01-04-2025
Budget experts warn lawmakers of upcoming fiscal uncertainty
New Jersey Treasurer Liz Muoio told lawmakers Tuesday that federal funding changes could have "a drastic" impact on the state budget. (OIT/NJ Governor's Office)
State budget experts warned lawmakers on Tuesday of widespread uncertainty as the state moves to enact a budget for the coming fiscal year.
Though officials from the Treasury and the nonpartisan Office of Legislative Services expressed optimism about revenue collections in the current fiscal year, which have exceeded expectations, they warned a tightening economy and residents' response to it could lead to a revenue slowdown in the fiscal year that begins July 1.
'While the broader state economy remains on stable footing, volatility in capital markets, shifting consumer behavior, and potential policy shifts could adversely impact revenue collections,' Oscar Mendez, a revenue and economic policy analyst with the Office of Legislative Services, told the Senate Budget Committee.
The office estimated $55.33 billion in revenue for the current fiscal year, about $456.5 million higher than Treasury's own projections, with the differences mostly attributed to strong collections from the state's pass-through business alternative income tax in the weeks after Treasury issued its estimates.
Stronger collections could ease the impact of the $1.2 billion structural deficit Gov. Phil Murphy has proposed for the upcoming fiscal year by expanding the state's reserves, which are spent down when state expenditures outpace state revenue.
Legislators will receive another update on state revenue reflecting April tax filings in May. That update is expected to have positive news for lawmakers because markets were strong in the 2024 tax year despite the recent tumble fueled by President Trump's tariff policies.
'We're going to need those revenues. Any April surprises, we're going to need them for next year,' said Sen. Paul Sarlo (D-Bergen), the Senate budget chairman.
Though the previous stock market hum may be a comfort to the state budget in the coming fiscal year, staggering drops across U.S. markets — including the S&P 500's worst quarter since Russia's full-scale invasion of Ukraine in February 2022 — could signal a potentially steep decline in income tax collections in the near future.
'Whenever the financial markets suffer, you can assume that there will be an echo in our revenue collections,' said Thomas Koenig, the legislative budget and finance officer.
Uncertainty around federal funding — particularly on the $14 billion in federal dollars New Jersey receives for Medicaid — could also upend the state's budget.
The future of Medicaid is particularly troubling not only because it sees an outsized share of federal spending but also because those federal funds are often paid to reimburse expenditures already made using state funds.
The fact that many federal cuts have been issued on short notice or even retroactively compounds uncertainty at the state level, said Treasurer Liz Muoio.
'It is very difficult, A, to predict what's coming through because it's coming piecemeal, but then it's coming in and it's immediate,' she said. 'So when you are dealing with this on a reimbursement level, you've already spent that money, so the potential hit to our budget and our programs, I should say, could be drastic.'
Legislators continued to express skepticism about some of the revenue raisers Murphy has proposed for the coming fiscal year, with particular resistance to a sales tax expansion that would tax services at laser tag arenas, swimming pools, and speedways, among a host of other recreational businesses.
'I want to make it clear to everybody who's listening to this. There's no desire from this Legislature to tax those services,' Sarlo said. 'I think they were a talking point by the governor. I think the governor realizes those will be eliminated.'
Sarlo added he hopes revenue foregone by eliminating the expansion could be made up through governmental efficiencies or spending cuts.
Public pans spending cuts, tax hikes in governor's budget plan
Health benefits for public workers are also set to be a major cost driver in the coming fiscal year. The local part of the State Health Benefits Program is projected to see total cost increases of more than 20% for 2026, before even considering increases in the cost of health benefits.
Municipalities have increasingly moved off the state plan amid steep cost increases in recent years, feeding a cycle where a smaller and increasingly less healthy pool of subscribers leads to cost increases that spur more departures.
'There is no doubt that the rate increases our plans have experienced in the past four years outpace what other, similar state and public employers are experiencing, especially in the SHBP local government section,' Muoio said.
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