Treasury Delivers Updated Revenue Projections to Senate Budget Committee for FY 2022-23

Record April Collections Help FY 2022 Revenues Soar Past Pre-Pandemic Trend Line with $13.4 Billion Jump Since FY 2020

Murphy Administration Looks to Use Revenue Boost for Additional Property Tax Relief, Debt Reduction, and Building Up Surplus

Revenue Growth Expected to Moderate for Fiscal Year 2023 as Economic Concerns Loom

(TRENTON) – The Department of the Treasury testified before the Senate Budget and Appropriations Committee at the State House today, providing a detailed update on revenue projections for the remainder of Fiscal Year 2022 (FY 2022) through Fiscal Year 2023 after sizing up collections for the all-important month of April, noting that revenues have now surged $13.4 billion higher than at the close of FY 2020 when the pandemic was in its infancy.

Deputy Treasurer Aaron Binder delivered testimony on behalf of State Treasurer Elizabeth Maher Muoio, who tested positive for COVID-19 last week, highlighting the unprecedented surge in revenue that New Jersey, like many other states, is witnessing since the start of the pandemic. Treasury also noted that the Murphy Administration is looking forward to working with the Legislature to use the additional revenue boost to provide greater property tax relief, more funding for debt reduction, and to build up the State’s surplus in the face of a potential economic downturn.

The following is a copy of the testimony, as prepared for delivery:

SENATE BUDGET AND APPROPRIATIONS COMMITTEE HEARING

Department of the Treasury

Testimony as Prepared for Delivery

May 12, 2022

Good morning, Chairman Sarlo, Vice Chair Cunningham, and members of the committee.

On behalf of Treasurer Muoio, I want to thank you for the opportunity to provide an update on the State’s revenue outlook for Fiscal Years 2022 (FY22) and 2023 (FY23) now that the all-important month of April has concluded.

With me here at the table are: Chief of Staff Jo-Ann Povia, Acting Director of OMB Lynn Azarchi, Deputy Director of OMB Tariq Shabazz, and Martin Poethke, the Director of our Office of Revenue and Economic Analysis (OREA). As always, we are grateful to each of them, as well as our front office, and the staff of OMB, OREA, and our other divisions, many of whom have joined us here today.

I will cut right to the chase today. The State’s fiscal picture is remarkably strong. The rapid revenue recovery last year, followed by the continued revenue surge this year, is unprecedented in New Jersey’s modern budget history. From a low of $38.0 billion in FY20 when the pandemic hit, State revenues have now soared to an estimated $51.4 billion in FY22 – a stunning $13.4 billion jump, up 35.3% in only two years.

In sharp contrast, after the Great Recession it took the State seven long years just to return to the pre-recession revenue peak. Today we haven’t just returned to the pre-pandemic peak or trend, we have soared $8.8 billion above the pre-pandemic trend line.

There is no precedent for this:

• Our revised FY22 revenue forecast of $51.4 billion is $4.5 billion above our early March forecast at the time of the Governor’s Budget Message (GBM).
• Our revised FY23 revenue forecast of $50.6 billion is $3.3 billion higher than March.
• Our combined two-year forecasts are a remarkable $7.8 billion higher than our two-year forecasts from just a couple of months ago.
• Our combined forecast is also some $4.7 billion above the April forecast by our colleagues at OLS.
• Our combined forecast is now $919 million above OLS’s revised forecast — $452 million higher in FY22 and $467 million higher in FY23.

What happened?

As we noted when we appeared before you last month, we fully expected to raise our projections substantially in May for several reasons. Having had the opportunity to see the incredible March revenue numbers that came in after we finalized our forecasts for the Governor’s Budget Message, the Treasurer noted at the time that it was understandable that OLS’ forecast, which was issued after those numbers came in, was higher. Now, having had the chance to review the April numbers, we have revised our forecast even further.

Most of the upward revenue revisions are due to very strong collections in March and April from the PTBAIT – the Pass-Through Business Alternative Income Tax – and the Gross Income Tax (GIT). Combined, these two revenue streams account for $6.2 billion of the $7.8 billion upward revision over the two fiscal years.

The PTBAIT surged in March after the Governor’s budget was released, collecting $709 million, or triple the amount collected last March. About one-third of this came from new taxpayers who had never paid PTBAIT previously. Our OLS colleagues had this information in April and appropriately revised their forecasts upward. We are doing the same now, forecasting $3.7 billion in FY22 and $3.4 billion in FY23, a combined increase of $1.3 billion since the GBM.

