Spotlight on the States: New Jersey

With federal budget news in a bit of a holding pattern until next month, we return to our Spotlight on the States blog series with a discussion of New Jersey’s FY 2012 budget battle.

Back in February, Republican governor Chris Christie proposed a $29.4 billion budget proposal aimed at reducing the growing $10.5 billion state budget deficit. The governor’s plan represented a 2.6 percent reduction in appropriations from the previous fiscal year’s budget, relying entirely on spending cuts rather than revenue increases (in fact, he cut taxes by $200 million in his budget). The battle over the budget loomed as the Democrat-controlled legislature was determined to increase spending in a number of areas, offset by an increase in revenues from a proposed millionaires' surtax.

Two months after Gov. Christie’s budget proposal was released, Moody’s Investors Service downgraded New Jersey’s credit rating from Aa2 to Aa3, the fourth highest rating. New Jersey was then the third lowest rated state, just ahead of California and Illinois. Moody’s cited “the state's weakened financial position” as the reason for the downgrade, along with rising pension and health-care costs. The state’s unfunded pension liability was reported to be about $54 billion at the time, which together with debt payments and health benefits made up 13 percent of the 2010 budget and could rise to 30 percent within 8 years.

On June 28th, after months of negotiations, the New Jersey legislature passed a pension reform bill aiming to ensure the solvency of public pensions and health care plans over the long-run by increasing employee contributions to both and raising the retirement age for pensions. This bill came after the state government had skipped a $3 billion payment to the state pension fund in FY 2011. The reform would save $267 million in FY 2012 alone, with $224 million from the Police and Fire Retirement System and $43 million from the Public Employee Retirement System. Over the next 30 years, these savings would total around $130 billion and would increase the state's pension funding ratio (ratio of assets to liabilities) from 62 percent to 88 percent.

At that point, the state government had to hurry to pass a budget before the start of the fiscal year. The New Jersey legislature passed a last-minute $30.6 billion budget on June 29th, just two days before FY 2012. The plan was $1.1 billion more than Gov. Christie’s original budget proposal, and included the contentious millionaire surtax that the Governor swore he would veto. Since there had been no negotiations on the budget between the legislature and Gov. Christie, he simply amended the proposed budget with a number of line-item vetoes and adjustments to appropriations, amounting to $900 million in cuts – including the elimination of the millionaire’s surtax. The final restructured budget totaled $29.7 billion in spending.

The plan’s deficit-reduction comes almost entirely from the spending side of the budget – an approach similar to those taken by Ohio and Wisconsin. In a press conference last week, Gov. Christie highlighted the current savings of the pension program already for FY 2012 and pointed to the positive outlook of the New Jersey deficit as a result of the new budget and reform measures enacted earlier this year.