Donald Trump at the White House on April 30.
Murphy, who had already predicted a crippling revenue loss, raised the stakes, now saying New Jersey could lose up to $30 billion over two years. Such a blow would be a knockout punch to a state with an annual budget of less than $40 billion.
“As with all of our budgetary projections, we considered everything we knew at the time, along with projections we had of the future of both the virus and our economic condition,” said Darryl Isherwood, a spokesman for Murphy.
Trenton insiders cocked their heads. The pandemic and state-mandated shutdown would blunt tax collections, no doubt. But $20-$30 billion? To some, the appraisal was stunning.
“I think they were disingenuous,” said State Sen. Steven Oroho, R-Sussex. “We did try to point that out. Unfortunately, when you’re talking about budgets, it’s hard to get across to the general public. They see $20 to $30 billion. They see $10 billion. And they got them afraid.”
When the Treasury Department painted a more detailed picture of the revenue loss in May, it had lowered its forecasts to a still-whopping $9.9 billion shortfall over two fiscal years. That included a $2.7 billion shortfall for the fiscal year that ended June 30 and a $7.2 billion shortfall for the fiscal year beginning July 1.
To offset the feared $2.7 billion shortfall in the last quarter of the fiscal year, when much of the state’s money has already gone out the door, Murphy’s administration cut some spending and dipped into surplus.
Tax revenues — sales taxes propped up by federal stimulus measures in particular, and personal income tax withholds — came in higher than expected. The worrisome $2.7 billion shortfall for the fiscal year that ended June 30 wound up being $1.4 billion.
O’Scanlon said the administration should have recalibrated and changed its tune after the stronger revenue numbers came in.
“The thing is, they continued to misrepresent revenue numbers even when we had revenue numbers that refuted what they said,” O’Scanlon said.
When Murphy introduced a revised budget proposal in August, the shortfall for the next fiscal year was now $5.6 billion. Murphy proposed resolving it with tax increases, cuts and $4 billion in borrowing.
By the time Murphy signed the budget into law at the end of September, after raising taxes, making cuts and increasing spending, he certified a nearly $4.7 billion shortfall. It would be plugged by borrowing.
In November, the administration’s latest shortfall estimate: about $4.3 billion — a nearly $3 billion improvement over Murphy’s initial projection.
While those projections proved off so far, Sweeney argued Murphy was right to prepare for the “absolute worst.”
“Here’s the other side of that: the same people that are saying it’s wrong, say he planned for half of it and then it went beyond? They’d be yelling: “You over-underestimated (revenues),’” Sweeney said.
There are also questions about how Murphy calculated the budget shortfall.
The administration did not compare how much money New Jersey would get this year to how much revenue it took in last year or the year before in figuring out the shortfall.
Instead, it used as its baseline Murphy’s pre-pandemic February budget, which predicted a booming economy and revenue from new and increased taxes that had not yet been approved by the Legislature.
“To compare what we really think is going to happen to what a wish list was back in February was completely disingenuous,” Oroho said.
The National Association of State Budget Officers uses actual fiscal year 2019 tax collections as its baseline when calculating how much revenue has declined.
According to treasury records, New Jersey took in $38.3 billion in the fiscal year that ended June 30, 2019, which was untouched by the pandemic.
Even though the pandemic hit in March, the $38 billion in taxes New Jersey got in the fiscal year that ended this June 30 is just $290 million less than what it collected the year before. It’s $490 million less than the $38.5 billion in tax collections the governor expected when he signed the budget for that year.
And the $36.9 billion the state expects to bring in this fiscal year is $1.4 billion less than it booked in fiscal year 2019, making the projected revenue loss over two years about $1.7 billion.
However, the state typically counts on about 3% growth each year, so while the comparison may capture the revenue loss, it doesn’t necessarily reflect the real pain.
Brandon McKoy, president of New Jersey Policy Perspective, a liberal think tank, said any sort of assessment of whether Murphy was “overly cautious” is premature, noting that national budget analysts also were predicting massive revenue shortfalls for states.
“We’re still in the middle of this crisis, and to say the projections didn’t play out, we’re not going to know that for a decade,” he said. “We’re not going to know it until we get well on the other side of it.”
McKoy argued the comparison that really matters is how much New Jersey should spend to deliver economic security to all its residents.
“The budget wasn’t sufficient to begin with, and to merely measure ourselves against where we were? I don’t accept that,” he said.