Even more impressively, the GIT surged to a record high in April. Previously, the largest April on record was the $3.6 billion booked in 2019. This April posted net collections of $5.15 billion. And that happened even with PTBAIT tax credits more than doubling to about $3.5 billion this year, which reduces Gross Income Tax liabilities. Final 1040 payments alone accounted for $4.4 billion in April; the previous highest April final payment total was $2.8 billion in 2019.

Given this massive “April Surprise,” we are now forecasting the GIT at $20.3 billion in FY22 and at $20.1 billion in FY23. Combined over the two fiscal years, our GIT forecasts are $4.9 billion above our forecasts at the beginning of March.

Beyond the $6.2 billion two-year increase from the PTBAIT and GIT, our forecasts for a number of other revenues are also up $1.6 billion over the two fiscal years.  You can find detailed revenue comparisons in the informational packet prepared by OMB, but I’ll quickly run through a few more forecasting highlights:

• The Sales Tax forecasts are $394 million higher, combined over the two fiscal years;
• The CBT forecasts are $541 million higher (combined);
• The Realty Transfer Fee forecasts are up $87 million (combined);
• The Insurance Premiums Tax forecasts are up $135 million (combined); and
• Casino revenue forecasts are up $97 million (combined).

Most of this tax revenue surge is driven by the very strong year taxpayers had in 2021. Last year was a record year for New Jersey’s labor market, as 212,400 jobs were restored and created. Moreover, through the end of March 2022, the State has recovered 92.7% of the jobs lost at the beginning of the pandemic, and the unemployment rate has fallen back to 4.2%. In 2021, wages and salaries rose 8.4% and State nominal GDP climbed 8.7%. Boosted by rising incomes and federal stimulus payments, retail sales soared 20.5% according to Moody’s. New Jersey’s hot housing market continued to grow and single family home prices rose 14.4%. Nationally, corporate profits jumped an estimated 36% in 2021, the S&P 500 Index rose 26.9%, and Wall Street bonuses were up 20%.

New Jersey is not alone. New York State recently closed its FY21-22 fiscal year with 33% higher revenues than they had originally forecasted last year – up $30 billion. Reports are also trickling in from many other states of unexpectedly strong April revenue collections.  For example, Pennsylvania reported beating its April tax revenue target by $1.8 billion, and that they are $4.5 billion ahead of their year-to-date target.

But this revenue surge also comes with warnings:

• The Urban-Brookings Tax Policy Center’s Lucy Dadayan, a long time expert on state revenues, says states are in a “fiscal bubble” and that current collection patterns are not sustainable.
• Home sales have been declining year-over-year for many months.
• The Federal Reserve has begun a series of interest rate hikes aimed at curbing inflation.
• Major economic forecasters have been lowering their GDP growth projections for 2022 and 2023.
• U.S. real GDP was down 1.4% in the first quarter of 2022.
• The S&P 500 index is down about 15% so far in 2022.
• National retail sales growth year-over-year slowed substantially in March to 6.9%, which is lower than the national CPI inflation rate of 8.5%, suggesting that consumers’ real spending growth has peaked and is starting to decline.
• In New Jersey, April Sales Tax collections growth of about 7% will be the lowest growth so far this year, and a sharp slow-down from the 17% growth seen in March.
• Also in New Jersey, April quarterly estimated GIT payments bucked the strong final payments growth trend and actually declined by 24%, suggesting higher income taxpayers are cautious about the coming year.

Our FY23 revenue forecasts take these warnings seriously. We agree that current growth rates are not sustainable. Some revenues have peaked and should adjust back to more sustainable levels. We are assuming economic growth will continue, but revenue growth will right-size after the current fiscal bubble.

Therefore, our total FY23 forecast of $50.6 billion is down 1.6% from FY22. We see the Sales Tax growing more slowly by 2.0%. On the other hand, we anticipate declines in the GIT, CBT, PTBAIT, Inheritance Taxes, and the Realty Transfer Fee.

New Jersey is benefitting from a remarkable two-year revenue rise. We have achieved, at least for now, some structural balance between revenues and expenditures. We have dedicated a significant amount to debt reduction to improve the State’s long-term fiscal conditions. We are fulfilling our commitment to fix the underfunded State pension system. We are substantially increasing property tax relief through the new ANCHOR proposal. We are committing record amounts of school aid on our way to fully funding the new school funding formula. And, we have built up a vital surplus to help provide a cushion for emergencies and protect the State from future negative downturns.

