New Jersey should've looked south

Virginia continues to be seen as a beacon of fiscal sanity as yet another prominent state —New Jersey — is dinged for making bad budget-balancing decisions.

There seemingly isn’t enough green flowing into the Garden State’s coffers, so its plastic-loving governor moved for the third year in a row to borrow money to balance his books. And it’s a move that has run the state farther up on the rocks in the eyes of credit-rating agencies.

Gov. Jim McGreevey, a Democrat, recently won a state Supreme Court battle to borrow $1.9 billion to plug gaps in his government’s yearly operating costs. The borrowed amount accounts for about 7 percent of the state’s $28 billion budget.

The lawsuit was to determine whether borrowed funds — such as tax-derived income — must be included in the state constitutional requirement that appropriations not exceed total revenue. The court ruled, oddly, that the $1.9 billion does not have to be factored into the revenue-to-spending equation. The decision allows McGreevey to use his cash advance for general spending and avoid any budget cuts. However, the court also ruled that he may not be allowed to borrow in such a manner again next year or in the future. This one-time fix — the latest in several years of hole-digging gimmicks — will most certainly create an even bigger budget mess next year.

It’s McGreevey’s borrowing proclivities as well as the court’s opinion that have caused two of the three Wall Street rating agencies to take an even dimmer view of the state’s creditworthiness. Just one day after the court’s ruling was announced, both Fitch and Standard & Poor’s bumped down a notch the state’s general obligation bond rating from AA to AA-. They simultaneously knocked down other state-supported debt from AA- to A+. Moody’s Investors Service currently has New Jersey on its credit watch list and also may downgrade the state’s bond ratings.

It’s one thing for a state to borrow money — under certain conditions — for infrastructure investment, just as a family might take out a loan for a value-enhancing home addition. It’s quite another, however, to go into debt to pay for everyday expenses, where no value is added to anything. Racking up operational debt is a cardinal financial sin.

New Jersey’s budget-balancing move ranks the state alongside other debt-ridden states. The most notable of these is California, which also has recently reached for the credit card — to the tune of about $15 billion — in order to avoid making the tough decision between raising taxes and drastically cutting spending. California now has the nation’s lowest-rated state bonds.

New Jersey chose the road Virginia did not take. After several years of budget cuts and shifts — about $6 billion in all — Virginia legislators opted this year for tax reform over yet another year of deep cuts or increased debt. They chose to raise by a half-cent the state sales tax on non-food purchases and to boost modestly its lowest-in-the-nation tobacco tax. They also slightly bumped up the tax paid on new home and land purchases.

However, legislators enacted tax cuts. They cut the personal income tax for every working Virginian and cut by a penny-and-a-half over the next three years the sales tax on store-bought food. They also eliminated the unfair income-tax marriage penalty and removed altogether from the tax rolls about 140,000 of the state’s poorest residents.

This hard-fought mix of hikes and cuts gave Virginia a net gain in revenue — about $1.4 billion — that allows for long-overdue investments in such core services as secondary and higher education, healthcare and public safety. It also allows substantial deposits to be made into the state’s nearly depleted cash reserve fund.

The carefully balanced tax-reform package and the strategic spending it allowed were enough to restore faith in Virginia’s fiscal health. Within weeks of the state’s tax and budget deals being set, Moody’s removed Virginia from the credit watch list it had been put on nine months earlier. And no longer was Moody’s considering downgrading the best-possible AAA bond rating that Virginia’s enjoyed since 1938.

Yes, there are numerous ways governors and legislators can balance state budgets. Going into debt for operating expenses is certainly one way to do it, albeit a most unwise one.

New Jersey’s McGreevey may have won a court battle, but it’ll end up costing him — and his state’s taxpayers — millions in higher borrowing costs. It’ll also take years, if not decades, for the bond rating agencies to regain lost confidence in the state government’s ability to wisely manage its fiscal affairs.

New Jersey Republicans, it should be noted, fought McGreevey’s move to make ends meet with $1.9 billion in borrowing and were, in fact, the instigators of the lawsuit to block it. They wanted to cut spending. And as politics go, this whole affair may well present an opening for the state GOP to go after the unpopular governor, whose approval rating last week was polled to be a mere 38 percent.

Virginia, certainly, will continue to be recognized for having the pluck to make the hard budget decisions so many others seek to avoid. The Old Dominion will continue to be an example to others for good fiscal policy and smart money management.

If only New Jersey had looked our way.