To help entrepreneurs, mid-level managers and C-suite executives gain a strong foothold as they take their first few steps into 2019, New Jersey Business magazine presents the following forecasts written by state government leaders and experts who represent industry sectors that play a vital role in daily business operations. We lead off this special feature with comments from Gov. Phil Murphy regarding his agenda for the state.
By Governor Philip Murphy
Whether it is bringing electric light to the world, the invention of the solar cell, or ongoing research and development of life-saving medical breakthroughs, New Jersey has been innovating since day one.
We are home to 21 Fortune 500 companies and more than 800,000 small businesses. We have one of the most highly educated and diverse populations in the United States. Our location is unparalleled, positioned between two of the largest markets in the US – New York and Philadelphia. Yet, New Jersey’s economy has lagged the rest of the nation. Too many of our families have struggled with unemployment, debt and an inability to make ends meet.
Under the leadership of our administration, this is changing – a stronger and fairer New Jersey is on the horizon.
Our economy won’t be reinvigorated on its own. That is why we have hit the ground running with a new economic agenda, focused on a strategic set of priorities to accelerate economic growth. It begins with investing in our people, to ensure we have the most-highly trained workforce for the innovation economy. And, it’s investing in our communities and infrastructure, focusing on transit-oriented development and a commitment to responsible investments in Opportunity Zones, at great benefit to stakeholders across the board.
We are proposing the creation of a new, $500-million Innovation Evergreen Fund, to pair state investments alongside those from private venture capital partners in developing New Jersey-based startups. We will also modernize our regulations and implement policies that support innovation while still protecting consumers.
In October, I spent eight days in Germany and Israel on my first foreign economic development mission. To our excitement, our team found a lot of leaders who are enthusiastic to explore investment in New Jersey. We signed numerous MOUs, brought on new a offshore wind-energy partner, and finalized the commitment for the relocation of Teva Pharmaceuticals’ US headquarters to Parsippany.
I am confident there will be more good to come from this trip in the coming months.
Whether it is Jersey City, Camden, Newark, Bridgewater or Atlantic City, our state has so much to offer the global business community. Our administration is committed to getting the word out.
Change does not happen overnight, but we will be there every step of the way to make sure it happens as fast and as responsibly as possible. To our state’s business leaders and future innovators: We are your friends and partners on the path to a stronger and fairer economy in New Jersey.
By NJ Senate President Steve Sweeney
New Jersey faces a daunting fiscal crisis. For two decades, New Jersey severely underfunded its pension system for teachers and state government workers. As a result, our unfunded liability for pensions and retiree health benefits now tops $150 billion – four times the size of the state budget – and we have the second-worst bond rating after Illinois.
We have to face the problem head-on. Pensions are a contractual right, and state governments – unlike cities – cannot declare bankruptcy. But pensions can go bankrupt, and if they do, future taxpayers will be on the hook for $11 billion per year just to pay current benefits.
That’s a staggering number, but the solution is not much better. In the next four years, actuaries project the state will have to increase pension funding from $3.2 billion to more than $6.7 billion to fund our obligations.
We cannot tax our way out of this crisis. Our taxpayers – businesses and residents alike – already bear a high tax burden. Higher taxes will only make New Jersey less affordable and hurt our economy.
To address the crisis, the Legislature convened an Economic and Fiscal Policy Workgroup, which issued bold recommendations (www.pathtoprogressnj.org) in August.
The panel recommended the creation of a hybrid pension system that would preserve the current pension system for vested employees, those with more than five years of service, but provide new hires and non-vested employees with a pension on their first $40,000 of income and a cash balance account with a guaranteed 4 percent return, or 75 percent of pension fund earnings, for income above that.
To cut healthcare costs, the Workgroup recommends shifting all employees and retirees from Platinum to Gold plans comparable to those offered by top private-sector companies. This would save $585 million for the state budget and $600 million for property taxpayers, and it would increase take home pay by more than $200 million for public employees.
Other important recommendations include the consolidation of all elementary and K-8 school districts into regional K-12 systems, full state funding of Extraordinary Special Education costs, a cap on payments for unused sick leave, and the development of a new shared services program for local governments.
We cannot wait any longer to restore fiscal sanity, enhance our economic competitiveness and make New Jersey more affordable for all of our citizens.
By NJ Assembly Speaker Craig Coughlin
The New Jersey Legislature and Governor produced several significant pieces of legislation affecting the state’s business community in 2018. Among them, the state enacted a landmark equal pay law and revamped our clean energy sector.
