July 2010
State Profile: New Jersey By: Evette Evans, SEI Global Fixed Income Management
SEI Global Fixed Income Management manages fixed-income strategies for SEI’s Managed Account Program (MAP) and Integrated Managed Account Program (IMAP).
Over the past three years, state and local governments have experienced the largest declines in tax receipts on record. These declines have caused major budget and pension struggles, which have in turn challenged many states on how best to exert fiscal management. The State of New Jersey is among those facing tighter budget restrictions in order to tackle its financial problems, which were described as a state of emergency by Governor Chris Christie in February.1 2011 Budget On June 29, 2010 Governor Christie signed his first budget into law just two days before the July 1 deadline which began fiscal year 2011. The budget totaled $29.4 billion and included measures to close an unprecedented budget gap of $11 billion. Some of those measures included: Cutting $3 billion in payments into the pension funds for government employees Debt restructuring totaling $410 million Suspending property-tax rebates for 2010 to save $850 million Cutting aid to schools by $819 million and aid to towns by $446 million Reducing aid to the working poor under the state Earned Income Tax Credit by $45 million Putting a hold on new applications for a property-tax rate reductions program for senior citizens to save about $28 million Permitting assessment increases on hospitals and ambulatory care facilities to increase by up to $45 million Finances and 2010 Budget Revenue expectations for fiscal 2009 were lowered on several occasions in response to weak tax collections. Exhibit 1 on the following page compares 2009 tax receipts to those for 2010. While the fiscal 2009 budget anticipated an overall revenue decline of 0.4%, there was actually a much larger decline of 11.3% from fiscal 2008 levels. Personal income tax receipts declined from fiscal 2008 levels by 16.9%, and sales taxes and corporate income taxes were 7.3% and 13% below fiscal 2008 levels, respectively. Revenue underperformance and additional spending needs prompted approximately $4.3 billion in budget-balancing measures, many of which were non-recurring. Fiscal 2009 closed with an ending balance of approximately $614 million, $121 million lower than the estimate upon which the fiscal 2010 budget was based.
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Please see SEI Global Fixed Income Management‟s article titled “New Jersey a „Fiscal Emergency,‟” published February 2010.
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Exhibit 1: New Jersey Tax-Collection Amounts Have Declined
Source: New Jersey Department of Treasury
The enacted fiscal 2010 budget addressed a current-level funding gap of $8.2 billion. A combination of revenue enhancements, federal stimulus monies, restrained growth and spending reductions were employed to close the gap, although reductions in pension funding and savings generated by restructured debt repayments accounted for a significant portion of the identified cuts. The majority of the proposed revenue enhancements came from new personal income tax brackets, which affected the state's highest earners and are scheduled to be in effect for one year. Other measures reduced property tax relief efforts, an area of pressure for the state. Enacted fiscal 2010 revenue expectations assumed an overall decline of 1.3% from fiscal 2009 revenues, but revenue underperformance and supplemental spending needs opened a current-year gap of $2.1 billion as of February 2010. A mix of spending reductions and balance draws totaling approximately $2 billion, which included $475 million in mid-year school aid funding reductions and $175 million in new revenue items, will be employed to maintain balance. Revenue performance through April 2010 is slightly below the revised expectations as shown in Exhibit 2 on the following page, and the state expects to close fiscal 2010 with an ending balance of approximately $500 million, approximately 2% of the state's fiscal 2010 adjusted resources ($28.334 billion). The state warns that additional spending pressures have surfaced and that the projected ending balance may come in lower than previously projected.