As we all know, vulnerabilities remain. Economic cycles will continue to rise and fall as they have throughout history. In the relatively short and mild 2001 “Dot-Com” recession, State revenues fell about 5% below targets. The very severe Great Recession of 2008-2009 saw State revenues fall some 20% below targets over two fiscal years. Even a moderate future economic downturn, falling somewhere between those two recessions, could easily see a 10% annual revenue shortfall, which would equate to approximately $5 billion for one year or $10 billion for two years.

We are in a very good place today, better than anyone could have hoped for 24 months ago. This is a good problem to have, but it will clearly serve as a temptation. We have to be cognizant of the economic news coming in on a daily basis.

The wealthy had a very good year, thanks to skyrocketing corporate profits across the globe last year, and this is reflected in our income tax revenues. On the opposite side of the coin, we’ve seen an increase in requests for assistance from our most vulnerable.

Both General Assistance and TANF (Temporary Assistance for Needy Families) caseloads have increased as of late and are now above pre-pandemic levels, likely due to the expiration of extended unemployment benefits. Take TANF for example – in the two fiscal years before the pandemic, enrollment decreased by an average of 18.4%. For the 7 months after the extended unemployment benefits expired, enrollment has increased on average, month-over-month, by 3.3%.

The Administration hopes to work with the Legislature to ensure that any future investments we make together are directed wisely where they are needed most – including property tax relief beyond what we proposed in March – while working together to continue shoring up our surplus.

We appreciate Senator Sarlo’s support for building up our surplus and couldn’t agree more. In fact, the administration would like to use some of the additional revenue that has come in to go above and beyond the $6 billion cushion he has suggested. This would put us at a healthy, widely-recommended level – one not seen in New Jersey in ages – as we face what appears to be an inevitable economic downturn. The administration would also like to use additional revenues to further reduce the State’s debt load, going above and beyond the additional $1.3 billion we proposed last month and the total $5 billion that we have proposed over the last year. This, too, will better prepare us for an economic downturn by further reducing our annual debt service if revenues start to decline.

New Jersey has only received four credit rating upgrades in the modern era, dating back to the 1960’s, and two of them have come in the past few months. This is clear recognition of the substantive progress we have made coming out of the pandemic. Now is the time to double down on prudent budget planning and locking in the gains we have made.  Let’s work together to make sure we secure the good fortunes we have been granted.

*Attached is the monthly cash collection chart that typically accompanies Treasury’s monthly revenue update.

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Department Highlights

Since today’s hearing also focuses on Treasury’s departmental budget, I’d like to take a couple minutes to highlight some of the many efforts underway in our department.

Over the past two years, our divisions were able to maintain a high level of service and meet the demands of their missions, while discovering additional ways to incorporate technology to expand the breadth, depth, and scope of what our department can offer.  A few examples:

Division of Pension and Benefits staff ensured uninterrupted access to critical services and benefits throughout the public health emergency, and in November, the division launched a live web chat service, which is proving increasingly popular, currently assisting up to 400 members per week.

Treasury’s Division of Revenue & Enterprise Services (DORES) has also instituted technological changes in recent years that have led to quicker and more efficient service on the State’s part, reducing the time and effort businesses and taxpayers need to spend completing required transactions. Today, roughly 95 percent of business formations flow through online channels.

Our Division of Purchase and Property (DPP) extended our online procurement platform to essentially create a virtual marketplace where municipalities, counties, and public school districts can now leverage the State’s purchasing power through the NJSTART system at no cost to them, saving time and taxpayer dollars. To date, more than 90 local entities have registered to utilize NJSTART.

DPP also recently launched the new Equal Employment Opportunity online submission portal for vendors, reducing certificate processing times from 10-15 business days to 3-5 business days and allowing public agencies the ability to disburse payments to vendors in a more timely manner.

My extended remarks which were submitted for the record also highlight two exciting ongoing development projects:

First is the ongoing restoration of the Executive State House by our Division of Property Management and Construction and the Building Authority, which continues on-time and on-budget with construction currently expected to be completed in late 2022.

The second involves our former Taxation Building right around the corner from here at 50 Barrack Street.  Last fall the Capital City Redevelopment Corporation (CCRC) issued a request for offers to purchase and redevelop the building  on behalf of Treasury, and in mid-April the CCRC approved the first step toward innovative recycling company TerraCycle potentially taking ownership of the ten-story building and bringing new life – and hundreds of new jobs – to the heart of downtown Trenton.

One of Treasury’s most significant undertakings in this past fiscal year has been the responsible and sizable reduction of the State’s debt, which will save taxpayers money and free up resources to continue moving the State forward, and these efforts have been led by Office of Public Finance (OPF).

