Last Friday started with a tense morning meeting between top aides from the governor's office and from the Senate and Assembly Democratic offices. Words were exchanged. Doors were slammed.
Then came a double whammy of announcements from Gov. Phil Murphy's administration:
- The state is gearing up for a government shutdown.
- The treasurer is immediately freezing all discretionary spending to avoid running out of cash from the pot of money used to run state government.
State operations won't grind to a halt during a spending freeze. However, employee promotions and hiring will be put on hold, as will some purchasing.
The treasurer's warnings are dire, and the solutions are fraught with politics.
It comes down to this: Murphy has a special reason to be desperate for a hike in the sales tax, and he wants a budget maneuver to make sure there's enough cash on hand.
His fellow Democrats who lead the state Legislature aren't sold on taxes or budget moves, at least not yet. Everything is a negotiation, Senate President Stephen Sweeney says.
But how did we get to this point?
It's not a simple case of New Jersey spending too much or taking in too little.
This is an interesting tale of big decisions made by governors and lawmakers dating back to the 1970s, and how they are coming home to roost for Murphy in 2018.
Here's how it happened, and what we face:
N.J. actually has 2 pots of cash -- and one is running on empty
What we call the state budget is really two pools of money.
When state leaders created the income tax back in the 1970s, they promised that every nickel would be used to help pay for your public schools and everything else that constitutes local spending and giving you relief on property taxes.
And they did it by changing the state Constitution to spend the income tax only on property tax relief, like aid to schools and towns, and property tax rebates.
This pot of cash — called the Property Tax Relief Fund — can't be used to pay for the other parts of state government, such as the salaries and spending of the state departments.
That spending comes from the other pot of cash, which is called the General Fund. It's funded by most other sources of state revenue, like the sales tax, Corporation Business Tax, cigarette tax and realty transfer fees. The General Fund accounts for 55 percent of the budget.
For most years, this setup worked pretty well. But no more.
You see, the income tax is going strong as the treasurer expects it will bring in about $15.2 billion this fiscal year. That means the Property Tax Relief Fund is flourishing.
The same can't be said of the General Fund, which pays for state government operations. Most of the taxes that keep it going aren't bringing in enough money. Spending here is growing faster than tax revenue.
And remember, the state is not allowed to use those income tax dollars to fill this pot of cash.
The Treasury Department has a term for this dilemma: "structural imbalance."
"This requires immediate action," state Treasurer Elizabeth Muoio told lawmakers last month.
What your leaders did to create the problem
So why is the pot used to pay for state government so cash poor?
Actions taken by lawmakers and the governor over the past two years have exacerbated the problem.
Back in 2016, the Transportation Trust Fund, which is backed by the gas tax, was running on fumes, forcing Gov. Chris Christie to freeze construction projects across the Garden State.
Eventually Christie, a Republican, and Democratic legislative leaders agreed to raise the gas tax 23 cents per gallon in exchange for a whole host of tax cuts.
They reduced the sales tax from 7 percent over two years to 6.625 percent. They gradually phased out the estate tax. They increased the Earned Income Tax Credit for low-income workers. They gradually raised the retirement income tax exclusion, and they created a tax credit for veterans.
Cutting the sales tax and eliminating the estate tax cut were big hits to the General Fund.
Then last year, Christie proposed using revenue from lottery ticket sales to pay for government worker pensions. The Legislature agreed in the thick of last year's budget negotiations and shutdown.
That removed about $1 billion of revenue from the General Fund, and it took the majority of the spending on pensions out of the Property Tax Relief Fund.
In March, Murphy introduced his $37.4 billion budget for the fiscal year beginning July 1. He also provided some updates on this year's finances.
Expected income tax collections were revised upward by nearly $600 million, and expected General Fund revenues were revised downward by nearly $800 million.
At the same time, Murphy was projecting higher spending than anticipated. And there weren't enough reductions in spending from the current budget — called lapses — to offset the higher appropriations.
