Legislative analysts: New Jersey surplus shrinking; OLS projects slightly higher revenue than executive for FY25–26

Trenton — The Office of Legislative Services told the Assembly Budget Committee that New Jersey’s sizable surplus is eroding because recurring expenditures now outpace recurring revenue, and that the state could face near depletion of reserves by the end of fiscal 2028 if current trends continue.

In testimony to the committee, Thomas Cohen of the Office of Legislative Services said the surplus would be “down to a couple hundred million by the end of fiscal 28” under current assumptions and that the state’s fiscal path “raises concerns about the sustainability” of reserves. Oscar Mendez, a revenue and economic policy analyst, presented the OLS revenue forecast and said OLS’s estimates for fiscal 2025 and 2026 are modestly higher than the executive branch’s projections.

Why it matters: Lawmakers must write a balanced budget each year. OLS’s forecast gives legislators a different near‑term revenue picture than the executive’s and underscores how a combination of slow revenue growth, continued spending increases and possible federal funding cuts (especially to Medicaid) could force policy changes or use of one‑time resources.

OLS figures and highlights - OLS projects fiscal 2025 general fund revenue at about $55.33 billion, roughly $456.5 million (0.8%) above the executive’s revised forecast of about $54.87 billion and about $819.1 million above the amount certified when the FY25 Appropriations Act was enacted. - OLS projects fiscal 2026 revenue at about $57.04 billion, roughly $227.8 million above the executive projection of about $56.81 billion. - The OLS testimony reiterated that, even with a projected surplus of roughly $6.3 billion at the end of FY26 (which would be historically large), recurring expenditures exceed recurring revenue; a sequence of deficits — about $1.6 billion in FY25 and $1.2 billion in FY26 under the governor’s proposed spending plan — would reduce reserves over time. - Using a simplified projection, OLS estimated an annual deficit of roughly $3.0 billion starting in FY27 under current spending and revenue trends, bringing the surplus close to exhaustion by the end of FY28.

Spending increases called out by OLS include a $757.5 million increase for NJ Transit (reflecting corporate transit fee collections dedicated to the agency), $478.9 million for higher Medicaid capitation rates, and $448.1 million for formula school aid. OLS noted the FY25 and proposed FY26 budgets meet the state’s balanced‑budget requirement in form but may not be sustainable in subsequent years.

Risks and uncertainties OLS and committee members flagged several downside risks that could worsen the outlook: weaker capital markets (which can reduce gross income tax payments tied to investment income and bonuses), slower consumer spending, and potential federal funding cuts. Committee members and OLS discussed recent federal proposals that could reduce the federal Medicaid match; OLS testified that some proposals could increase state costs by “at least $2,000,000,000 per year,” depending on how federal match rates change.

Policy and revenue changes cited Oscar Mendez said OLS assumed for forecasting purposes that the governor’s proposed FY26 tax and revenue changes would be enacted and that those changes — including increased rates for internet and sports betting, an assessment on high‑value real property, and an expansion of the sales tax base — are expected together to raise close to $1.0 billion in FY26. OLS also identified roughly $1.1 billion in on‑budget revenue raisers and roughly $1.27 billion when certain off‑budget proposals are included; including additional routine off‑budget increases and scheduled toll or fare changes could raise the total closer to $2.2 billion.

Legislative discussion Committee members pressed OLS on the timing and drivers of the OLS‑executive differences, the volatility of stock‑market‑linked income, and whether large one‑time events (for example, the state’s 250th anniversary celebrations and international events such as the World Cup) are yet incorporated into projections; OLS said those events had not been included but could be considered in future forecasts. Several lawmakers asked whether higher revenue proposals would affect affordability; OLS summarized tradeoffs between higher revenues and maintained or expanded services.

Outlook and next steps OLS said it will update its forecast in May, after April tax filings, to refine estimates. Lawmakers and OLS noted that, while the current surplus provides time to plan, action will be needed — either spending cuts, tax increases, or both — to avoid a drawdown of reserves that could leave the state with minimal contingency funds if a downturn or federal funding cuts occur.

Ending: OLS staff remained available to answer committee questions and said their May update, informed by April collections, will provide a clearer picture for budget negotiations.