As you are aware, the most publicized of these actions took place between November 2021 and February 2022, as OPF managed the defeasance of $2.25 billion in State bonded debt principal over eight transactions. These transactions ultimately led to the retirement of more than $3 billion in combined debt principal and interest, saving taxpayers more than $600 million dollars.

There are also a number of less publicized transactions that the Office of Public Finance has overseen, which have led to sizable savings for the state and our taxpayers, including last year’s sale of $1.47 billion in Transportation Trust Fund Authority refunding bonds, which ultimately saved $383.4 million at a true interest cost of 2.6 percent.

At the end of the day, we have substantially reduced our debt load while securing real savings for the taxpayers of this state. In fact, the State’s current debt load is now lower than it’s been at any time since FY 2015.

Treasury has continued to work with the Department of Labor and Workforce Development to investigate claims of worker misclassification and related allegations that can result in the exploitation of Garden State workers through off-the-books employment, misclassification as independent contractors, or any other deprivation of the benefits and protections that employers are required to provide.

Our Division of Taxation reassigned 20 senior investigators to its Revenue Opportunity unit, leading to 264 on-site examinations and reviews of 3,335 associated businesses for compliance, increasing collections from $450,000 per month to $1 million per month.

Treasury’s Unclaimed Property Administration is on-track to return a record setting approximately $160 million in property to owners in Fiscal Year 2022.

Over the past year, Treasury has also focused on expanding outreach to the public and connecting residents to both services and benefits that put hard-earned money back in their pockets.

In conjunction with Veterans Day 2021, we launched an extensive outreach campaign featuring a new Treasury webpage to serve as a “one-stop shop” for veterans’ benefits, services, and programs offered by Treasury and other statewide agencies.

Additionally, we’ve boosted promotion of a number of other important tax relief programs administered by the Division of Taxation, including the expanded Child and Dependent Care Credit, the Senior Freeze property tax rebate program, and extensive promotion of the expanded Earned Income Tax Credit.

This last outreach campaign included a joint effort by our Treasury communications team, the Division of Taxation and the Division of Administration’s eDevelopment team to create an easy-to-use marketing toolkit that has been circulated to our sister cabinet agencies, legislative and congressional district offices, and stakeholders to spread the word about the credit and ensure that every eligible resident is taking advantage of this vital lifeline.

In July, Treasury and the Attorney General’s Office collaborated with the NJ State Veterans Chamber of Commerce to offer training to all Executive Branch, Higher Education and State Authorities’ procurement officers on the State’s disabled veteran-owned business set aside program in order to engage a greater number of eligible businesses and to make sure this program works the way it was intended.

Also, just last week, 13 Treasury staff from four divisions participated in the Chamber’s 2022 Disabled Veteran & Veteran Owned business Summit helping many veteran businesses get certified and registered in NJ Start – key factors in linking these businesses with procurement opportunities.

Last week was also Small Business Week, marking one year since Treasury waived the $100 fee for businesses to certify as Small, Minority, Women, or Veteran-owned Business Enterprises, removing a barrier that previously held back emerging businesses from certifying with the State. Since the fee waiver was enacted, we’ve seen a 22 percent increase in the number of businesses certifying with the State.

As part of Small Business Week, Governor Murphy also announced that LGBTQ+ owned businesses will now be able to certify with the State, helping more LGBTQ+ -owned enterprises successfully launch and gain a foothold in their respective industries, and our Division of Revenue and Enterprise Services (DORES) is currently working to implement this new certification program.

At the most recent State Investment Council meeting, the Division of Investment announced the formation of an Emerging Manager platform to better diversify the investments of the State’s approximately $95 billion pension fund. This new program will enable the State to engage smaller fund managers and newer funding options, including ground-floor opportunities with a wider universe of professionals.

At the same meeting the Division also announced the first proposed investment of this new program – up to $250 million in a separately managed investment vehicle with Barings Funds and Co-Investments. We are excited by the potential of this new investment avenue as well as the relationships and talent that may be developed through this initiative.

And, last month, in conjunction with Financial Literacy Month, we launched Treasury’s new, free financial wellness platform. NJ FinLit is an interactive website where New Jersey adults can find reliable information and tools to improve their financial resiliency at any stage of life.

All of this work and progress has taken place against the backdrop of a pandemic that is now entering year three.  We recognize that our “new normal” is a more efficient, modern, and resilient way to deliver the operational and financial support the State and the people of New Jersey expect of us. And I’d like to thank every Treasury employee who has made this transition possible.

We are now happy to take your questions.