N.J. Governor to Propose Full Pension Payment for First Time Since 1996

In New Jersey, as in many other states, tax revenues have outperformed earlier projections. When the pandemic hit, states projected revenue would drop off significantly. State revenues ended up falling 1.6% in fiscal year 2020 and were 3.4% lower than projected before the pandemic, according to the National Association of State Budget Officers. While states expect revenues to fall 4.4% in fiscal 2021, which ends on June 30 for most, 18 states are seeing revenues come in above forecasts.

Federal aid for businesses and households helped prop up incomes and consumer spending across the U.S. Unemployment fell and economic activity picked up much faster than expected.

State and local budget shortfalls have been at the center of discussions in Washington since last spring over what to include in another economic relief package.

Congress has provided state and local governments more than $300 billion in federal aid, including grants for education and higher federal matching funds for Medicaid, though the funds came with restrictions on how they could be spent. Democrats are now proposing $350 billion in flexible funding to plug state and local budget holes, a provision Republicans have opposed.

Mr. Murphy’s pension payment proposal, which will be included in broader budget discussions with the Democratic-led legislature that formally kick off Tuesday, doesn’t use any federal stimulus funds, the officials said. And making a full pension payment for the upcoming fiscal year isn’t contingent on raising taxes, they said.

“With this payment, we are keeping our word to hundreds of thousands of retirees who have paid into their pensions even while past administrations continually kicked the can down the road,” Mr. Murphy said. “I am proud that we are able to finally meet our obligations without attacking the middle class and slashing services.”

In the spring of 2020, New Jersey budget officials expected tax revenue would fall during the economic crisis fueled by the Covid-19 pandemic. And while some revenue streams are down, others like sale-tax revenue—driven by holiday shopping—and state lottery revenue are doing better than anticipated. Federal stimulus has also infused more money in the state.

The improved financial picture means the state could avoid the most painful of spending cuts that many feared would be on the table this budget year.

Many past administrations, led by both Democrats and Republicans, failed to make full payments or skipped payments altogether, increasing the burden on the state to make up those contributions in the future and making New Jersey’s pension system one of the worst funded in the country, according to the Pew Charitable Trusts.

New Jersey’s $71.9 billion in unfunded pension liabilities has also put pressure on the state’s credit rating. Both S&P Global Ratings and Fitch Ratings downgraded New Jersey’s debt in 2020, citing the state’s high pension obligations, and projected weak revenue growth stemming from the pandemic.

Last year, New Jersey borrowed $4.5 billion to help pay for operating expenses at the same time it made the $4.77 billion pension payment, drawing objections from some Republicans. The Murphy administration has defended its approach, saying it made financial sense to take advantage of low interest rates and take on more debt, rather than cutting spending more deeply or making a smaller pension contribution.

—Kate Davidson contributed to this article.

Write to Joseph De Avila at [email protected]