Oroho suggested Murphy was trying to get the attention of federal lawmakers. If there is going to be another stimulus program, New Jersey deserves its fair share, he said.
“However, credibility means something,” Oroho said. “When you’re going to be that wildly off, and you’re the chief executive in the executive branch, just like a public company that gives its forecast for Wall Street, when they see you’re that wildly off, your ability to manage is put into question.”
O’Scanlon sees politics at work: “It’s obvious they wanted to take advantage of a moment to make their lives easier going forward. Next year, we’re going to hear ‘Our management was so good, our predictions were so wonderful and improved the economy, so trust us, re-elect us.’”
Murphy’s projections could begin to look more accurate if the pandemic persists.
There is reason to believe the pandemic’s impact on states’ finances is only going to get worse, said Brian Sigritz, director of state fiscal studies for the National Association of Budget Officers.
Last fiscal year, which began in July 2019, had the benefit of nearly nine months of strong revenues before the pandemic hit. Revenues were coming in ahead of projections, and that lessened the blow. This fiscal year doesn’t have that cushion going for it.
Murphy’s administration said its forecasts had to account for the possibility that the state wouldn’t bounce back from the virus over the summer. It was unclear how quickly consumers would feel comfortable dining indoors again and socializing one business began reopening, Muoio said.
“Looming in the background has been the fear that once the economy reopened and people began to return to their ‘normal activities,’ there would be a greater likelihood that the virus would resurge, a reality which is coming to pass as we speak,” she said.
NEW JERSEY COULD RUN OUT OF CASH?
New Jersey had more than just a budget shortfall problem, state officials warned. By August or September, the state would be running dangerously low on cash.
Having enough money to pay bills was a concern for states around the country as economic activity ground to a halt and income taxes filing deadlines were pushed from April to July.
Even so, states that run short on cash before tax revenues come in have ways of managing it. Many, like New Jersey, regularly use short-term borrowing to tide them over.
Treasury deferred some spending — including a $951 million pension payment, school aid, municipal aid and an NJ Transit subsidy — and was able to temporarily borrow from its federal relief aid to get through Sept. 30, Muoio said. It also extended the repayment deadline of a $1.5 billion short-term loan with Bank of America from June 30 to Sept. 30 at 4% interest.
The Murphy administration portrayed those steps as merely Band-Aid measures.
“The wheels come off the bus on Oct. 1,” Muoio said June 1.
Murphy was more apocalyptic. New Jersey faced an “imminent fiscal meltdown” if it didn’t authorize borrowing for an emergency cash infusion, he said at a coronavirus briefing in July.
He added that that even with immediate action, “it will still take many weeks … for us to get to the point where we’ll have the money we need to keep the state running.”
Months earlier, the Treasury Department had alerted lawmakers to a potential $4.3 billion cash flow shortfall by the end of September, according to a Treasury analysis obtained by NJ Advance Media.
In reality, New Jersey’s cash low point came this spring, with $2.2 billion on hand. At its lowest for point in September, the state had $5.8 billion in its operating accounts. Since the administration told lawmakers the state would be about $4 billion in the hole as it pushed for permission to borrow, that’s a difference of about $10 billion.
While the Legislature believed cash flow might be tight, it “never agreed” with the administration’s” analysis, Sweeney said.
Republicans were more biting.
“How could they be that far off?” Oroho said. “We gave them the benefit of the doubt and we should not have.”
Muoio attributed the better cash flow to the administration’s proactive measures, the benefit of federal assistance that helped residents spend money and the comparatively low COVID-19 case counts in May and June that helped the economy rebound more quickly than expected.
Those with money shifted spending from eating out to things like home renovations and home-office purchases, boosting sales tax revenues that were expected to plunge, she said.
Despite skyrocketing unemployment at the outset of the pandemic, job losses were concentrated in low-wage sectors, lessening the impact on income tax collections, she said.
DEVASTATING EDUCATION CUTS?
When U.S. Senate Majority Leader Mitch McConnell unveiled a federal stimulus proposal in July that set aside no new money for states, Murphy wasn’t pleased.
There would be consequences, he warned. New Jersey may be forced to cut $1 billion in school funding for the coming school year if Congress didn’t send more cash, he said July 22.
“We cannot fully support our districts in their plans for the upcoming school year without help from Washington,” Murphy declared.
Murphy’s startling remarks came as local education officials were scrambling to stockpile PPE and invest in technology for an unprecedented school year.