Murphy's maneuver to get past this year
The state's budget experts have for years been shifting any expenditure that can be considered property tax relief into the Property Tax Relief Fund.
But now Murphy's administration says they've stretched the definition of property tax relief as far as it'll legally go.
But there's one maneuver Murphy is pushing to get past this budget year.
Murphy wants to move $788.5 million in Energy Tax Receipts "on budget" in a technical accounting maneuver.
Energy Tax Receipts are corporation business taxes and sales taxes paid by energy companies. Right now, the money comes into the state and goes right back out to municipalities.
But because the state needs additional revenue in the General Fund, Murphy's administration is recommending those tax collections be deposited in the General Fund.
Meanwhile, those municipalities will be paid out of the Property Tax Relief Fund, which is flush with income tax cash.
Without this move, the General Fund, which pays the bills for state operations like State Police, corrections, and children and family services, will end this fiscal year and begin the next one with virtually no surplus to fall back on.
But Murphy can't do this without the Legislature
Moving the Energy Tax Receipts requires a change in law, which means Murphy needs the Legislature's approval.
While the vote wouldn't usually come until later this month before the fiscal year ends, Murphy wants a commitment from legislative leaders.
Sweeney is not going to give it without something in return.
"The administration needs to do what they need to do. We're not saying no. We're just saying, 'Listen, you've shown us your priorities. We'd like a commitment on our priorities'," Sweeney said Friday. "It's part of a negotiation."
Sweeney, D-Gloucester, wants to restore $123 million for legislative spending priorities that Murphy killed out in his budget proposal.
"At the end of the day, there's things that the Legislature feels are important and they stand for: $20 million in additional funding for people who work with the disabled and poor and needs. They're things that matter to us," he continued. "I didn't think I'd have to fight with a Democrat to fund programs that help sexually abused kids."
With legislative leaders holding out, Murphy's administration is suspending discretionary spending and most hiring.
Why towns are worried
Towns are the the recipients of Energy Tax Receipts, and the League of Municipalities worries about what could happen despite the administration's assurances that they're not going to lose out.
The league says there is reason to be skeptical.
Energy Tax Receipts were once paid by energy companies directly to local municipalities for property tax relief. The state merely calculated how much should be paid.
The state eventually made itself the collection agency for the municipalities and under the Corzine administration started diverting some of the money to the state treasury.
The league is leery of an accounting maneuver it sees as making it easier for lawmakers to spend it however they want.
"We have no doubts that the governor, the treasurer and all current state legislators appreciate the value of municipal government and remain committed to municipal property tax relief. But who knows that a future administration or future legislators might do, if they are given discretion over Energy Tax Receipts," the league said.
Municipalities have already received the money this year and are budgeted to receive the same amount next year.
Does this have anything to do with Murphy's push to raise the sales tax?
It sure does.
While the administration is pushing that accounting maneuver it says will bring the General Fund in balance this year, New Jersey is staring down at a deep deficit next fiscal year and beyond because tax revenue has been cut or diverted.
It is one reason Murphy's administration is pushing to increase the sales tax from 6.625 back up to 7 percent. It projects this will kick up $597 million in new revenue.
The sales tax is, by far, the General Fund's biggest source of revenue. The Treasury Department projects it will generate more than $9.5 billion next year.
Rather than proposing large increases on small taxes, the administration chose to propose a small increase on a large tax.
The Democrats who run the legislature have said they're not crazy about raising the sales tax.
What happens if Murphy and the Dems can't agree?
If the Legislature doesn't go along with the General Fund "solutions" the Murphy administration is recommending, "everyone must be prepared to get out the red pen and make draconian cuts," Muoio said.
Sweeney doesn't think cuts are such a bad thing. And he and Assembly Speaker Craig Coughlin, D-Middlesex, aren't too keen on Murphy's tax hikes.
The General Fund woes are only a concern "if you want to do a whole lot of expansion of government, then that's a big problem," Sweeney said last week. "I'm one of these believers, look, we have plenty of revenue. It's the way it's spent."