Tue 04/06/2021 18:03 PM
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During testimony before the New Jersey Senate Budget and Appropriations Committee this afternoon, New Jersey State Treasurer Elizabeth Maher Muoio defended last year’s decision by the administration of Gov. Phil Murphy to undertake a $4.28 billion noncallable emergency bond issuance. Muoio also expressed confidence that the U.S. Supreme Court will take up a tax dispute between the states of New Hampshire and Massachusetts that could affect the ability of New York state to tax New Jersey residents employed by New York state firms who are working from home. New Jersey estimates that it will credit about $1 billion to residents employed by New York firms who worked at home during the pandemic.

Muoio testified on Murphy’s proposed fiscal 2022 budget and provided a detailed update on improving revenue projections. She noted that the proposal includes the first “full” pension payment, or 100% of the annual actuarially determined contribution, or ADC, in more than 25 years and a year earlier than anticipated. Muoio also said the administration is reducing state debt issuance with “significant direct appropriation investments” and is “examining ways to defease other existing debt.”

Senate Budget and Appropriations Chair Paul Sarlo said the proposed budget is something the legislature can work with and approve, but he expressed concern about the projected drop off in federal stimulus funding and the impact it could have in the state budget in two or three years. Sarlo urged the state treasurer to move towards multiyear budgeting to ensure the state addresses any potential future “fiscal cliff.”

In November 2020, New Jersey issued $4.28 billion in general obligation bonds with a 12-year maturity authorized under the state’s Covid-19 Emergency Bond Act. The deal was “significantly oversubscribed” and bonds were sold at a premium, driving down the transaction’s true interest cost to about 1.95%, according to the New Jersey Treasury Department.

The bill was enacted in July and originally authorized the state to borrow up to $9.9 billion. After the New Jersey Republican State Committee sued the Murphy administration in an attempt to stop the borrowing, the New Jersey Supreme Court upheld the constitutionality of the bond act, but stipulated that the state cannot issue bonds or borrow funds beyond the actual fiscal need caused by the pandemic, and required the state to certify projected revenue shortfall before the issuance of each tranche of the general obligation borrowing. When the state entered the market in November, the improving revenue situation reduced the projected revenue shortfall to $4.28 billion. The proposed fiscal 2022 budget forecasts the state will close fiscal 2021 on June 30 with a $4.9 billion surplus.

Several Republican senators questioned Muoio on the wisdom of the decision, the inaccuracy of last year’s revenue projections and the decision to issue noncallable bonds. But Muoio defended the decision to borrow, noting that government estimates of the projected shortfall was whittled down substantially from an initial projection in May 2020 of $7.2 billion to the $4.28 billion estimate in November 2020. She said state estimates were in line with other forecasts, noting that Moody’s Analytics estimated a potential two-year baseline shortfall for New Jersey of $9.6 billion and a potential severe shortfall of $13.2 billion. The state treasurer also said the decision was made jointly with the legislature “at a time of enormous economic uncertainty during a once-in-a-century crisis.”

The borrowing took place as the state braced for another surge in Covid-19 cases, with potential substantial economic consequences, according to the official. “We couldn’t simply say, as some are now suggesting, let’s wait until later in the fiscal year to make the decision to borrow,” Muoio said, noting that the state has already placed $1 billion of available appropriations into reserve, postponed more than $500 million in spending on critical obligations, and transferred the state’s rainy day fund into the general fund. “The lives and livelihoods of our residents were clearly not worth that very real risk,” Muoio said.

Treasury officials also defended the decision to issue noncallable bonds as the best financial decision. Assistant State Treasurer Dini Ajmani said a 12-year bond deal with callable bonds would not be attractive to investors and pointed out that demand for the bonds helped drive down interest rates. She said that call features are usually reserved for longer term bonds.

Michael Kanef, director of Treasury’s Office of Public Finance, also explained that New Jersey has about $40 billion in outstanding bond debt and that interest rates on the debt range between 4% to 5%. He said officials decided it would be better to defease some of the outstanding higher priced bond debt than place a call feature on the emergency bonds that would increase their cost. He said an analysis by his office shows that the state would save $150 million by defeasing the higher cost debt rather than the bonds issued last year.

While Muoio said the administration is exploring additional defeasement opportunities, Senate Budget and Appropriations Chair Sarlo called for a “structured defeasement program.”

New Jersey-New York Tax Issue

The state treasurer also addressed questions about New York state’s practice of continuing to tax New Jersey residents employed by New York state firms even if they work from home during the pandemic. While the problem predates the pandemic, senators said the issue has grown with the increase in employees working from home during the pandemic and the advance in technology that made this possible.

Muoio said that the state has filed an amicus brief related to the bill of complaint filed by the state of New Hampshire in the U.S. Supreme Court against the Commonwealth of Massachusetts and its temporary rule imposing tax on nonresidents working from home for an in-state employer. New Jersey was joined in its brief by the states of Hawaii, Connecticut and Iowa, and 10 other states filed a separate amicus brief in the case. The states all side with New Hampshire’s position in the case, which was filed in October 2020.

Muoio acknowledged that the state has not taken aggressive action against New York state because of the possibility that New Jersey residents could be taxed twice.

“If we were to step in and say ‘no, it belongs to New Jersey,’ residents would essentially be paying tax twice because New York is not backing down on what they believe they are legally allowed to charge. … We do not want to be in a position where our taxpayers are the rope in the middle of a tug of war between New York and New Jersey, and we don’t want them to pay twice,” Muoio said.

The state treasurer said in the absence of federal laws governing the issue, the courts will have to settle the issue, and New Jersey officials were happy about the opportunity to intervene in the legal dispute. Muoio said the U.S. Supreme Court has asked the U.S. solicitor general to provide a legal brief on the questions raised by the dispute, which she said is a good sign that the Supreme Court will agree to consider the case. She said that probably will not happen until the next Supreme Court session.

The New Jersey brief estimates that New Jersey will credit between $928.7 million and $1.2 billion to its residents for taxes paid to New York based on income they earned or are projected to earn while working from home during the first year of the pandemic.

Future Revenue Projections

The state treasurer also discussed future revenue projections. Fiscal 2022 revenues are projected to total $40.86 billion, which is $3.3 billion below the total level in fiscal 2021, but when the $4.3 billion in fiscal emergency bond proceeds are excluded, fiscal 2022 revenues are projected to grow by $952 million above fiscal year 2021, representing a 2.4% growth rate. Excluding a one-time Pass-Through Business Alternative Income Tax net collection of $606 million in fiscal 2021, baseline recurring revenues are projected to grow by $1.558 billion, or 4%, according to Muoio.

The state’s three largest tax revenues are all expected to grow in fiscal 2022:
  • Gross income tax, or GIT: $16.257 billion, up $978 million, or 6.4%;
  • Sales tax: $10.910 billion, up $287 million, or 2.7%; and
  • Corporation business tax, or CBT: $3.721 billion, up $282 million, or 8.2%.

Muoio noted that the proposed budget was presented prior to the passage of the American Rescue Plan, or ARP, is delivering an estimated $9.6 billion in direct stimulus payments to New Jersey taxpayers and federal supplemental unemployment benefits could provide individuals with an additional $8 billion. The state government is also slated to receive a total of $6.6 billion under the ARP.

“Had the ARP not been enacted, we might have begun to see the impact on consumer spending fade sooner than we now expect in FY22. Instead, these direct infusions should help maintain the current positive trends,” Muoio concluded.
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