We protected medical patients by ending surprise medical bills. We rebalanced the School Funding Reform Act to reapportion school aid to follow the students and deliver property tax relief. We ensured tax fairness between Main Street and e-commerce outlets and we expanded the use of Public-Private Partnerships.
Heading into 2019, the General Assembly has a strong appetite for more change. After a summer of robust research and meetings throughout the fall, the Assembly is primed to hit the ground running in the new year.
The Assembly will move swiftly to enact a phased-in minimum wage increase to $15 over a specified period of time. New Jersey has one of the highest costs of living in the nation, but it guarantees a minimum wage that pays a full-time worker poverty wages. The bill will balance the needs of workers and businesses alike.
The Legislature will once again enact a responsible, fiscally-sound SFY2020 budget that is devoid of new tax increases, but also adequately funds our state’s priorities such as School Aid and other forms of property tax relief, transportation funding, higher education, public employee pension payment and Medicaid, among other social safety net programs.
Upon entering my role as Speaker, I committed to the fight against hunger. Fighting food insecurity will be a challenge. But, it is a challenge I personally plan on continuing to address with the help of my colleagues in government and organizations, and a package of bills currently pending completion.
Housing is a significant portion of any state’s economy and there are two areas in need of improvement – the availability of affordable housing, which respects the concerns of local communities, and a foreclosure process in need of repair. The latter already has a comprehensive package of legislation prepared for the year ahead. Addressing affordable housing is a tremendous challenge, but the Assembly will be judiciously addressing this matter through legislation.
Finally, the Assembly will address issues affecting senior citizens, assist NJTransit to once again become the premier commuter transit line, and continue to invest in infrastructure such as increasing the number of projects through the Transportation Trust Fund.
By James W. Hughes, University Professor and Dean Emeritus of the Edward J. Bloustein School of Planning and Public Policy, Rutgers University
Economic records are about to be shattered. The nation’s longest economic expansion in history, which took place between March 1991 and March 2001, lasted a full 10 years (120 months). But, it will likely be eclipsed in July 2019 when the current national economic expansion (which started in June 2009) reaches 10 years and one month (121 months) in length. Unless there is a significant external (global) shock in 2019, New Jersey will continue to be embedded in a record-setting cyclical period providing substantial economic tailwinds.
Moreover, New Jersey will continue to surmount the structural disruptions that hindered the state during the expansion’s early years. Regional de-suburbanization of both population and office ecosystems has finally abated and started to show a reversal. The “burbs are back” will be a phrase of compelling resonance in 2019. Millennials are maturing into the family-raising stage of the life cycle. Increasingly, they appear to be not nearly as averse to human-driven personal vehicles, lower densities, and single-family suburban houses as they were earlier in their life cycle. This suburban millennial shift will also be increasingly important to New Jersey’s employers who are seeking the skilled employees to staff growing unfilled job openings throughout the state’s economy.
In addition, surging cost-driven inhibitors in New York City – and its faltering transportation infrastructure – will make New Jersey’s once out-of-favor suburban office markets a much more convincing locational choice. Repositioned office campuses such as Bell Works in Holmdel, ON3 in Nutley and Clifton, and the New Jersey Center of Excellence in Bridgewater are representative of the state’s new cutting-edge economic infrastructure. These and other similar assets coming on line will be highly competitive 21st century economic forces.
Three employment sectors will lead the 2019 New Jersey economic expansion. Professional and business services – the principal driver of the state’s office markets – will continue to be a crucial engine of growth, along with ever-expanding health services. Both had been the job creation leaders in 2018. They will again be joined in 2019 by the trade and transportation sector, as distribution and fulfillment centers continue their furious expansion. And manufacturing will continue to rebound, with 2019 marking its third straight year of employment growth.
By John E. McWeeney, Jr., President and CEO, New Jersey Bankers Association
As we head into 2019, New Jersey banks have strong momentum with increased levels of loans, deposits and capital. Driven by stronger lending activity, improved margins and a lower effective tax rate, bank earnings also increased. While well-positioned to continue their strong performance in the New Year, New Jersey banks will certainly be impacted by the overall economy and a variety of issues including rising interest rates, global trade wars and consumer and business confidence levels.