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Exhibit 2: New Jersey Revenue Sources Comparison
Source: New Jersey Department of Treasury
Debt New Jersey total net tax-supported debt is the third-largest in the nation—$31.95 billion on a net basis and $37.74 billion on a gross basis.2 Net tax-supported debt is $3,669 per capita and 7.2% of 2008 personal income, up from 5.3% a decade ago. Net tax-supported debt as a percentage of gross state domestic product for 2010 is 6.73%, a decline from 6.82% in 2009. Pensions New Jersey operates five defined-benefit pension plans for state employees. The state reported as of June 30, 2009 that its pension systems were underfunded by $44.7 billion when liabilities were discounted at the 8.25% annual return that New Jersey predicts it will achieve for its investment portfolios. It is estimated if state pension assets average a return of 8%, New Jersey will run out of 2
2010 State Debt Medians Report, Moody’s Investors Service
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funds to meet its pension obligations in 2019. State actuaries estimate that under certain assumptions, New Jersey‟s pension plans will run out of assets to make benefit payments beginning in 2013.3 In order to reduce pension costs going forward, several reforms to the system have been made: All workers will now contribute 1.5% of their salaries toward their own health-insurance premiums (potentially saving local governments and school boards $315 million in the coming year alone). Sick-time cash-outs are limited to $15,000, and workers must work 35 hours a week (32 weeks at local levels) to be eligible for the defined-benefits plan. A new defined-contribution plan will be created for part-time workers. Both state and local workers are affected, in contrast to previous proposals that affected only state workers. The last two bills are projected to save $8 billion over 15 years. Employment New Jersey employment contracted marginally in June, but the state's unemployment rate moved lower from its high reached in December 2009. The state's unemployment rate edged down by 0.1% in June to 9.6%, just above the national rate of 9.5%. According to preliminary estimates, total nonfarm wage and salary employment in New Jersey was lower by 1,900 jobs in June, falling to 3,866,800. Private sector employment, however, added 5,300 jobs. Private-sector employers have added jobs in three of the past five months. Net job losses for the month were due to a decrease in public-sector jobs (-7,200), the majority which is attributed to the federal government's first-wave release of temporary workers hired for the 2010 U.S. Census. Previously released May estimates show a small upward revision of 1,400 in nonfarm employment to a total of 3,868,700. The gain from April to May was revised to 9,000 jobs from the preliminary estimate of 7,600. In June, six of ten private-sector industry supersectors recorded job gains, which included professional and business services (+4,400); leisure and hospitality (+2,800); trade, transportation and utilities (+2,600); and education and health services (+1,300). Job creation in professional and business services resulted from hiring in the administrative support, waste management/remediation (+3,300) component that includes temporary employment services. Exhibit 3 on the following page tracks the movements in New Jersey‟s unemployment rate for the one-year period ending June 30, 2010.
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The Crisis in Public Sector Pension Plans: A Blueprint for Reform in New Jersey, Mercatus Center, George Mason University, June 2010
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Exhibit 3: New Jersey’s Unemployment Rate, June 2009 – June 2010
Source: NJ Department of Labor and Workforce Development
New Jersey remains one of the most affluent states in the nation. Per-capita income for 2009 was a strong $50,313, which is 129% of the national average and ranked second behind the State of Connecticut. As of May 2010, the median home value was $287,700, which is 158% of the national average. Property Tax Cap On July 13, Governor Christie signed a property tax limitation into law that reduces the current 4% cap on annual property tax levy increases to a more stringent limitation of 2%. The 2% limitation will take effect January 1, 2011. The new cap is a negative for New Jersey local governments, which are already weakened by reduced revenue related to the economic recession, high fixed expenditures and the previous 4% property tax cap put into effect in 2008. The new legislation provides important exemptions from this cap, including expenditures for health benefits, pension contributions, debt service and increased school enrollment. It also allows levy increases above the 2% cap with a simple majority vote of local residents as opposed to a supermajority that was required under the previous cap. Ratings The State has credit ratings of AA/AA/Aa2 with a stable outlook. Our View We continue to feel that there are opportunities in New Jersey with regard to its municipal debt. Volatility is expected to remain front and center as the economy continues to rebound and states work to repair their balance sheets. Opportunities exist in both general-obligation and revenue bonds issued in New Jersey. We continue to feel comfortable adding exposure in our mandates and remaining active within New Jersey markets.
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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only. There are risks involved with investing, including loss of principal. No mention of particular securities should be construed as a recommendation or considered an offer to sell or a solicitation to buy any securities. SEI Investments Management Corporation or its employees may sometimes hold positions in the securities discussed here. SEI Global Fixed Income Management is a unit of SEI Investments Management Corporation which serves as the investment advisor.
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