Budget Ills Vex New Jersey's New Gov

If things were normal in New Jersey, this would be the time of year when the Legislature begins hearings on the budget the governor proposed a month ago for the fiscal year that starts July 1.

But these days things are anything but normal.

Freshman Gov. James E. McGreevey won't even propose his 2002-03 budget until March 26, and that's just fine, because Legislature's finance committees already have their hands full. Instead of poring over departmental testimony and listening to the steady stream of supplicants at public hearings, they're debating McGreevey's proposals to cut programs and shift funds to close a budget gap he inherited for the current fiscal year, which runs through June 30.

"We are facing a $3 billion budget shortfall for the remainder of this fiscal year," McGreevey, a Democrat who succeeded eight years of Republican rule, said in a sharply partisan, look-what-they-left-me speech to both houses last month "We have another $6 billion shortfall expected for the year beginning July 1. In all, we have to close a staggering $9 billion gap in 18 months."

To back up those numbers, McGreevey and his advisers assumed the worst about everything, and even double-counted some figures, rankling Republicans whose votes he'll need to pass some tough measures. For example, McGreevey projected a $2.5 billion shortfall in revenues this year could continue next year, then counted that $2.5 billion again, so it makes up $5 billion of the $9 billion shortfall.

But even if the problem is not as large as $9 billion, no one denies New Jersey has to dig itself out of a deep fiscal hole. Moody's Investors Service downgraded the state's debt this week, and the new governor has shifted from his 2001 campaign against a Republican candidate to a 2002 campaign against Republicans in general.

"It's not just spending money, and clearly they spent money that they didn't have," McGreevey said recently. "More to the point, they spent money that they knew they were not going to have, and that's the thing."

Last year, Republicans controlled the governor's office and both houses of the Legislature, and they enacted a budget based on revenue estimates that ignored warnings signs of recession.

The economic slowdown that occurred, combined with the Sept. 11 terrorist attacks in New York where many North Jersey residents work, brought a problem into sharp relief that budget experts had been warning of for years: New Jersey had become heavily reliant on income taxes derived from capital gains.

Such revenues can, and did, disappear quickly even when other economic indicators such as unemployment and construction remain relatively healthy.

The state was not totally unprepared for a downturn, however. In addition to spending $22.9 billion, the 2001-02 budget included $1 billion in reserves, and a year-end audit of 2000-01 turned up another $200 million that was added to the reserve.

After the terrorist attacks, acting Gov. Donald DiFrancesco began to freeze discretionary accounts, and by the time he left office another $443 million had been salted away.

Finally, in addition to the usual last-minute spending on pet projects, the lame duck Legislature took several steps to improve the state's bottom line, including extending a tax on power companies that generated $104 million.

McGreevey took $740 million from the surplus, the $443 million in freezes and the $104 million in energy taxes, but still had to find another $1.6 billion to plug his immediate budget gap.

His proposed solution includes shifting $325 million in unemployment taxes from the compensation trust fund into his budget; drawing $328 million from a health care account designed to pay for future benefits to retired public employees; and offering a tax amnesty expected to raise $150 million.

He also wants to dip into a half-dozen other dedicated accounts for such purposes as insurance failures and hospital construction.

Each state department has been told to implement a 5 percent cutback in operations -- a move that contributed to layoffs of more than 600 workers -- and aid to colleges and universities has been cut by $73 million.

Not all of the proposals are going down well in the Legislature.

The elections produced a 44-36 Democrat-controlled Assembly and a 20-20 split in the state Senate. But many of those Democrats got there with the help of organized labor, and the president of the state AFL-CIO is not happy about using unemployment funds to balance the budget when it is unclear if Congress will extend benefits.

Some of the legislation implementing McGreevey's short-term fixes also includes provisions that stretch out two or three years, and Republicans who promised short-term cooperation are balking at signing a blank check for his whole administraton.

Some Republicans believe the governor is hyping the gloom to avoid blame for tougher cuts expected in the next budget, especially to popular property tax rebate programs. They also feel he could be laying the groundwork for a tax increase, something he promised not to do in the 2001 campaign.

"Joseph Goebbels would be extremely proud of their rhetoric," said Assembly Minority Budget Officer Joseph Malone, R-Burlington County, referring to the Nazi propaganda master. "All we're asking him to do is stop all the rhetoric and calm down. Haven't we had enough excitement with Sept. 11, with the 20-20 split in the Senate? The governor should just say, 'I'm not going to add to the chaos, I'm going to step back and be a strong leader.' "