(TRENTON) – State Treasurer Elizabeth Maher Muoio testified during a virtual hearing before the Assembly Budget Committee today, providing a detailed revenue report and fielding questions on the difficult choices the Murphy Administration has been forced to make in order to close the massive gap that looms for the remainder of the extended fiscal year due to the devastating impact COVID-19 has had on New Jersey’s finances.
ASSEMBLY BUDGET COMMITTEE HEARING
State Treasurer Elizabeth Maher Muoio
Testimony as Prepared for Delivery
May 28, 2020
Good afternoon, Chairwoman Pintor Marin, Vice Chair Burzichelli, Budget Officer Wirths, members of the committee.
I don’t think anyone in a million years could have predicted this would be the circumstances under which we would be addressing the Governor’s proposed budget for the first time.
Even though you can’t see them at the moment, I am joined virtually by my colleagues –
They and their staff, along with many others in our front office and across Treasury’s divisions, have been invaluable in navigating the unchartered territory that has come to epitomize this budget season and lending their expertise to a number of complex issues we’ve been managing.
As I’ve said before, our primary goal from day one has been to ensure first and foremost that all of our departments and agencies have the resources they need to help the people of New Jersey confront this brutal health crisis.
At the same time, we’ve been working non-stop to address the fiscal crisis that has grown to unprecedented proportions.
No amount of planning could have predicted the magnitude of the financial devastation we are facing…and that’s evident by the constantly evolving professional forecasts we’ve seen…and continue to see.
To truly appreciate the magnitude of the fiscal crisis we find ourselves in, it helps to view the present situation in the context of more recent history.
As you all know, we spent the last two years working together to shore up the state’s finances:
Let me just say this – it’s a good thing we had begun to make headway in building up our surplus and rainy day fund.
While our reserves going into this crisis were still not comparable to many other states, I can’t imagine how we would be weathering this storm right now without that cushion.
As a case in point, the ratings agencies had also begun to take note of our progress. Even while issuing warnings recently, Moody’s and S&P noted the headway we have made in recent years.
Then COVID came along…and halted this progress in its tracks…
…and the budget we spent MONTHS working on all but evaporated.
The difficult decisions in the Governor’s proposed budget for the remaining fiscal year and the three-month extension demonstrate our enormous need for additional federal assistance as well as legislative authorization to borrow in order to ensure our cash flow.
To balance out billions in lost revenue, the State must make devastating cuts across nearly all sectors and all branches of government.
The report we sent to you last week proposes decreasing planned spending by over $5 billion, including:
We have tried to strike a balance…tightening our belt, incorporating significant cuts, and proposing borrowing to address our cash flow issues.
But as I walk you through some of our revenue projections, it will become clear that even with these solutions, we are still facing many more difficult decisions, especially without significantly more federal funding, and flexible funding at that, as well as the ability to borrow.
Let me start by quickly providing a picture of the economic outlook we are forced to contend with.
The onset of the COVID-19 health pandemic has created a global economic crisis that the world has not seen since the Great Depression nearly a century ago, and a health crisis not seen since the 1918 Spanish Flu pandemic.
In April, national unemployment rose to 14.7 percent and New Jersey’s unemployment rate rose to 15.3 percent, the highest level since the Great Depression nine decades ago.
As a point of reference, the national unemployment rate peaked at 10.0 percent during the 2008-09 Great Recession, while the New Jersey rate peaked at 9.8 percent.
The Congressional Budget Office projects that the national unemployment rate will average 15.0 percent during the second and third quarters of 2020 and then begin to decline, reaching 9.5 percent by the end of 2021.
When it comes to the national real GDP, second quarter forecasts vary from a 12.9% to 36.9% decline, with the Blue Chip Consensus Forecast now predicting a 24.5% drop.
This Q2 decline is unprecedented, but so is the speed at which professional economic forecasters have revised their projections downward.
For context, in February, most national forecasters were projecting low rates of growth for all quarters of 2020.
By mid-March to mid-April, there was a race to the bottom as forecasts plummeted.
The bottom line, based on a recent Wall Street Journal Economic Forecasting survey, is that real GDP is not expected to return to pre-COVID levels until mid-2022 at the earliest.
These rapidly devolving projections have complicated what was already an increasingly daunting revenue forecasting situation.
Quite frankly, there are no forecasting models for this type of scenario.
With that in mind, the report we delivered to you last week is designed to serve as a road map to help us navigate what is essentially unchartered territory.
But bear in mind, the virus will ultimately dictate the outcome of not only the health crisis, but also the economic crisis.
12 MONTH REVENUE FORECASTS
The revenue scenarios I’m about to walk you through are based on the assumption that regardless of the status of New Jersey’s “stay-at-home” order, we can expect its effects to be felt through June and beyond since experiences across the globe indicate that economic activity does not return to normal as soon as lockdowns expire.
Tax revenue collection figures released two weeks ago for the month of April provided a first look at the impact of COVID-19 on New Jersey.
Overall, total collections fell $3.5 billion below April of 2019, down nearly 60 percent over last April.
As we noted at the time, April revenue collections largely reflect March economic behavior due to the fact that many of the major revenues report with a one-month lag.