The state sends nearly $9 billion in aid to school districts each year. By the time Murphy teased a $1 billion cut in July, he had prepared districts only for a $335 million reduction in aid from his proposed budget in February.
Lawmakers were confused. Just days earlier, the state Legislature authorized borrowing as much as $9.9 billion. Now, suddenly, school aid was on the chopping block?
O’Scanlon quickly dismissed the warning as “a scare tactic” considering the state’s plans to borrow money.
Asked by a reporter that day why the state didn’t borrow even more money to avoid the $1 billion cut, Murphy said: “At a certain point, as desperate as we are, we can only bear so much leverage.”
The federal government has still not delivered a second stimulus plan, though talks are ongoing. The $1 billion cut Murphy said would be necessary never happened.
The administration has offered no detailed explanation of how it arrived at the $1 billion cut Murphy reference. It said the state had not yet established “an appropriate borrowing number” at the time of the governor’s comments.
State Sen. Teresa Ruiz, D-Essex, who chairs the Senate Education Committee, said Murphy’s announcement compounded the insecurity districts were already feeling.
“Making any type of cuts, or any conversations out loud about dismantling any school budgets would be reckless in my opinion,” she said. “Fortunately, it didn’t happen.”
In May, Murphy gave Bloomberg Television’s audience another attention-grabbing warning: If the federal government didn’t come through with more aid, 200,000 public employees could lose their jobs.
That grim tally would be nearly half of New Jersey’s full-time state and local government workforce of about 433,000, according to the U.S. Census Bureau’s 2019 Annual Survey of Public Employment and Payroll. There were more than 130,000 part-timers.
“This is about keeping firefighters, police, EMS, healthcare workers, educators employed,” the governor said. “The alternative, I should say, to not getting that funding is a whole lot of layoffs. We think as much as 200,000 or more.”
Of the 1.8 million workers in the Garden State who have filed for unemployment benefits, just a tiny fraction are public workers.
There were about 559,000 state and local government jobs here in February and 528,000 in October, according to seasonally adjusted data from the Bureau of Labor Statistics. Three quarters of those job losses were in local government, primarily in K-12 schools.
Meanwhile, municipalities losing parking, recreation and other fees feared homeowners who lost their jobs would fail to pay their pricey property tax bills, spurring widespread layoffs and service cuts.
But that hasn’t come to pass, they said, because of federal reimbursements for coronavirus-related expenses and the stimulus funding — both checks and enhanced unemployment benefits — helped homeowners stay afloat.
Local governments know they have a safety net in a new state law that allows them to borrow to make up for lost revenue and costs of fighting the pandemic, said Michael Cerra, executive director of the New Jersey League of Municipalities.
Tax collections, Cerra added, “were stronger than we might have anticipated …. the worst-case scenario that we feared in the spring and in the summer haven’t been realized.”
Counties have been saving money on personnel costs through attrition, not layoffs, said John Donnadio, executive director of the New Jersey Association of Counties.
“200,000 is a very stark, scary number,” he said. “At the county level I can’t see it. I’m not aware of any county that has laid off employees.”
Isherwood said Murphy’s Bloomberg interview came before the governor reached a no-layoff deal with the Communications Workers of America, the largest state workers union, and before Murphy signed the borrowing bill, which he said allowed the state to maintain local and school aid. The deal with the union postpones raises and requires employees to take up to 12 unpaid furlough days. The administration estimated this would save more than $100 million.
Murphy has continued banging the drum for more federal aid as the pandemic’s second wave is forcing renewed restrictions on bars and restaurants.
So much of how New Jersey weathers the pandemic will depend on the severity of the resurgence. The state is already bracing as 500,000 workers are slated to lose federal unemployment benefits after Christmas.
And those predictions of a grimmer budget year for states next year could spell trouble — especially if the pandemic tightens its grip on social and economic activity.
The deep public-sector job cuts that were so far averted?
“I would not necessarily rule (job cuts) out in the first half of 2021,” Donnadio said.
The National Association of State Budget Officers expects fiscal year 2021 to be worse for states than 2020, Sigritz said.
“To what degree is largely going to depend on a number of factors: If the COVID cases grow worse over the winter, if economic conditions worsen, if Congress isn’t able to agree on another stimulus package,” he said.
It’s likely the effect of the pandemic will stretch into fiscal year 2022, he added.
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Samantha Marcus may be reached at firstname.lastname@example.org.