Tuesday, May 17, 2011

About that Supposed New Jersey Budget Windfall

The Record headlines that New Jersey is expected to take in $913 million more than anticipated according to the nonpartisan Office of Legislative Services.

All is not quite what it seems.

You don't get to the facts until the very last paragraph:
The OLS predicts the state will finish the fiscal year that ends June 30 with $683.9 million more than expected in income tax revenue, though business taxes will fall $190.1 million shorter than ex­pected.
That means that for the fiscal year ending June 30, the state will take in $493.8 million more than it anticipated. That can carry over to the upcoming fiscal year (FY 2011-2012), and may allow for a partial restoration of certain existing programs, including the Transportation Trust Fund, education financing, or to provide a payment to the pension funds or the rainy day fund.

It should not be seen as grounds to expand the state budget and spending. One should not rely on the improved financial picture to expand spending when the state still can ill afford it.

At the same time, legislative Democrats are busy carping that the money should go to fund education, even though the state's education system is anything but efficient. It is a morass of waste and inefficiency, and despite the billions thrown into the system - and billions more shifted as per the prior Abbott rules, poor performing districts remain poor performing despite the increased funding. Still more funding will not fix these districts. They are in need of serious reformation that doesn't necessarily mean increasing the money to the district. It means making sure that the districts must spend more in the classrooms themselves.

So, how should this windfall be characterized? Conservative fiscal planning meant that the OLS didn't anticipate the gross income (personal income tax) revenue, but it also didn't expect that corporate revenues dropped despite what is believed to be an uptick in business activity. Indeed, the picture for the business climate in New Jersey isn't looking all that hot - revenues are expected to be down for all taxes other than the personal income tax. While the personal income tax is expected to be $811.7 million above the Governor's budget message, sales, corporate, and other revenues are expected to bring in far less - $483.8 million in total. That's not an inconsiderable sum, but the $911 million is the result of combining the two fiscal year figures together, even as the business climate is far from settled and recovering.

The drop in sales and corporate taxes likely reflects individuals spending less and companies retrenching in the current business climate. Since no tax rates were changed (sales or corporate tax), the change is the result of reduced revenue - not reductions in tax rates.

In fact, the personal income taxes rose despite the end of the millionaire's surtax, but that doesn't indicate either causality or a correlation.

New Jersey remains in serious financial shape, and it needs to prudently use these funds to shore up key infrastructure, pension obligations, and restore funding on education.

NJ State Treasurer Andrew P. Sidamon-Eristoff is predicting a much smaller windfall than the OLS. In fact, his prediction is about 40% smaller. As I previously noted, the OLS figure is a conflation of two fiscal year figures, and shows that while personal income tax revenues are coming in ahead of expectations, other taxes are showing an ongoing shortfall.
Sidamon-Eristoff is projecting revenues to outpace projections by $511 million through June of 2012, far less than the $913 million the non-partisan Office of Legislative Services estimated earlier today.

Sidamon-Eristoff said he is putting forth more conservative estimates because of the volatile nature of the economy and host of other reasons that make estimating a complicated task.

"We are just emerging from a volatile situation" he told the committee.

The state treasurer certifies all revenue estimates.
It is prudent to keep the conservative estimates, lest the state start spending more money than it should expect to take in. The difference should go first to the pension fund obligations, followed by the transportation trust fund/infrastructure improvements, and then education.

At this time, Christie is expected to provide a pension fund payment and property tax relief using those funds if certain other reforms are undertaken by the legislature.

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