The following is a parable:
There once was a family that made a good income, but lived beyond its means. This lifestyle was financed with borrowing, and soon it became a struggle even to pay the interest on the loans. Then one day, the family won the lottery, a prize sufficient to retire significant debt and allow current income to meet necessary expenses, including servicing the remaining debt. Unfortunately, the family could not break the habit of over-spending and rather than paying off debt found new lenders and spent itself into even more debt.
That is about to happen to New Jersey. If you recall, in the early days of the Covid-19 pandemic we were warned that the State’s tax collection would collapse and as a result Governor Murphy not only finally got his millionaires tax, but the ability to borrow billions due to the emergency.((The crisis did not prevent proposals of ever more creative ways to spend money, such as giving newborns a $1000 “baby bond” which they could redeem at age 18.)) Fortunately, the State’s revenue not only did not crater, but it looks like there will be additional billions, in addition to federal stimulus money.
Just like the family in the parable, however, politicians (it is, after all, an election year) are outdoing themselves in finding new ways to spend this money. Do you remember the national tobacco settlement? Billions of dollars were to be paid to the states over the course of many years. But politicians wanted to spend (they may have said “invest”) now, so they found a way to trade the future revenue stream for an immediate payment.
We need to avoid the temptation and spend (invest) the money wisely. First the emergency borrowing should be repaid. If the terms of the borrowing do not permit prepayment, then the present value of the future debt service, calculated using a conservative interest rate, should be locked into a sinking fund and somehow made off-limits during the annual budget process to all use other than paying those debts.((The only exception I would allow is if there is other debt with less favorable terms that can be prepaid so that the future cost of debt service is reduced.))
Any remaining extra revenue should be used for necessary expenses that keep getting put off, like updating the State’s unemployment computers.
Any extra revenue is a windfall, an opportunity that should not be wasted by creative new ways to spend money that will not be matched with similar revenue in the future.
Don’t blow it New Jersey.
Jay Bohn
June 14, 2021