Virtually every lending category increased in 2018 when compared to the prior year. Commercial and industrial loans for New Jersey headquartered banks increased by $847 million or 10 percent to $9.2 billion. While data was not available for out-of-state headquartered banks doing business in New Jersey, the trends are likely very similar. The largest category of lending continues to be loans secured by real estate, which grew by $8.8 billion or 9.3 percent to $102.8 billion. Construction lending, 1-4 family residential and multifamily, all enjoyed sizeable increases.
Banks must sustain strong levels of capital and liquidity in order to continue lending, and the report card on New Jersey banks is strong. Due to their improved earnings, capital levels for the 77 banks headquartered in New Jersey increased by $1.4 billion or 8.3 percent to a total of $18.6 billion. Similarly, deposits increased by $3.2 billion or 2.8 percent to a total of $117.3 billion. Anecdotal evidence suggests that growing deposits has become more challenging as rates rise and consumers have more options due to digitalization and a host of new FinTech providers.
Given the current level of economic momentum that exists at both the national and state levels, 2019 should be another strong year for New Jersey’s banks. How strong will likely be driven by decisions made in Washington, D.C. by the Federal Reserve on interest rates and by the Trump administration with regards to trade policy. Locally, the hope is that the state’s fiscal challenges and the recent increase in the corporate business tax will not undercut all of the positive things that are happening.
By Ralph Albert Thomas, Executive Director, New Jersey Society of Certified Public Accountants
Certified public accountants (CPAs) and other accounting professionals in finance departments face several pressing issues in 2019 that will greatly impact business operations. Small businesses are likely to be hit particularly hard by New Jersey’s proposed minimum wage hike, their inability to obtain funding and the high cost of doing business in the state, while larger businesses face technological challenges and a talent shortage.
Minimum Wage Raise: Increasing the minimum wage in New Jersey to $15 per hour would hurt small businesses and, in turn, the state’s economy. In order to afford a $15 minimum wage, many business owners will have to reduce their workforce or pass the increased costs on to consumers – which is not a win for New Jersey.
Cost of Doing Business: Aside from having the highest property tax rates in the nation, the cost of living and doing business in New Jersey precludes young professionals and retirees from staying here. That’s a problem for businesses when both young and mature individuals choose to leave the state for less expensive areas. New Jersey would benefit from the purchasing power of these groups.
Growth: Small companies have difficulty in gaining the financial resources necessary to expand their footprint beyond New Jersey. Governor Murphy has addressed this issue in his economic development master plan, which should help if much of the application processes related to funding do indeed get more streamlined. This could ease some of the burden on finance professionals.
Talent Shortage: We continue to hear that a serious void exists in hiring those professionals with five to seven years of accounting experience. These professionals typically face abundant career choices and may not always stay put in their department or corporation. Companies will have to work hard to retain them.
By Sarah Lynn Geiger, Vice President, New Jersey Association of Health Plans
In New Jersey, healthcare spending has increased by 18 percent since 2012, while nationally that increase is 15 percent – New Jersey represents the fifth highest per capita spending in the country.
The largest driver of costs continues to be pharmaceuticals, in which spending has increased more than 27 percent since 2012, while utilization has only grown 2 percent. Prices for healthcare services have also risen – inpatient services costs increased 38 percent and outpatient costs have jumped 19 percent.
Both the fully-insured and self-insured markets will feel the effects of these increasing costs. As the charges for healthcare services and prescription drugs increase, so do premiums. Trends are expected to continue in this direction for 2019.
Meanwhile, efforts to dismantle portions of the Affordable Care Act (ACA) slowed in 2018. Included in the federal tax reform legislation was an elimination of the penalties for violating the ACA’s individual mandate beginning in 2019. The individual mandate, while politically controversial, has a ripple effect on premiums in the individual market.
New Jersey has responded in-kind to uphold some of the most cost-effective pieces of the ACA. Earlier this year, Governor Murphy signed into law the New Jersey state individual mandate, which will become effective in 2019. It requires residents to obtain minimum essential coverage or face a penalty. Passing the individual mandate in New Jersey was essential to continue the progress that the state has made in reducing the number of uninsured.
In August, New Jersey’s application for a 1332 Innovation Waiver from the federal government was approved. The funding from this waiver, combined with the funds from the penalties collected under the individual mandate, will establish a state-based reinsurance program to assist in paying for the highest-cost patients in the individual market. The reinsurance program will reduce premium costs by 9.3 percent for individuals and businesses that purchase insurance in the Marketplace in 2019. Prior to the individual mandate and the 1332 Waiver going into effect, premiums were expected to rise by over 12 percent. Premium savings are expected to continue into 2020.
