New Jersey officials on Thursday approved a budget that hinges on borrowing $4.5 billion to cover basic operating costs, making the state one of the first to take on debt to plug a gaping financial hole during the pandemic.
Gov. Philip D. Murphy and his fellow Democrats who control the Legislature argued that the step was needed to avoid deep cuts to essential services, including education, transit and health care, in the absence of a deal in Washington on a stimulus bill.
Across the country states and cities have been pummeled by declining tax revenues and unparalleled levels of unemployment.
Illinois has also looked to balance its budget using $1.2 billion from a short-term lending program run by the Federal Reserve, and New York City’s mayor, Bill de Blasio, has asked the state for permission to borrow billions of dollars to cover operating costs.
New York’s governor, Andrew M. Cuomo, said on Thursday he was leery of permitting new borrowing — a budget tactic that has been disparaged ever since it brought New York City to the brink of bankruptcy in the 1970s.
New Jersey’s plan has been roundly criticized by Republicans, who sued to try to block the borrowing.
Normally, many economists warn that states should avoid borrowing to pay for operating costs, arguing that doing so can lead to spiraling debt that can force major spending cuts or significant tax increases.
New Jersey is already burdened by the fourth-highest level of bond debt in the nation, representing a cost of $4,125 per resident, according to the credit rating agency Moody’s.
Daniel Bryan, a senior adviser to Mr. Murphy, said the $4.5 billion in new borrowing was an option of last resort.
“It was this or a calamitous slashing of government services that would have done even more damage to families already hit hardest by the pandemic,” Mr. Bryan said.
The $32.7 billion budget relies on the borrowing to help plug an estimated $5.3 billion deficit magnified by the urgent health needs of the pandemic and the sharp decline in tax revenue following a monthslong shutdown of businesses.
The spending plan, which covers the next nine months, also includes about $1 billion in cuts, establishes a so-called millionaires’ tax on income over $1 million and retains a 2.5 percent corporate surcharge, which had been scheduled to drop to 1.5 percent.
It also builds in an anticipated end-of-year surplus of about $2.5 billion, a cushion officials in the Murphy administration say is crucial given the potential for a second wave of the virus.
State Senator Michael L. Testa Jr., a Republican who filed the lawsuit on behalf of the state Republican Party, said the state should not have crafted a budget that left a $2.5 billion surplus when it was borrowing to cover operating expenses.
“How could anyone with any intellectual honesty borrow $4 billion to do that? You’re maxing out your credit card to put money in your savings account,” Mr. Testa said.
But rating agencies like Moody’s have cited the state’s lack of robust surpluses as part of the reason New Jersey has the second worst bond rating in the nation. Only Illinois has a lower rating.
In April, Moody’s revised the state’s credit outlook to negative from stable. If it is downgraded,New Jersey’s rating would be considered the lowest level for investment-grade debt, which makes it more expensive for a state to borrow. Over time the expense can add up to a lot of money that residents would rather see spent on public services.
Baye Larsen, a Moody’s analyst, said it was not uncommon for states to use deficit financing during recessions. She said Moody’s would be looking carefully at the details of how the $4.5 billion in new debt is structured as it considers the state’s bond rating.
“The risk always with large budget gaps is that the government will have to reach for unsustainable solutions to fill it,” Ms. Larsen said.
If Republicans and Democrats in Congress do agree on a pandemic aid package for states and cities, there is a possibility that some of those funds could be used to pay down the new debt, provided that is not barred as a condition of the bailout, state officials have said.
After voting to approve the budget, Craig J. Coughlin, the Democratic speaker of the Assembly, noted that option.
“I still think the federal government needs to do more,” Mr. Coughlin said. “If they do, we’ll be able to pay down debt — readily.”
On Thursday, Representative Darin LaHood, an Illinois Republican, introduced a bill in Congress to provide new federal relief to states and local governments, but with strings attached.
The money would be offered as loans, to be repaid with interest at the same rates that the Fed now offers to states. But if by June 30, 2022, the borrowing governments could show that their budgets were “truly balanced,” and they were building up adequate rainy day funds, the loans would be forgiven and the borrowers could keep the money.
In 2004, as former Gov. Jim McGreevey, a Democrat, moved to borrow to enable spending increases, he was sued by Leonard Lance, a Republican member of the State Senate, who was later elected to Congress.
The state Supreme Court permitted the borrowing that year, but made it illegal to do so in subsequent budgets without voter approval.
This year, the Supreme Court cited the extraordinary health emergency and the fiscal crisis caused by the coronavirus, which has led to more than 16,000 deaths in New Jersey, when it cleared the way for the borrowing to go forward.
New Jersey delayed approval of its fiscal year budget by three months during the early throes of the pandemic, passing a stopgap spending measure in late June. The budget that was approved on Thursday, which is widely expected to be signed into law by Mr. Murphy, covers only nine months.
Mr. Lance, who lost his seat in Congress in 2019, said the state should have been permitted to borrow in the fiscal year in which the crisis struck, but not during the year that starts Oct. 1.
“This is a terrible burden that will be borne by our children,” he said.
In August, more than 90 economists and economic policy experts in New Jersey released a joint letter urging the state not to use what they called “counterproductive” cuts to balance the budget.
“Large cuts would erode the health and social infrastructure needed to continue combating Covid-19, increase inequality and exacerbate the economic downturn,” they wrote.
James W. Hughes, the former dean of the Edward J. Bloustein School of Planning and Public Policy of Rutgers University, said the $4.5 billion borrowing plan was completely unlike the state’s use of debt in 2004.
“We had a real budget crisis this year, with chances of massive budget cutbacks,” said Professor Hughes, who was not among the economists who signed the letter. “This is a real, deep, unprecedented crisis.”
Luis Ferré-Sadurní contributed reporting. Susan C. Beachy contributed research.