COVID-19 Recovery Bonds Considered

COURT HOUSE – While public attention is on the reopening of the economy, state lawmakers are considering options for dealing with an unprecedented loss of tax revenue. State Treasurer Elizabeth Muoio reported May 22 that New Jersey faced an unprecedented fiscal crisis.
The Congressional Budget Office is projecting economic activity to decline nationally by almost 40% in the second quarter. Speaking of New Jersey’s recession and recovery, Muoio said that the state’s economic output may take two years to be restored to 2019 levels. She predicted a revenue shortfall for the state of over $10 billion for fiscal years 2020 and 2021.
One response to these predictions was a bill (A-4175), which passed the state Assembly June 4 on a 51-to-28 largely party-line vote. The bill authorizes the state to issue up to $5 billion in COVID-19 emergency bond relief to off-set losses of revenue from income, sales, and business taxes. The state would also be empowered to borrow up to $9 billion in short-term loans from the federal government.
It is hoped that the borrowing plan would prevent steep cuts in the state budget and the laying off of thousands of state employees.
The bill was approved in a remote voting session and moves to the Senate where Senate President Stephen Sweeney indicated he supports borrowing, but has issues with the amounts authorized in the bill.
Even if the bill passes the Senate, it will likely face legal tests since most large borrowing by the state requires voter approval. A legal opinion from the Office of Legislative Services said the state would be allowed to borrow to cover catastrophic losses due to COVID in the current budget year, but is less supportive of any attempt by the state to use the new authority to balance future budgets without voter approval. This fiscal 2020 budget year was extended to September.
The bill calls for repaying the debt through sales tax revenues, possibly a lead-in to raising the sales tax, something Gov. Phil Murphy championed before the pandemic.
Standard language in the bill allows for a property tax surcharge if the state is unable to make the necessary principle and interest payments in any year. Republicans have claimed that, this time, the language may lead to higher property taxes. The enormity of the borrowing at a time when the state was already dealing with significant fiscal problems, they argue, makes the backstop of property taxes more worrisome.
Murphy argues that borrowing is the only way to prevent increases in property taxes. Assembly Minority Leader Jon Bramnick disagrees and said more debt is the wrong way to go for a debt-ridden state.
A second bill that cleared the Assembly would allow municipalities and counties to issue bonds to raise funds as needed to cover revenue problems. This bill is favored by the League of Municipalities.
Municipal relief bonds would be secured by property taxes. Municipalities would be allowed to issue bonds based on their bond ratings to cover the loss of revenue and/or new, unexpected expenses related to the pandemic.
The bill (A-3971) passed the Assembly May 14 by a vote of 57-20.
The League of Municipalities argues for the bill, saying that “a one-size-fits-all solution is not the best approach toward addressing revenue shortfalls and increased expenses.”
Supporters argue that the bill would give municipalities options for meeting expenses while crafting a repayment schedule that works for a given local government. New Jersey Citizen Action has also issued a statement supporting the bill.
First District Assemblymen Erik Simonsen and Antwan McClellan voted against both bills.
To contact Vince Conti, email vconti@cmcherald.com.