TRENTON — State finances are so shaky that a recent survey listed New Jersey among the 10 states whose fiscal woes could drag down the rest of the nation as it recovers from the current recession.
The report released Wednesday by the Pew Center on the States warned that at least nine other big states beyond California are also barreling toward economic disaster, raising the likelihood of higher taxes, more government layoffs and deep cuts in services. A historic budget crisis in California earlier this year grew so bad that state agencies issued IOUs to pay bills.
The survey found that Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are also at grave risk. Double-digit budget gaps, rising unemployment, high foreclosure rates and built-in budget constraints are the key reasons.
Speaking after a Veterans Day event in Holmdel Township, Monmouth County, Gov.-elect Chris Christie said he expects shared sacrifice from the state work force of about 75,000 as he grapples with New Jersey’s dire financial condition, including a projected budget deficit of $8 billion in his first year in office.
Christie said he’s leaving all his options open for the dismal fiscal year ahead, including trimming the state’s contribution to the workers’ pension fund and asking for additional givebacks from labor.
The Pew analysis, “Beyond California: States in Fiscal Peril,” urged lawmakers and governors in the financially troubled states to take quick action to head off a wider catastrophe. The 10 states account for more than one-third of the nation’s population and economic output, according to the report.
How we got here
States have historically had their worst tax revenue years soon after a national recession ends. At the same time, higher joblessness and underemployment mean more people need government-sponsored health care and social safety-net programs, further taxing state services.
In New Jersey, where lawmakers are confronted with a gap of nearly 30 percent of the overall budget, Jon Shure, deputy director of the State Fiscal Project at the Center on Budget Policy and Priorities said, “When the recession hit New Jersey, it was like a tornado hitting a house that was already falling.”
Survey authors found New Jersey playing desperate catch-up after years of fiscal mismanagement resulted in soaring debt and a persistent imbalance between what it collects and spends.
The recession hit the state particularly hard, because so much of its income tax collection comes from already-battered Wall Street employees, making this year’s rate hikes on top earners worth less.
At the same time, the state’s $44 billion debt was huge and growing, a total survey authors said was “an eye-popping figure that is 53 percent larger than the state’s latest annual budget and is higher in per-capita debt than almost every other state.”
Debt payments have grown, while pension funds remain drastically underfunded.
Soaring property tax rates also mean lawmakers are pressured to spend more on property tax relief, while court decisions have required higher spending in urban school districts.
Christie urges talks
Survey authors noted Gov. Jon S. Corzine’s efforts to rein in spending, furlough workers and consolidate some government, but said the efforts barely made a dent. They cited the $3.9 billion borrowed last year for new school construction.
Late last year, Corzine reopened state workers’ contracts after revenues plunged and New Jersey’s budget deficit ballooned.
Under a renegotiated deal finalized early this year, the unions put off the 3.5 percent pay raise they were due on July 1 for 18 months and took unpaid furlough days in exchange for a no-layoff pledge through December 2010.
Christie, who accused Corzine of being too cozy with labor throughout the gubernatorial campaign, said he wasn’t trying to pick a fight with the unions. He said he hoped to avoid layoffs, but would not be bound by Corzine’s pledge.
“We’re going to have to have a negotiation with state employees regarding how we’re going to move forward with the benefits and pay that they get,” Christie said. “Given the state of our economy in New Jersey, I don’t think anything should be taken off the table.”
Under the current contract, union workers are due a 3.5 percent raise next July 1, and the 3.5 percent that was deferred on Jan. 1, 2011. Deferring the raise saved the state about $189 million in the current budget year.
Bob Master, political director of the state’s largest labor union, the Communications Workers of America, said the renegotiated contract stipulates that the deferred 3.5 percent raise would kick in if there are layoffs.
“We think it’s very positive that he is saying quite clearly that he wants to avoid layoffs,” Master said. “He needs to understand that our members have been sacrificing ... and they are middle-class people struggling to get by as well.”
Christie’s options for balancing the budget in the coming year are limited because he has promised not to increase taxes or cut K-12 school aid. He takes office in January and must introduce a budget in March for the fiscal year that begins July 1.
States’ low grades
The Pew survey compared states to California with financial indicators available July 31 that included revenue declines, budget gaps and rates of foreclosure and unemployment.
With California receiving the worst score of 30, New Jersey was scored at 23, while New York came in at 20, Delaware at 16 and Pennsylvania 11. Rhode Island, which received a 28, was the only other state in the Northeast whose fiscal woes were worse than New Jersey’s. Six states were worse off than New Jersey
The survey also issued letter grades, giving New Jersey’s finances one of four C-s, while New York received a C+, Pennsylvania a B and Delaware an A-. Only California and Rhode Island had shakier finances.
California leads the most vulnerable states identified by the report, which describes it as having poor money-management practices. Since February, California has made nearly $60 billion in budget adjustments in the form of cuts to education and social service programs, temporary tax hikes, one-time gimmicks and stimulus spending, according to the Legislative Analyst’s Office.
In reviewing why some states are suffering more than others, Pew found that the 10 states tend to rely heavily on one type of industry, have a history of persistent budget shortfalls or face legal constraints making it extra difficult to implement major changes, such as tax increases.
Many require a supermajority vote for passing tax increases or budget bills.
Press staff writer Derek Harper and The Associated Press contributed to this report.
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