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State budget is victim of fallout from attack
Originally appeared in the Trenton Times on 10/03/01
TRENTON -- Although the issue of security has taken center stage in the governor's race since the terrorist attacks of Sept. 11, the first test of the next governor is likely to be a budget crisis triggered by the faltering economy.
Earlier this year, state lawmakers argued over whether to believe acting Gov. Donald DiFrancesco, who claimed the budget passed in June would leave a $1 billion surplus, or the nonpartisan Office of Legislative Services, which predicted the state could wind up millions of dollars in the red.
Both scenarios assumed the economy would begin to rebound by the second half of this year.
Instead, the weak economy was plunged into chaos by the national tragedy of Sept. 11.
"Since May, we've had the worst quarter in the history of the stock market," said David J. Rosen, chief of the OLS Revenue, Finance and Appropriations Section.
Rosen said it is too soon to predict the impact of the economic downturn on state revenues for this fiscal year. The impact won't be certain until tax returns are filed next spring.
Under the rosiest forecasts, the economy could start to recover in the first half of 2002, he said.
But an ongoing recession could leave the state with a major shortfall.
"Worsening economic conditions can quickly have an impact on revenues," Rosen said. "Between March and May, we reduced our forecast by $545 million. The weakening that occurred then was not as great as the weakening that's occurring now."
Former state Treasurer Roland Machold, who resigned early this year, believes a budget crisis is nearly inevitable.
"The new governor is going to have a real tough agenda, not only because of this year's revenues falling, but if you look at the 2003 budget (that begins in July), which they are already starting to work on, there are a lot of cliffs out there," Machold said. "What I mean by cliffs is pledged expenditures for which the underlying income base is not there."
Machold said the "cliffs" were the product of one-shot infusions of federal aid, as well as state officials who never planned for the good times to end.
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The terrorist attacks are expected to further weaken New Jersey's economy, causing state revenues to decline at a time when there is increased demand for state spending to increase security and to pay unemployment and health benefits for those who have lost their jobs.
With many of the state's highest earners working on Wall Street and many more supplementing big salaries with capital gains on stock investments, the bearish stock market and the attacks on the World Trade Center could cut deeply into state income tax revenues.
Those making $250,000 or more a year pay more than half of the income taxes collected by the state, state officials report. Those making at least $100,000 pay 80 percent of state income taxes. A large portion of their income has been bonuses, which are expected to shrink dramatically this year.
"Certainly bonuses on Wall Street are going to be much, much lower," said Rutgers University economist James Hughes. "And with the stock market taking a big hit, the capital gains revenue is certainly going to be below anybody's forecast."
Hughes and Machold said the state's other two major sources of revenue -- the sales tax and the corporate tax -- also will probably drop dramatically. Consumer confidence is down, probably to a greater degree the closer you get to New York, the epicenter of the tragedy, Hughes said.
Republican gubernatorial candidate Bret Schundler, the conservative former mayor of Jersey City, has said the economic crisis will enable him to reform government. Schundler, citing his success in turning around the fortunes of Jersey City, has claimed he will even be able to deliver tax cuts.
"An economic crisis . . . offers an opportunity to change the way government operates, so that we can deliver better services at lower costs and pass the savings back as tax cuts," Schundler said.
Richard McGrath, spokesman for the Democratic candidate, Woodbridge Mayor Jim McGreevey, said the predicament calls for "strict fiscal oversight, so every dollar is maximized."
"Our governing principle is that New Jersey must live within its means but must invest wisely in education and property tax relief for the long term," McGrath said.
Machold was skeptical of any politician "glibly" promising more efficiency.
He said debt service payments and school and municipal aid account for 80 percent of the state budget. The remaining expenditures are largely tied to federal formulas so state cuts would be matched by reductions in the dollars flowing from Washington to Trenton.
"You can make government more efficient, but in this day and age to accomplish that you'd have to spend more money up front to buy better technology," he said.
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Machold expects the state's pension system to become a drain on the state budget.
"New and better pension benefits have been handed out in recent years," he said. "Those were based on the portfolios having 8.75 percent increases annually. Instead, they (lost) roughly 10 percent last year and another 10 percent this year.
"That's going to hit hard, if not in (fiscal) 2003, then in 2004. The state has been paying nothing into the pension plans because of the fat years. Suddenly we are going to have hundreds of million of dollars in shortfalls."
State Sen. Peter Inverso, R-Hamilton, vice chairman of the Senate budget committee, agrees there are lean times ahead.
"It's not a good convergence," he said. "We are going to have to control expenditures since we can't control revenues. Obviously some oxes are going to be gored."
Inverso hopes the $1 billion surplus built into the current budget -- under the administration's projections -- will cushion the blow.
Sen. Bernard F. Kenny Jr., D-Hoboken, the chief budget officer for the Senate Democrats, said the hard times probably will not pass quickly.
"I think the next governor is going to have a very big burden, both with respect to the economy and with respect to leading the state out of this terrible tragedy," he said. "It's going to probably dominate the next governor's term in office."
Hughes, who has declared that New Jersey is in a recession, said the economic downturn has been marked by job losses. Between February and August, the state lost 19,400 jobs. In the preceding three years, he said, the state was adding about 46,000 jobs every six months.
"That's a dramatic slowdown," he said.
The state could, however, see some job growth as a consequence of the terrorist attacks.
Manhattan lost about 30 million square feet of office space, which housed an estimated 120,000 employees. If 40 percent of those workers live in New Jersey, it is likely their employers will relocate them to the state, where about 16 million square feet of first-class office space is available from Mercer County north, Hughes said.
Available office space in Newark and Jersey City has been snapped up since Sept. 11, and Merrill Lynch, which had 3.1 million square feet of space in the World Financial Center next to the World Trade Center, has moved thousands of employees to its offices in New Jersey, Hughes said.
"We could have up to 20,000 employees relocated to New Jersey and paying state income taxes, fully counterbalancing the job loss from February to August," Hughes said.
Those jobs will bring secondary economic activity in the form of added business services, Hughes said. He said the state also can expect to get a large amount of federal aid related to the tragedy.
But, Hughes said, the economic outlook remains troubling.
"All forecasts before (Sept. 11) are now null and void," Hughes said. "The world has changed dramatically.
"It was entirely possible that we were bottoming out in the third quarter, and we would have seen growth resuming in the fourth quarter. We'll never know now. . . . We definitely are taking a hit in the last four months of 2001. Whatever we were anticipating is going to be far below that."
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