The Challenge Ahead

On September 11 , New Jersey's world changed as much as the New York City skyline we loved. The attacks on the World Trade Center pushed an already-slowing economy into recession, and the financial markets on which so much of New Jersey's economy relies were particularly hard hit.

The faltering economy, coupled with overly optimistic revenue estimates in an election-year budget, will saddle the new governor and Legislature with a $3 billion budget problem that will be compounded the following year when pension and debt payments start coming due.

These budget deficits will severely hamper our ability to meet the massive future funding needs of a mass transit and highway system already strained beyond capacity, and to pump more money into the higher education system upon which we depend to keep New Jersey at the forefront of technology.

It isn't just an economic and fiscal challenge. New Jerseyans feel more vulnerable than ever before. Small towns and suburbs suffered greater casualties in one day than in World War I and World War II combined. The shock of losing mothers and fathers, husbands and wives, sons and daughters was so much greater because they had not gone off to war months before, but had been at soccer games, Cub Scout meetings and family dinners the previous night.

New domestic security concerns, including the realization that New Jersey not only was a base for terrorist operations but also the dropbox of choice for anthrax-laden envelopes, have reopened issues of profiling and civil liberties that seemed resolved after three wrenching years of debate.

New Jersey's diversity and our position as one of the nation's leading portals for immigration will increase the pressure on our communities, schools and churches to figure out new ways to teach tolerance and citizenship, and develop understanding of the complex currents of world history we previously ignored.

After years of prosperity and security, the challenge for decision-makers in our public, private and nonprofit sectors is to look ahead.

THE $3 BILLION BUDGET DEFICIT
BY MARK J. MAGYAR

To the region's economists and business leaders, the destruction of the Twin Towers officially sealed the end of the longest peacetime economic expansion in New Jersey history. With the stock market diving, consumer spending slowing, and the airline and travel sectors suffering devastating financial losses, it was clear that the Garden State's economy would be in no position to rebound before the end of the year.

"If we weren't in a recession before September 11, we're certainly in one now," said Joseph Gonzalez, executive director of the New Jersey Business and Industry Association.

Makeshift Memorial: Flowers, candles, cards and photographs make up an impromptu remberance in Jersey City for victims of the World Trade Center attack.

The September 11 attacks virtually guaranteed that the third quarter economic reports would show a downturn, and despite the shift of thousands of jobs from Lower Manhattan to New Jersey, the fourth quarter also would show an economy in contraction. Officially, as of January, New Jersey would join much of the rest of the nation in a recession.

While the duration and depth of the recession is in doubt, there is no question among state government insiders and budget experts about the impact of even a short recession on the state budget. "It's going to be a disaster," said Gonzalez.

State Treasurer Peter Lawrance has been adamant in refusing to offer a preliminary analysis of the impact of the World Trade Center attacks, the subsequent further decline in the stock market, and the recessionary economy on the state budget. But interviews with state budget experts, public and private sector economists, and political insiders, and a comparison of assumptions made by Treasury and legislative budget analysts last May and June with the economic realities today indicate that the new governor and Legislature will inherit a sizable budget headache.

Soon after Lawrance and Acting Governor Don DiFrancesco leave office in January, the new governor and Legislature will find themselves wrestling simultaneously with a shortfall in the budget for the fiscal year ending June 30, 2002, and a substantial revenue gap for the upcoming 2003 fiscal year. Both budget gaps must be filled by July 1, 2002, when the new governor must sign a balanced budget into law.

Together, that budget gap is likely to total at least $3 billion, a shortfall that would be difficult to address without raising taxes, making significant cuts in existing government programs, or both. The budget cap is the product of a tailing economy, a declining stock market, the usual overly optimistic election-year budget projections, mounting debt, disappearing federal aid programs, and a state government that has grown addicted to ever-increasing revenues from high-income taxpayers to fund ever-increasing spending with no contingency for the inevitable recession.

Lawrance insists that "Acting Governor DiFrancesco and the State Legislature put together a fiscally responsible FY-02 budget which includes a $1 billion surplus to provide fiscal flexibility in times of unforeseen emergencies." But election-year budgets of outgoing eight-year administrations have had a time-honored tradition of overestimated revenues and disappearing surpluses.

A $3 billion shortfall would represent a 13 percent gap on a $22.3 billion budget --- ironically, about the same percentage as the $1.4 billion gap on an $11.8 billion budget that Democratic Governor Florio faced in 1990 when he took office from GOP Governor Kean shortly after the onset of the last recession. Kean inherited a similar revenue shortfall from outgoing Democratic Governor Byrne when he took office in 1982, also in the middle of a recession.

Mark Magyar is president of the Public Policy Center of New Jersey and editor of New Jersey Reporter magazine.