May 18 (Bloomberg) -- New Jersey Governor Chris Christie may face about $2.3 billion in unplanned costs next fiscal year to pay for schools, Medicaid and his decision to scrap a commuter-train tunnel to New York.
The first-term Republican warned of “unthinkable” cuts if the state Supreme Court rules that his $1.7 billion of education-aid reductions are unconstitutional. He may need to find another $300 million in savings if the U.S. government rejects his budgeted Medicaid changes and at least $271 million if he is forced to repay money spent on the canceled tunnel.
Christie isn’t alone in proposing a budget that banks on cost savings that haven’t been secured. In New York, Governor Andrew Cuomo’s budget assumes he will win union concessions and Medicaid reductions. Christie may have to choose between abandoning his no-tax-increase pledge and making deeper cuts that could hobble state government if those $2.3 billion of costs materialize, said Daniel Solender, director of municipal-bond management at Lord Abbett & Co. in Jersey City.
“He has to balance his budget,” Solender, who oversees $14 billion, said in a telephone interview. “So far, he’s tried to avoid doing anything with higher taxes, but with this amount of money involved, this will make it that much more difficult to do that.”
Christie, 48, faced a deficit of as much as $10.5 billion in crafting his $29.4 billion spending plan for the fiscal year that begins July 1, according to the Office of Legislative Services. That gap emerged even after Christie slashed $10 billion of expenses last year to balance his first budget.
The Christie administration got a little leeway yesterday, when the legislative services office reported that revenue may exceed his projections by $914 million over two years because of rising income-tax receipts. Christie’s treasurer, Andrew Sidamon-Eristoff, said the excess may be about $511 million for that period. The higher forecasts echo revised estimates in California, where Governor Jerry Brown said May 16 that revenue will be $6.6 billion higher than forecast through June 2012.
“Caution and discipline must temper revenue forecasts,” Sidamon-Eristoff told lawmakers yesterday. “The state risks building expectations for higher spending that cannot be sustained and opens itself to yet another potential budget crisis that would have to be addressed under the worst possible, emergency situations.”
The legislative revenue estimates just for next fiscal year are $429.6 million above the projections in Christie’s budget. That’s about one-fourth of the amount he would need if the state Supreme Court orders him to restore school aid he cut. A ruling may come before June 30.
“It’s not easy to cut a budget, especially after all of the low-hanging fruit has been picked,” said Richard Ciccarone, a managing director at McDonnell Investment Management in Oak Brook, Illinois. “He’s doing some tough things right now, and some of them may not stick.”
Christie’s budget also proposes saving $300 million by closing the Medicaid health-care plan for the poor to new adults, increasing the use of managed care and raising co-payments. In New York, Cuomo included $337 million in assumed Medicaid savings among reductions designed to close a $10 billion budget gap. In both cases, the U.S. government still must approve changes to the state-federal program.
“I’m very concerned not only that we’re not going to get that money, but I can’t separate what happens to the elderly and vulnerable from the budget impacts,” Senate Majority Leader Barbara Buono, a Democrat from Metuchen, said in an interview.
The portion of New Jersey residents who disapprove of Christie’s job performance climbed 9 percentage points from February to 49 percent, his highest negative rating since taking office in January 2010, according to a Monmouth University poll released today. His approval rating was unchanged at 47 percent, while only one-fourth said they are satisfied with Christie’s budget plan.
Another potential cost for Christie is the $271 million bill he is fighting from the Federal Transit Administration, which ordered him to repay money spent on the planned tunnel under the Hudson River. Christie killed the $8.7 billion project in October, citing possible cost overruns of as much as $5 billion.
Christie’s administration has been billed $950,000 so far from Patton Boggs LLC, the Washington-based law firm it hired in December to contest the tunnel bill, Paul Wyckoff, a spokesman for New Jersey Transit, said May 17. New Jersey also is being charged about $52,000 a week in interest by the FTA.
The potential higher costs loom as New Jersey copes with an April 27 decision by Moody’s Investors Service to downgrade its general-obligation bonds amid concern the state’s economic recovery is lagging behind the nation. A lower rating may boost New Jersey’s borrowing cost by leading investors to ask for higher interest rates to compensate for increased risk.
New Jersey’s budget has more than doubled from $12 billion in fiscal 1990. Pension, health-care and other fixed expenses may rise to 30 percent of the state’s budget in eight years, from the current 13 percent, Moody’s said.
“It’s not just New Jersey, it’s also states like California and Illinois where the size of government has gotten out of control over the past 20 years,” said Michael Pietronico, who oversees $455 million as chief executive officer of Miller Tabak Asset Management in New York. “It’s hard for any one person to change that in just a year or even one term.”
Christie cut $1.3 billion from aid to schools and towns, skipped a $3 billion pension payment and suspended property-tax rebates to balance the current budget. New Jersey also lost $400 million in education money after Christie’s administration made an error on an application for a federal grant last year.
The state’s pension deficit increased 18 percent to $53.9 billion as of June 30 as the state failed to make contributions for most of the past decade. Christie will make a $759 million payment once lawmakers pass his plan that would have all public workers pay 30 percent of the cost of their health-insurance premiums by 2014, Sidamon-Eristoff said.
Assemblyman Louis Greenwald, a Democrat from Cherry Hill who heads the budget committee, said Christie went too far with spending cuts and has put the state in a dangerous situation.
“If things don’t break his way, there’s not enough there to cover it,” Greenwald said during a Statehouse interview.
Christie proposed keeping municipal funding unchanged in his budget for next fiscal year. He said in April he may cut aid to towns, hospitals and prescription-drug programs if he is ordered to restore his education-funding cuts.
“People think there have been Draconian cuts before?” Christie said. “The kinds of things we will have to cut if the court makes this ruling are unthinkable.”
The governor said he won’t support a Democratic proposal to reauthorize a tax surcharge on the state’s wealthiest residents. His refusal may force Christie to make more cuts at the same time his party is fighting to win control of the Legislature from Democrats in the November election.
“He’s obviously been intransigent in a number of areas that have put the state at great risk,” Buono said. “He plays fast and loose with the numbers and hopes for the best with the peoples’ money, and that’s not the way you should govern.”
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