Gov. Phil Murphy’s campaign pledges are about to collide with New Jersey politics, Wall Street skeptics and a massive budget deficit.
Since his term started in January, Murphy has pleased his progressive base with moves on women’s wages, health care, climate change, immigration and offshore drilling. On tough fiscal matters, though, he and fellow Democrats who control the legislature — all eager to undo Republican Chris Christie’s policies — are following their own agendas.
Murphy’s first state spending plan, which he’ll introduce Tuesday, will include a millionaire’s tax to help generate $1.3 billion for New Jersey’s underfunded schools, transportation and pension systems. That initiative lacks support from Senate President Stephen Sweeney, who says residents are being penalized enough by President Donald Trump’s U.S. tax changes, which limit deductions for individuals’ state and local taxes.
Even if Murphy gets his millionaire’s tax, it’s a fraction of what he needs to close an estimated $8.7 billion structural gap between revenue and expenses. More than a decade of skipped or reduced pension contributions have left New Jersey with the worst-funded state system in the nation.
“The headline issue for New Jersey is pensions and how they’re going to fund them and if they’re going to fund them,” said Daniel Solender, head of municipal investments at Lord Abbett & Co., which manages $20 billion of state and local debt.
To address New Jersey’s biggest budget pressure, Murphy’s treasurer on March 1 raised the assumed pension-return rate temporarily to 7.5 percent, winning praise from local governments that had faced hundreds of millions of dollars in added payments when Christie lowered the rate to 7 percent last year. The effect, though, will be short term and won’t fix a system headed toward insolvency, according to a March 5 commentary by S&P Global Ratings.
During Christie’s two terms, New Jersey was downgraded a record 11 times by the three major ratings companies. Only Illinois has worse credit.
“The state’s massive pension obligation is a major reason for these downgrades but insufficient revenues, other debts, and increasing costs are fueling further economic instability,” Murphy’s transition advisory team said in a Jan. 1 report.
Investors demand more yield to buy New Jersey debt because of its lower credit rating, high debt levels and unfunded pension liability. New Jersey general obligations maturing in 2033 traded on March 9 at a yield of 3.4 percent, about 60 basis points more than top-rated municipals due in 15 years, according to data compiled by Bloomberg.
“The state has some well-known credit challenges, mostly related to their pension issues,” said Terrance Hults, a portfolio manager at AllianceBernstein, which manages $40 billion of municipal debt. “We’re negative on the state’s credit long-term, and obviously there’s a high degree of economic activity in New Jersey relative to some other very troubled parts of the muni market you might point to — it’s not Puerto Rico. But they do have a significantly underfunded pension at this point.”
Murphy, 60, a retired Goldman Sachs senior director and U.S. ambassador to Germany, campaigned on a stronger New Jersey economy. His headwinds include an unfunded pension and benefits liability that reached $184.3 billion in 2017 and a $36 billion debt load that consumes 11 percent of revenues, according to the transition team report.
Christie put $8.8 billion into the pension system, more than double the combined payments of all governors since 1995. Still, that’s 27 percent of the actuarially required amount, the report said. The system has a $90 billion unfunded liability, and its revenue growth is not enough to cover its increasing costs, according to a state pension panel.
New Jersey’s property taxes — the highest in the nation — continued to grow under Christie, though at a slower pace than in the previous administrations.
“I remain committed to a true millionaire’s tax and closing corporate-tax loopholes most states closed long ago,” Murphy said March 1 at a New Jersey Chamber of Commerce annual gathering in Washington. “I remain committed to reversing eight years of failed fiscal policy, and to funding our public schools, delivering property-tax relief — firstly to the middle class and seniors — and to rebuilding our infrastructure.”
For any of that to happen, he needs lawmakers’ cooperation.
Sweeney, New Jersey’s highest-ranking Democratic lawmaker, appeared with other party leaders alongside Murphy for the governor’s first executive order signing on Jan. 16. Since then, he’s gone his own way. On March 6, Sweeney unveiled a bill to raise $657 million annually with a 3 percent surcharge on companies earning more than $1 million. The result, he said, would be the biggest infusion of cash to fund education in more than 25 years.
At a separate press conference, the governor said the measure had “some appeal,” though not as an alternative to taxing millionaires.
The minority party is seizing on the discord. In a statement, Senate Republican Leader Tom Kean Jr. from Westfield said Sweeney’s pitch was “demonizing employers” and would chase jobs from the state.
“Instead of fighting over how to make the state more affordable, the majority is fighting over which taxes to increase,” Assemblyman Anthony Bucco, a Republican from Boonton, said in a statement.
Ahead of the budget address, the political squabbling is evident even to Trenton outsiders.
“There’s still some uncertainty in terms of the potential political gridlock and coming up with fiscal solutions to deal with the issues that they’re facing right now,” said Andy Shin, senior research analyst at BNY Mellon Asset Management North America.
Murphy had early Democratic support, even from Sweeney, to make New Jersey the 10th state with legalized recreational marijuana. Since his election, though, the 19-member Legislative Black Caucus, all Democrats, have joined Republicans and urban religious leaders to criticize the drive, saying more widespread drug use has potential to harm poor communities and lead to harder substances.
Still, lawmakers are presiding over public hearings on the matter, a sign that factions are moving beyond the bitterness of the Christie years, when a combative Republican governor lost early support for pension changes from a Democratic-led legislature. Overall, the political alignment of the governor’s office and legislature probably will make for “a little less drama,” according to Paul Brennan of Nuveen Asset Management, which oversees $140 billion of municipals, including three dedicated New Jersey funds.
“Both of those branches are now controlled by the same party, but they still face the issues that were there before the election,” Brennan said. “They need to come up with new sources of revenue and/or find ways to cut expenses or benefits that have to be paid.”
(c) 2018, Bloomberg · Elise Young, Michelle Kaske