New Jersey governor declares fiscal emergency

A pedestrian crosses Chestnut Avenue in Trenton, January 4, 2008.

TRENTON, New Jersey (Reuters) - New Jersey Governor Chris Christie on Thursday declared a "fiscal emergency," allowing him to reserve or freeze state spending as part of his plan to tackle one of the largest 2011 deficits among U.S. states.

"These are among the hardest decisions any governor could be called upon to make," said the Republican, according to a copy of his speech to legislators in a special session.

The deficit in the current budget, which ends on June 30, is $2.2 billion, while the gap in the following budget has spiked to $11 billion from a forecast of $8 billion in November, Christie said in his first major policy address to state lawmakers.

Next year's deficit is the largest per-capita budget shortfall of any U.S. state, said Christie who is scheduled to deliver his budget for the coming fiscal year on March 16.

Christie cut $2.203 billion from the current budget in a series of measures that include reducing aid to school districts and using unspent funds from some agencies.

In all, 375 budget lines are subject to cuts, efficiencies, and program eliminations. Cuts include $475 million in aid to school districts; $62 million in cuts to colleges, and $12 million in aid to hospitals. The cut in school-district funding will force them to use budget surpluses for the remainder of the fiscal year, Christie said.

Also helping to close the budget gap is the capture of $158 million in unspent funds from a state-run clean energy program; $13.8 million in homestead rebates, and $15.9 million in unused grant money from the division of youth and family services.

Delayed programs and capital projects totaled more than $115 million. There was no reduction in municipal aid.

Christie already has won over some bond investors. Since his election, spreads for the state's general obligations have narrowed to 25 basis points to 30 basis points over prices for top-rated municipal bonds, said Timothy McGregor, a fund manager with Northern Trust Global Investments in Chicago.

Until Christie won in November, the spreads "had been closer to 40 basis points to 50 basis points," McGregor said.

Democratic leaders blasted Christie's plan to balance the current budget as dictatorial and unnecessary. Louis Greenwald, Democratic chairman of the Assembly Budget Committee, called the action to reduce school aid a "reckless" move that would force school districts to raise property taxes.

"This has taken money out of the school district's pocket and put money in his pocket," Greenwald said. He accused Christie of acting without consulting the legislature, and promised to hold public hearings on the budget plan next week.

Senate Majority Leader Barbara Buono accused Christie of "overreacting to the fiscal circumstances as a pretext for circumventing legislative involvement."

Buono cited the last paragraph of the executive order used by Christie to make the cuts, which says it remains in effect "until, rescinded, modified, or supplemented by me."

Christie blamed New Jersey's financial problems on the previous budget enacted under his predecessor, former Democratic Governor Jon Corzine.

Elected in November after promising to reduce the size of government, Christie also said deep cuts could not be avoided and faulted "defenders of the status quo."

He said: "New Jersey has been steaming toward financial disaster for years due to that kind of attitude. The people elected us to end the talk and to act decisively."

Christie also warned that the fiscal 2011 budget will contain more tough spending cuts and more "dramatic" reforms.

(Reporting by Jon Hurdle; additional reporting by Joan Gralla)

(Writing by Jon Hurdle and Joan Gralla; Editing by Andrew Hay, James Dalgleish and Diane Craft)