Because the social and commercial restrictions implemented due to the COVID-19 pandemic were only in place for about half the month of March, the impact of the pandemic on New Jersey’s revenue collections is still not fully apparent.
Additionally, April’s collections reflect the impact of extending the filing and payment deadline for both the income tax and the corporation business tax from April 15 to July 15.
While we expect a portion of this shortfall to be made up during July, just how much remains to be seen because it is likely more taxpayers than usual will request extensions.
I just want to take a second to clarify that, for comparison purposes, the projections I’m about to detail are all prepared based on the traditional fiscal year of July 1st through June 30th, not the new temporarily extended and shortened fiscal years.
In terms of the big picture, the revised forecast prepared by our Office Revenue and Economic Analysis through Fiscal Year 2021 is staggering, particularly in light of the fact that the Governor’s Budget Message (GBM) was delivered just 12 weeks ago
We are now projecting that revenues for Fiscal Year 2020 (FY 2020) will come in at $36.733 billion, which is $2.732 billion, or 6.9 percent, lower than the revised forecast we issued at the time of the GBM in February.
Additionally, we are projecting that revenue collections for the FY 2021 budget will come in at $33.955 billion, which is $7.207 billion, or 17.5 percent, lower than our February forecasting.
In total, the revenue shortfall for FY 2020 and FY 2021 combined is approximately $10 billion.
It’s important to note that these figures do not incorporate any of the tax policy proposals contained within the GBM, nor do they assume another surge of the virus in the fall.
If that resurgence scenario does in fact occur, our revenue analysts estimate that we could in fact see an additional shortfall of roughly $1 billion.
Now, let me walk you through the projections for some of the major taxes so you can understand what we have to contend with for the foreseeable future.
For the Gross Income Tax (GIT):
When it comes to the Sales and Use Tax:
As for the Corporation Business Tax (CBT):
It’s interesting to note that the projected two-year decline between the CBT revenue peak in FY 2019 and FY 2021 is 35.4 percent, similar to the two-year decline between FY 2008 and the CBT low-point in FY 2010 due to the Great Recession.
Other notable forecasts for select major taxes include:
The Motor Fuels Tax:
As for the Petroleum Products Gross Receipts Tax:
As you can see, gas tax-related revenues, like most other revenues during this pandemic, have plummeted.
One last revenue stream of note - the Realty Transfer Fee:
PROJECTED FUND BALANCE
What all of this means is that our ambitious plans for closing out this fiscal year – as well as the proposed budget we unveiled to you in February – have all been rendered obsolete.
We are going to require federal assistance and the ability to access borrowing facilities in order to meet our obligations.
At the time of the Governor’s Budget Message in February, our projected closing fund balance through June 30 of this year was $1.5 billion, which included $732 million in the Surplus Revenue Fund (SRF), also known as the Rainy Day Fund.
However, given the unprecedented economic impact of the current pandemic, revenues through June 30 are expected to decline by $2.7 billion.
As a result, we are looking at a revised projected fund balance, through June 30th – the date by which we must still close our financial year – of NEGATIVE $1.2 billion.
Obviously we can’t let that happen for many reasons, chief among them the fact that we are constitutionally required to have a balanced budget.
So we had to take many decisive and crucial steps early on to remain solvent:
Additionally, as I mentioned at the top of my remarks, we are proposing to decrease planned spending by over $5 billion across all sectors and branches of government, including:
Taken as a whole, these decisions get us to a POSITIVE fund balance of $344 million as of June 30, 2020 and a $494 million ending fund balance as of September 30, 2020.
While that is certainly better than a NEGATIVE fund balance of $1.2 billion, it’s far from acceptable.
That type of surplus balance might have been customary during the last administration, but it’s anything but advisable.
In volatile economic times such as this, it is the equivalent of a “rounding error” and could disappear in a flash.
And I would remind you that should we see a second surge of the virus, additional adjustments will need to be made.
The $2.4 billion from the federal Coronavirus Relief Fund that we have received to date will certainly be a big help, but without more robust AND flexible federal aid – as well as the ability to borrow – additional, substantial cuts will be necessary to produce a balanced FY 2021 budget.
The reason for this is simple - we must spend this $2.4 billion in accordance with U.S. Treasury guidance otherwise it may result in the claw back of these funds by the federal government.
To complicate matters, U.S. Treasury guidance remains incomplete as it relates to eligibility for payroll and other expenditures for COVID-related activities.
While we do have a proposed spending framework mapped out, until we receive clear guidance and approval from the U.S. Treasury, the state simply cannot formalize a final plan or dedicate funds widely to sub-grantees that would be reliant on Treasury guidance to expend these funds.
Rest assured, we are eager to begin disbursing these funds where they are needed most –
As we get more guidance and finalize plans for disbursement we will be sure to share them with you.
Like I’ve said before, we have been faced with many tough decisions already…and we’ll be faced with many even tougher ones as we work on the nine-month budget ahead.
But, we are not alone. All across the country, states are facing similar challenges that seemed inconceivable just a few short months ago.
Managing this crisis will require an unprecedented level of cooperation, and we look forward to working with all of you in the weeks and months ahead to address this unprecedented challenge.
We are now happy to answer any questions. Thank you.