Feb. 24 (Bloomberg) -- New Jersey Governor Chris Christie’s $32.1 billion budget is structurally unbalanced because it is built on “optimistic” economic-growth projections, according to Standard & Poor’s.
The spending plan, introduced Feb. 21, counts on tax revenue increasing 7.3 percent, the most since before the recession began in December 2007. It also depends on using $288 million of reserves and increases the state’s reliance on one-time revenues to $1.6 billion, S&P said today in a report.
“The economic assumptions that underpin the state’s revenue forecast appear to be optimistic based on current and projected economic conditions at the state and national levels,” wrote John Sugden, an S&P credit analyst.
Christie, a first-term Republican, proposed the biggest budget in five years for fiscal 2013, which begins July 1. The plan, which is $2.4 billion more than the one enacted last year, would cut income and business taxes while making a $1.1 billion pension payment, the biggest in state history.
“This governor has an unbroken record of creating responsible, balanced budgets without tax increases that have been built on solid, conservative revenue estimates,” Treasurer Andrew Sidamon-Eristoff said in a statement. “We think S&P should learn from its own experience and make more of an effort to avoid reaching premature conclusions.”
Kevin Roberts, a spokesman for Christie, declined to immediately comment on the report, saying he hadn’t seen it.
“It really puts a halt to the victory lap he’s been doing,” said Ben Dworkin, director of the Rebovich Institute of New Jersey Politics at Rider University in Lawrenceville. “Chris Christie has been all over national television promoting his efforts to turn around New Jersey as exemplified by this budget. He got driven off that message because now he has to respond to this.”
Assemblyman Declan O’Scanlon, a Republican from Little Silver who is his party’s budget officer, said he disagrees with S&P’s assessment of the spending plan. Christie would be ill-served to inflate projections to boost spending, and the increase in one-time revenue is due to the tax cuts, he said.
“It wouldn’t benefit them to be overly optimistic and have to make mid-year budget cuts,” O’Scanlon said in an interview. “The governor’s got to be re-elected less than two years from now, if he was overly optimistic and had to make mid-year cuts, there would really be a political risk for him.”
Under New Jersey’s 1947 Constitution, the governor and lawmakers must adopt a balanced budget by the July 1 start of the fiscal year. That requirement led to a week-long shutdown in 2006, when Democratic Governor Jon Corzine ordered non-essential state services closed after lawmakers balked at his proposal to balance the budget through a sales-tax increase.
Christie, who ousted Corzine in 2009 and is midway through his first term, froze $2.2 billion in spending to close a midyear deficit in 2010, and then cut $10 billion in projected new spending for schools, pensions and towns. He is now calling for a 10 percent income-tax cut over 36 months, which he said is needed to spur growth, and has promised to veto any attempt to increase taxes on residents earning $1 million or more.
Governments from New York City to California have begun crafting budgets based in part on anticipated revenue growth. Two Republican governors, Florida’s Rick Scott and Michigan’s Rick Snyder, have proposed higher spending.
Nationwide, combined state tax revenue rose 6.1 percent from July to September, the seventh-straight quarter of growth, and the streak may have extended into the three months ended in December, according to a Jan. 26 report from the Nelson A. Rockefeller Institute of Government. Yet the gains appear to be weakening, the Albany, New York-based group said.
Christie’s budget forecasts income-tax revenue to increase 6.3 percent after the tax cuts, while year-to-date collections are coming in 2.9 percent below budget as of December, S&P said.
While New Jersey’s total revenue rose 3.2 percent through the first half of this fiscal year from the same period of 2011, it was 3.2 percent, or $326 million, below budget targets.
Senator Paul Sarlo, a Democrat from Wood-Ridge who is chairman of the budget committee, said Christie’s plan is “overly optimistic.” Derek Roseman, a spokesman for Senate Democrats, said no date has been set for a start to legislative hearings on Christie’s budget. Democrats control both houses of the Legislature.
“The first order of business as my committee dissects this is we need to get a better handle on the state of the economy in New Jersey and whether these revenue projections are realistic,” Sarlo said in a telephone interview.
Rising pension costs and a slow recovery led Standard & Poor’s, Moody’s Investors Service and Fitch Ratings to lower the state’s credit grade last year. New Jersey’s general-obligation debt is rated AA- by S&P and Fitch, the fourth-highest grade, and a comparable Aa3 by Moody’s.
S&P hasn’t changed its rating or outlook on New Jersey, Sugden said in an interview.
“This is the proposed budget and we’re just giving our view based on that,” he said. “Often times, there are significant changes between the proposed budget and what gets enacted, particularly in New Jersey.”
Although Christie’s proposal more than doubles the pension contribution, and accounts for 3.3 percent of total spending, it continues to defer full payments. New Jersey is only funding 29 percent of the amount recommended by actuaries, resulting in “continued pressure on its pension system,” S&P said.
One-time revenues account for 5 percent of the total in Christie’s 2013 budget, up from 4 percent in 2012, S&P said. The state projects ending this year with $588 million in reserves, which would fall to $300 million, or less than 1 percent of expenditures, at the end of 2013, S&P said.
“At this level, New Jersey’s fund balance would provide a limited financial cushion with which to offset revenue shortfalls should current revenue growth assumptions turn out to be optimistic,” S&P said.
Christie’s opponents are sure to use S&P’s findings as an example of a Wall Street firm questioning his handling of budget issues, said Peter Woolley, director of the PublicMind polling institute at Fairleigh Dickinson University in Madison.
“It hurts Christie where he’s strongest: that’s to say on his reputation for being fiscally conservative,” Woolley said. “It just becomes a weapon for Democrats to use. How effective they are, really, is going to depend on the economy.”
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