Looking forward to 2019, any new healthcare policies will need bipartisan support in Congress as party leadership in the House of Representatives will be in the hands of Democrats. In New Jersey, the healthcare landscape will look much like it did in 2018 as the Murphy Administration continues to work on key healthcare policies that enhance quality, increase access, and control costs. We expect the Murphy Administration and the legislature to continue to work on medical marijuana reforms, and also anticipate that public employee health benefits will be a hot topic as we move into the new year.
By Erick Ford, Executive Director, New Jersey Energy Coalition
2019 will be a pivotal year in the energy world for both New Jersey and America. The way energy is generated has become cleaner. In 2018, New Jersey took steps in its energy sector by passing and signing into law A-3723 – the Renewable Energy bill. This law will help to understand where New Jersey’s energy sector is heading. The transformation of the energy sector will take time, and there are multiple avenues and ways which need to be included and understood. To quote Governor Murphy, “Creating energy jobs of the future is critical to growing New Jersey’s economy.” When we think of the energy sector, we need to think of the economy because each time the energy sector does anything, like build a new transmission system, it creates micro-economic impacts in communities, which must not be understated.
Lets look at some major aspects the new law requires:
By the year 2020, 21 percent of the energy sold in the state must come from Class I renewable energy sources with additional measures in 2025 and 2030 to be met.
As we look at what is coming for New Jersey, we must also consider what is forecasted for 2019 nationally. As of November 2018, U.S. Energy Information Administration (USEIA) suggests that, in 2019, total marketed production for natural gas will be 96.65 billion cubic feet per day, which is up from 2018. It also predicts electricity consumption will be about 10.67 billion kilowatt hours per day nationwide in 2019. Along with this, America will export 5.25 billion cubic feet per day of LNG, which is nearly twice of what was expected in 2018. In 2005, the price of natural gas was $13.03 per MMBTUs. In 2016, the price dropped to $8.01, which translated into significant savings for the people, allowing them to spend their money in other places of the economy. With more electricity being produced by natural gas, there should be a reduction in cost to produce electricity and, again, the savings are passed onto consumers.
In 2019, New Jersey will publish a draft of the Energy Master Plan (EMP) for people to give comments and suggestions, followed by a final version. Some of the areas the EMP should touch on are AMI, Microgrids, comprehensive energy needs, infrastructure, and bridge fuels. The EMP needs to lay out a plan not just for the next few years but for the next few decades in order to reach the 2050 goals set by the current administration.
By Michael G. McGuinness, CEO, NAIOP New Jersey
The outlook for the commercial real estate (CRE) industry in 2019 is favorable due to plentiful capital, rising rents, and motivated investors. Market fundamentals are strong and likely to remain so next year, while rising costs for construction materials and labor, and severe shortages of skilled workers and industrial land near the port, challenge us to find creative solutions. Public- and private-sector partnerships appear to be the new norm as communities compete for jobs and the skilled workers that employers need.
The industrial sector is on autopilot with demand at an all-time high and vacancies of 1 percent along the NJ Turnpike (NJTPK). Rents have increased by 10 percent for the last three years. Given the dearth of available industrial land close to the port, developers and tenants are heading west along the corridors of Routes 287, 78 and 80, and southwest along the NJTPK and Routes 195, 295, 130 and 206. Lacking readily available options, more developers are converting vacant office to industrial (Meadowlands, 8A and along Rt 287) and going vertical (Bronx and Brooklyn, and soon northern New Jersey). More than 1 billion square feet of industrial space houses more than 500,000 jobs, about 12 percent in logistics. The largest drivers of space demand are 3PLs (third-party logistics), retail and food & beverage, as northern New Jersey is New York City’s pantry.
In contrast, the 200-million-plus square feet of office space has an average vacancy rate of 23 percent … a tenant’s market. Although leasing activity is healthier, consolidation and densification are keeping vacancy steady. With an aging population, medical office will keep growing, and the outlook for the professional services and tech sectors remains favorable. Amazon’s decision to locate one of its HQ2 offices in Long Island City, Queens may have a ripple effect on New Jersey, especially in northeastern counties just west of the Hudson River.
