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New Jersey’s Borrowing Addiction

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New Jersey’s Borrowing Addiction

The nation’s fiscal basket case is looking to take on even more debt. July 17, 2020
Economy, finance, and budgets

In 2004, with New Jersey facing a revenue shortfall, then-governor Jim McGreevey’s administration borrowed—in defiance of the state’s constitution—some $2 billion in order to boost spending by a hefty 17 percent. Though the state supreme court ruled the move unconstitutional, it allowed the debt to remain because the state had already budgeted the money. It was one of a series of court decisions that prompted voters in 2008 to approve, overwhelmingly, a referendum that tightened borrowing restrictions.

Trenton is now planning to defy the will of the voters. The Democratic-controlled state legislature has approved an unprecedented plan backed by Governor Phil Murphy to borrow $10 billion to close a projected deficit. Despite the squeeze on state budgets caused by the Covid-19 lockdowns, only three other states—California, Illinois, and New York—have announced similar borrowing plans (most other states are announcing significant budget cuts). Relative to the size of its budget, New Jersey’s borrowing is by far the largest. Jersey plans to cover most of the cost of its deficit with debt by tapping a last-resort Federal Reserve lending program.

New Jersey is already the nation’s most fiscally unsound state, according to the Institute for Truth in Accounting. It bears some $234 billion in debt, including about $100 billion in unfunded pension liabilities. A recent Pew study estimated that, between 2003 and 2017, the state spent $1 for every 91 cents in revenue it collected.

Fiscal 2021, which began on July 1, is a difficult budget year for all states, which are projected to lose hundreds of billions of dollars in tax revenue as a result of the lockdowns. Among the hardest-hit states, according to the National Conference of State Legislatures, are California, Colorado, New Mexico, Wyoming, and New Jersey, all projecting revenue declines of about 20 percent this fiscal year. Yet California’s budget allows Governor Gavin Newsom to transfer $11 billion from dedicated funds to the general budget—a kind of borrowing by the state from itself—while Illinois and New York plan to borrow more conservatively, relative to the size of their budgets, than New Jersey.

Before the pandemic, Murphy had proposed a $40.7 billion budget for fiscal 2021, a spending increase of 5.4 percent. Though the new fiscal year has already technically begun, the state has yet to produce a final budget, as Murphy and the legislature argue over details of the borrowing. The administration has taken only marginal steps to reduce spending by, for instance, delaying water infrastructure projects. Many other cuts Murphy has announced involve simply shelving plans to spend more money, including $850 million in new spending for schools, expanded pre-K programs, and free college tuition. Throughout his three years in office, Murphy has left on the table billions of dollars in savings from employee benefits recommended by a state commission. Bypassing such cuts, Murphy wants to borrow the equivalent of nearly one-quarter of likely spending.

Republicans in the state legislature have promised to sue to stop the borrowing. Their problem: the New Jersey Supreme Court, one of the most activist top courts in the country, has a history of disregarding state constitutional debt limitations. A 1991 Wisconsin Law Review article on state borrowing limits concluded that no other court had gone as far as New Jersey’s in ignoring voters’ wishes. “The New Jersey Supreme Court has effectively read the limitations out of the constitution,” the article observed.

The court’s disregard for its own state constitution is what prompted the 2008 referendum that added new lending restrictions. After the court allowed McGreevey to keep the money he’d illegally borrowed, it demanded that the legislature find money to fix deteriorating inner-city schools that local municipalities couldn’t afford to repair themselves. The result: an $8.6 billion bond offering made through a state entity without any revenues of its own. That deal allowed Trenton to claim that it wasn’t borrowing the money itself and therefore didn’t have to seek voter approval. The court brushed aside lawsuits challenging the debt, and when the state squandered much of the proceeds on patronage and overspending, the court demanded that it finish the job with another $3.9 billion in borrowing.

Though the New Jersey constitution now limits borrowing without voter approval, Murphy believes that the constitution’s debt limitations don’t apply to his proposed borrowing. The pandemic, he claims, has created an emergency that allows the state to take on debt without asking voters’ permission. He’s betting that the court will agree.

With one of the worst credit ratings among the states, New Jersey might not be able to issue bonds. Instead, it could take a low-cost loan from the Federal Reserve’s Municipal Liquidity Facility, designed to be a lender of last resort for states. The deal, however, raises questions about whether the Fed hasn’t simply introduced a new way for fiscally unsound states to keep piling on debt that worsens their stability. That’s a bad line of business for a central bank to be in.

Consider New Jersey, among other things, a valuable lesson about the perils of judicial activism: a state with a judiciary that often ignores voters’ intentions has helped create one of America’s most financially unstable governments.

Photo: Aneese/iStock

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