Joseph Krist

Publisher

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NEW JERSEY BUDGET

Governor Phil Murphy released his second budget. It includes appropriations totaling $38.6 billion, with a projected surplus of $1.16 billion and projected savings of $1.1 billion.  The plan would increase funding for NJ TRANSIT, boost school funding, and provide local property tax relief through the Homestead Benefit Program. 

The Governor claims $1.1 billion in real and sustainable savings, including nearly $800 million in public employee health benefit cost savings and over $200 million in departmental savings. It reduces one-shot revenues to just 1.7% of the total budget, a reduction of $400 million from the current budget and half of the average of 3.4% under the previous administration. 

The budget includes an additional $100 million in General Fund support for NJ TRANSIT, for a total subsidy of $407.5 million. Of this, $75 million will replace diversions from other sources and $25 million represents new direct funding. In addition, NJ TRANSIT will not raise commuter fares in FY2020. 

The Governor proposed applying the millionaire’s tax enacted in FY 2019 to all millionaires. The budget projects a surplus of $1.2 billion for FY2020, and expects to close FY2019 with a surplus of more than $1 billion. The budget also counts on revenues from the legalization of recreational marijuana. Enactment has been much more difficult than originally expected (it was planned for January 1 of this year.)

NYC BUDGET

The NYC Independent Budget Office (IBO) has released its analysis of the Mayor’s proposed FY 2020 budget.Under the Mayor’s plan, the continued growth in the size of the budget is largely driven by three factors: debt service, salaries, and fringe benefits. The financial plan estimates obscure the total size of the budget in each year by not accounting for the use of $4.6 billion of 2018 resources to pay for 2019 expenses and the use of $3.2 billion of 2019 resources to prepay some 2020 expenses. Adjusted for prepayments, IBO project that the 2019 budget will total $93.7 billion (6.2% larger than the 2018 budget after adjustments) and the 2020 budget will reach $95.9 billion (an increase of 2.4% from 2019).

With revenues from the city’s tax on personal income rising nearly 21% in 2018, overall tax revenue growth was boosted to 8.5%. As expected, tax revenue growth has slowed and IBO now projects an increase of 3.6% this year, with collections net of refunds totaling $61.0 billion. Growth is expected to be slightly higher in 2020 (4.0%), yielding $63.5 billion. For the remaining three years of the financial plan IBO forecasts that growth in tax revenues will average 3.6% annually with revenue reaching $70.5 billion by 2023. Continued strength in the property tax and—to a lesser extent—growth in the general sales and unincorporated business taxes will offset weaker growth in the personal income tax (annual average of 1.4% between 2018 and 2023).

Based on the proposals included in the Mayor’s Preliminary Budget and IBO’s re-estimates of city spending and revenues, IBO projects that the budget for 2019 will end with a surplus of $3.4 billion and 2020 with a $722 million surplus. Assuming the 2020 surplus is used to prepay expenses in the following year, it forecasst budget gaps of $1.97 billion in 2021 (2.7% of projected city–funded expenditures), $1.84 billion in 2022 (2.4%), and $1.62 billion (2.1%) in 2023.

Between 2018 and the final year of the financial plan agency expenditures will increase an average of 2.1% annually. The large increase in agency spending between 2018 and 2019 is primarily due to the settlement of the city’s labor contracts. In June 2018 the city settled its labor contract with DC 37, which provided for 7.42% compounded wage increases over a 44-month period—2.0% for the first 12 months, 2.25% for the next 13 months, and 3.0% for the remaining 19 months. This contract set the wage increase pattern for the remaining city unions.

In order to fund this pattern the city added resources in 2019 through 2022 over and above what had previously been budgeted in the labor reserve for this round of settlements. The steep increase in 2019 agency costs reflects the cost of retroactive wages resulting from the settlement of these contracts as well as retroactive payments made for previous contracts, in particular for the United Federation of Teachers (UFT). After 2019, agency expenditure growth will average 1.0% annually.

In 2018 the city spent slightly under $10 billion in fringe benefit costs; in the current year these costs are expected to be $10.9 billion, and by 2023 they are estimated to increase to nearly $13.4 billion, an annual growth rate of 6.2%. IBO estimates that health care costs, by far the biggest component of fringe benefits, will grow at a rate of 5.8% during the same period, from $6.2 billion in 2018 to $8.2 billion by 2023. Debt service is projected to grow at an average annual rate of 8.4%, from $6.1 billion in 2018 to $9.1 billion in 2023, an increase of over $3.0 billion. In contrast, from 2014 through 2018 actual debt service costs increased by an average of 2.3% annually, from $5.5 billion to $6.1 billion. Debt service on new long-term bonds during the plan period is estimated to add approximately $2.0 billion in costs by 2023, net of any savings accrued from the retirement of older debt and refundings. $36.8 billion the total amount of new long-term debt the city plans to issue through 2023 would greatly exceed any previous five-year period.