In 2019, rising wages, enhanced building/campus amenities, and greater flexibility in leasing terms, tenant diversity and space design will become more mainstream. CRE will continue to benefit from the Federal Tax Reform Act of 2017 (reduced corporate tax rate, doubled estate tax exemption, lower tax rate for pass-through businesses), and the Opportunity Zone program designed to spur economic development, job creation and infrastructure improvements via generous tax benefits for investors. The new NJ Public Private Partnership law may spur considerable infrastructure and redevelopment work statewide. Potential setbacks include a worsening labor shortage, failing infrastructure, an expansion of WeWork co-working type lease arrangements, and the latent impact from federal trade tariffs.
By Alfred J. Titone, New Jersey District Director, U.S. Small Business Administration
If we remember anything about 2018, it will be the year that the economy came roaring back.
So what is in store for 2019? Economists predict that the GDP will hover around 3 percent, although challenges ahead could slow the economy. Potential interest rate hikes, tariff increases, and a tight labor market that lacks a surplus of skilled workers could dampen economic growth.
At the U.S. Small Business Administration, we monitor and measure loan output as it continues to be a key economic indicator for the agency overall, and enables us to gauge how the small business economy is doing here in New Jersey. Through the analysis of our loan portfolio, we saw a 2 percent decrease in loan approvals to New Jersey small business owners, and a 4 percent increase in the dollar amount. A total of 2,291 loans for a record $905 million went to small businesses in 2018, compared to the 2,326 loans for $869 million they received in 2017.
The drop in number of loans was expected, as history has shown that when the economy is strong, lenders tend to underwrite loans without the backing of the SBA. This is good for everyone, as it indicates better credit among borrowers, and thus lower rates across the board. What surprised us was seeing a state of our size reaching over $900 million in loan approvals for the very first time. This is new and welcome territory and it certainly demonstrates the impact SBA lending has in almost every area of the state.
The average SBA loan was for $397,000 in 2018, up from the $374,000 average loan in 2017. A breakout of the loan data showed that 1,388 or 60 percent of all loans went to start-up businesses, while 903 or 40 percent of the loans went to existing businesses. Those loans helped to create 7,816 jobs and retain another 9,397 jobs in New Jersey.
I expect that SBA loan volume and approvals will decrease overall as Garden State individuals and small businesses increase their credit worthiness and overall ability to borrow. But not to worry, NJ SBA will still be here reaching out to our underserved populations and small businesses helping them to start, grow and succeed in whatever ways we can.
By Daniel G. Trout, partner, Financial Principles, LLC
Last year’s investment environment proved to be much more difficult than 2017’s great finish. However, many economic indicators remain positive: unemployment at 3.9 percent; wages rising almost 3 percent year over year; 1.2-million housing starts; 16.6-million auto sales; and high consumer confidence. These tell us that the next recession is not a concern in the short term. Yet twice in 2018, we have seen the entire year’s equity gains wiped out in a three-week trading period. Volatility is back and can be quite unsettling for investors who saw their statements only go up in 2017. To make matters even harder was a rising interest rate environment which led fixed income to be flat or down depending on the length of duration of one’s fixed income holdings.
So what can we expect in 2019? As we enter the late stages of this bull run that will be entering its 10th year, the indicators should remain positive. This should support continued economic expansion – possibly between 2-3 percent GDP growth. We believe company earnings and profits will continue to grow, but they will not be bolstered as much from the Tax Cuts and Jobs Act of 2017. It will become harder to beat earnings estimates and any misses will be punished harshly by the market. That being said, there is still enough positive economic momentum for companies to deliver enough earnings, which could lead to modest single-digit positive equity returns.
With the Mid-term elections behind us, we now have a divided government, which also historically bodes well for better equity returns. There are two major headline risk news stories that will probably lead to uncertainty and inevitably continued volatility: Trade negotiations with China and the Federal Debt Ceiling. President Trump has two basic demands of China around the forcing of US companies into joint ventures with Chinese companies and fairer tariff rates in line with other developed nations. This deal should eventually be completed as neither side is interested in the mutual destruction of relations between each other’s largest trading partner; but most likely the commentary and concerns will get worse before it gets better. The current debt ceiling agreement will expire on March 1, 2019. The Democrats now have a seat at the table and negotiating leverage with their control of the House. Here too, we expect an 11th hour deal with potential volatility as politicians engage in a standoff raising uncertainty and fear.
In summary, we are cautiously optimistic for another positive year, but will have to hold on tightly for a rougher ride in these late stages of this bull market.
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