Christie’s New Jersey Tax Cut Imperiled by Increase in Debt, Pension Costs
New Jersey (STONJ1) Governor Chris Christie will say next week how he’ll pay for the first phase of a 10 percent income-tax cut for the second-wealthiest U.S. state’s residents even as he deals with as much as $1.3 billion in higher costs for pensions and debt.
Christie, a 49-year-old Republican who’s set to deliver his third budget on Feb. 21 in Trenton, declined to offer specifics of the spending plan for the year starting July 1. He’s expected to call for $150 million in income-tax cuts as a “down payment” on his pledge to cut the levy across all brackets.
While revenue for the six months through December rose 3 percent compared with the same period in 2010, it was still $326 million less than projected in the current $29.7 billion budget. Rising pension costs and a slow recovery from the longest recession since World War II led Standard & Poor’s, Moody’s Investors Service and Fitch Ratings to lower the state’s credit grade last year.
“It is concerning if you can’t tell us how you’re going to pay for the cut in the revenue,” Jamie Pagliocco, director of municipal-bond portfolio managers at Fidelity Investments, said yesterday at a Bloomberg Link conference in New York .
“If they’re going to start cutting income taxes, that’s going to play well with the voters,” said Pagliocco, who helps oversee $29.5 billion in muni securities from Merrimack, New Hampshire. “But I don’t know how they’re going to supplement their income to take care of the structural issues that still exist.”
Christie would need to introduce his income-tax cut as a bill separate from the budget. Assembly Majority Leader Louis Greenwald, a Cherry Hill Democrat, and others in his party who hold a majority in both legislative houses, have urged Christie to abandon the plan. They would rather focus on lowering local property levies, the nation’s highest at an average of $7,759 in 2011, according to the state Community Affairs Department.
Debt-service, pension and benefit costs may consume 30 percent of New Jersey’s revenue in coming years, Moody’s has said. The governor has said his 2013 spending plan won’t push recurring budget concerns into the future.
New Jersey isn’t alone in finding that the 18-month recession that began in December 2007 is tough to shake off. Twenty-nine states have predicted deficits totaling $44 billion in the coming budget year, according to the Washington-based Center on Budget and Policy Priorities, a nonprofit researcher.
Tax Cut’s Cost
Christie’s proposed income-tax cut would cost the state $150 million in fiscal 2013, rising to $1.3 billion in 2016, David Rosen, the Legislature’s chief budget analyst, said Jan. 30. Along with that lost income-tax revenue, the state will forgo $163 million in the coming year under a business-tax reduction plan Christie signed last year.
Last year, Christie cut almost $1 billion in funding for schools, police and working-poor tax credits that Democrats had added to the current budget. In a move that averted a potential government shutdown, Christie unilaterally made the cuts through line-item vetoes while rejecting a separate bill raising income taxes on those earning more than $1 million.
The governor’s plan to reduce wage levies may be hampered by debt payments of more than $3 billion, about $182 million more than Christie covered in the current spending plan, according to the state’s most-recent report on borrowing. About $23 million of that growth stems from a $294.2 million payment on a 1997 pension-funding bond issued under former Republican Governor Christie Whitman.
Senator Richard Codey, a Democrat who sought unsuccessfully to reduce pension benefits during his 14-month stint as acting governor in 2004 and 2005, said the bonds were designed to cover pension costs as revenue dropped from Whitman’s 30 percent income-tax cut. The borrowing was structured to push the highest payments into future years, he said.
“You don’t know what the economy is going to look like down the road,” Codey said in an interview. “Everybody wants a tax cut -- you, me and everyone else. The reality is that you don’t know when it’s going to come back and bite you.”
Democrats say Christie’s income-tax cut favors the wealthy and ignores the high property-tax burden that has plagued New Jersey homeowners for decades. The governor already had touched off conflict with the Legislature by vowing to veto a same-sex marriage bill approved by the Senate Feb. 13 and passed by the Assembly yesterday.
Christie said he has made “tough decisions” on spending. “I’m the only person who hasn’t blown the budget out in the last decade from either party,” he said Feb. 15 while announcing a school-construction plan in West New York.
“You can be assured that if anybody is going to be fiscally responsible, it’s going to be me,” he said.
Christie’s budget for the current year relies on $300 million in Medicaid savings through a comprehensive waiver from federal guidelines that has yet to be approved by regulators in Washington. The state sought federal assent for instituting managed care in the jointly funded program for the poor.
New Jersey’s efforts to close deficits haven’t prevented investors from increasing the amount of interest they demand to hold state and local debt. The gap between the yield on New Jersey securities and an index of top-rated municipal bonds was 45 basis points on Feb. 16, according to data compiled by Bloomberg. The difference has increased by about 10 basis points since Christie took office in January 2010. A basis point is one-hundredth of a percentage point.
“It’s always a concern when you just have blanket statements made,” Thomas Metzold, co-director of municipal investments at Eaton Vance Management in Boston, said of Christie’s tax-cut plan during the Bloomberg Link conference.
“Similar to our current federal budget, there’s a lot of spending, but no way to pay for it,” he said. “There has to be an offset, and we’ll continue to monitor that.”
State Senator Steven Oroho, a Republican from Sparta who serves on the budget committee, said Christie will be able to balance the competing needs of tax cuts and growing costs. While the economy has improved in New Jersey and nationally, Oroho said growth hasn’t occurred as quickly as he and others had hoped for based on previous recoveries.
“Unfortunately he’s got the legacy costs to take care of and an uncompetitive position, but I think he can balance his budget,” Oroho said in an interview. “It’d be a heck of a lot easier if the economy was coming back quicker here, and nationally as well. ”
Christie also needs to finance transportation projects as the Transportation Trust Fund, which pays for road work, runs out of money for new projects. The authority in April voted to sell its final $600 million in authorized debt before payments on past bonds consume its entire $895 million in annual revenue.
Every governor going back to Whitman, including the previous chief executive, Jon Corzine, has played a role in underfunding pensions, according to Christie. The retirement fund had 67.5 percent of the assets needed to meet promised benefits as of June 30, state data released last month show.
Under a 2010 law, the state is required to phase in full funding of its retirement contributions over seven years. That will cost taxpayers $484 million this year.
New Jersey may be obliged to provide as much as twice that amount, or $968 million, in fiscal 2013, under the law’s formula. Andrew Pratt, a Treasury spokesman, said actuaries haven’t yet determined how much the state will need to contribute to the pension next year.
While the governor seeks lower income taxes, Greenwald, the Democratic leader from Cherry Hill, said he’s never had a constituent call him or stop in his office to complain about them. He said someone earning $50,000 would pay $80 less while a person making $1 million would save $7,200. He said he doesn’t expect Democrats to support the measure.
“He’s not breaking the bank with that issue,” Greenwald said in an interview. “His bigger problems are that he’s got to double up his pension payment.”
To contact the reporter on this story: Terrence Dopp in Trenton at email@example.com
To contact the editor responsible for this story: Mark Tannenbaum.