Pension costs are often cited as a primary driver of expenditure growth, although in recent years they have accounted for less of the growth than debt service and fringe benefit costs. In 2018 the city spent $9.6 billion on pension costs. OMB estimates that the city’s pension costs will increase to $9.9 billion in 2019, $10.0 billion in 2020, and $11.1 billion by 2023, an average growth rate of 2.8% from 2018 through 2023. The current rate of growth in pension costs is greater than at this time last year, with the increase primarily attributable to the recent contract settlements. In the November plan an additional $1.1 billion was allocated for pension costs across the plan period to cover the pension costs associated with the salary increases included in the settlements. Excluding the pension increases attributable to the recent contract settlements, annual growth in city funded pension expenditures over the plan period would have averaged 1.5%.

GET THE LEAD OUT

Here’s a potential source of issuance going forward. The Minnesota Department of Health estimated last week that it could cost up to $4 billion over two decades to replace lead pipe from drinking systems. In 2012 the Centers for Disease Control and Prevention determined that there is no level of safe exposure. An estimated 100,000 old lead service lines remain across Minnesota primarily in Minneapolis (60,000), St. Paul (28,000) and Duluth (5,000).

The State is considering whether to finance the costs of pipe replacement through bonds issued for and secured by the Drinking Water State Revolving Fund. Funding the repairs will be important as replacing lead service lines can cost a homeowner anywhere from $2,500 to more than $8,000 per line. A program in Saint Paul covers half the cost of a residential replacement. Unfortunately, fewer than half of residents choose to pay the $3,000-$4,000 required to address their half of the work.

SMALL COLLEGE PRESSURES CONTINUE

The National Center for Education Statistics annually compiles statistics to project the demand for college enrollment in the US over an extended period. The newest report estimates demand through 2027. NCES is the primary federal entity for collecting, analyzing, and reporting data related to education in the United States and other nations. It fulfills a congressional mandate to collect, collate, analyze, and report full and complete statistics on the condition of education in the United States; conduct and publish reports and specialized analyses of the meaning and significance of such statistics; assist state and local education agencies in improving their statistical systems; and review and report on education activities in foreign countries.

Total public and private elementary and secondary school enrollment was 56 million in fall 2015, representing a 3% increase since fall 2002. Between fall 2015, the last year of actual public school data, and fall 2027, a further increase of 4% is expected. Both public and private school enrollments are projected to be higher in 2027 than in 2015. Public school enrollments are projected to be higher in 2027 than in 2015 for Blacks, Hispanics, Asians/Pacific Islanders, and students of Two or more races. Enrollment is projected to be lower for Whites and American Indians/Alaska Natives. Public school enrollments are projected to be higher in 2027 than in 2015 for the South and West, and to be lower for the Northeast and Midwest.

Enrollments are projected to be higher in 2027 than in 2015 for 33 states and the District of Columbia, with projected enrollments 5 % or more higher in 24 states and the District of Columbia; and  less than 5% higher in 9 states. Enrollments are projected to be lower in 2027 than in 2015 for 17 states, with projected enrollments 5% or more lower in 10 states; and less than 5% lower in 7 states. Public elementary and secondary enrollment is projected to decrease 4% between 2015 and 2027 for students in the Northeast; decrease 1% between 2015 and 2027 for students in the Midwest; increase 9% between 2015 and 2027 in the South; and  increase 2%between 2015 and 2027 in the West.

The data drives one to the conclusion that the pressure on small independent colleges will not abate. It also shows that the risk is likely to be geographically concentrated as well. Unsurprisingly, much of the risk is concentrated in New England and the Rust Belt. The locus of small colleges and declining overall demographics are bound to increase the competitive pressures for small colleges with limited scale or ability to attract students from outside their region. These overwhelmingly private tuition dependent institutions will be hard pressed to fund operations in the face of demand trends dampening demand.

CANNABIS LEGALIZATION

Efforts continue on two fronts to advance legalized marijuana through the legislative process rather than through the ballot process. Florida senators voted 34-4 to remove the current ban on smokable forms of medical marijuana. The law currently only allows patients to use cannabis oils and baked goods. In 2018 – the year following a ballot initiative which legalized medical marijuana – state lawmakers passed measures to ban the sale of smoking products, saying that patients could use medical marijuana through other methods, such as vaping, food and oils.

A Leon County Circuit Court Judge ruled that the ban was unconstitutional. The sponsor of the ban on smokable marijuana has said that it was “time to move on.” The Governor said that he will not would not appeal the decision if the state legislature passed a new law by March 15. 

In New Mexico, the House of Representatives voted to legalize marijuana for recreational purposes. The outlook for the bill in the State Senate remains uncertain. It is a compromise designed to address Senate concerns and it includes state-run marijuana stores, something that has not yet happened in other legalization states. 

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