TRENTON — State leaders have begun discussing the prospect of borrowing billions of dollars from the Federal Reserve to pay for operating expenses, as they hold out hope for federal grants and try to hold off on potentially deep budget cuts.

Those are their basic options when it comes to state finances: Pray for a federal bailout; proceed with a borrowing plan, despite a 2004 court ruling that bond proceeds can’t be used to balance a budget; and if all else fails, prepare to slash spending.

Gov. Phil Murphy hopes Congress provides states the $500 billion in additional funds they’re seeking but says in the interim New Jersey must plan to borrow up to 20% of revenues, $9 billion, from the Federal Reserve in a new program announced to respond to coronavirus pandemic.

“We don’t take any of this lightly, whether it’s credit ratings or other realities we take very seriously,” Murphy said. “But the fact of the matter is we are going to have serious cash flow challenges. And then beyond cash flow, we will have serious programmatic challenges.”

William Glasgall, senior vice president and director of state and local initiatives for the Volcker Alliance, expects states to borrow pretty heavily from the Federal Reserve, given that CARES Act funds can’t be used to cover deficits – though notes New Jersey state law prohibits it.

“In times of shock like this, one-time measures are inevitable and almost acceptable,” Glassgall said.

Assembly Speaker Craig Coughlin, D-Middlesex, said on Twitter that he will work with Murphy and Senate President Steve Sweeney “to responsibly borrow $ to stimulate our economy and stabilize our finances. Funds must be dedicated to helping NJ get thru the pandemic and savings must be achieved.”

Assemblyman Jay Webber, R-Morris, said any plan to borrow money to pay for regular operating expenses is unconstitutional, even during a war or emergency, under a 2004 ruling by the state Supreme Court in a case he participated in as an attorney for the plaintiffs.

“Borrowed funds cannot be used as income to balance the state budget,” Webber said. “The state Supreme Court in Lance v. McGreevey has already looked at this and given all the guidance we need.”

Assemblyman Hal Wirths, R-Sussex, suggested that the issue should be decided by voters – but the Federal Reserve borrowing deadline is Sept. 30, five weeks before Election Day.

Richard Ravitch, a former New York lieutenant governor and board member for the Volcker Alliance, says amidst the hope for a federal rescue, there’s been little talk of cutting government – but that will change in the coming weeks.

“You will see a significant effort on the part of some to reduce services and indeed in many cases the functions the state and local governments provide,” Ravitch said.

Murphy said he hopes it doesn’t come to that, but there aren’t many options. New Jersey has among the most paltry rainy-day funds of any state, so that surplus won’t provide much of a fallback.

“Folks should assume we’re going to have to gut programs. And that will affect everybody in this entire state. There’s just no other way around it,” Murphy said.

“This is on behalf of the 9 million of us who care about great public schools, police and fire, services at all levels of the state, who care about pension payments getting made, etc,” the governor said of the borrowing plan.

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Susan Wachter, co-director of the Penn Institute for Urban Research, said the cuts by state and local government could undercut the hoped-for economic rebound in the fourth quarter of 2020, after the private sector ramps backs up.

“But this bounce-back will not occur if the contrary wind coming from state and local cutbacks are in place,” Wachter said. “The second-leg downturn that we may look to may be driven by the state and local cutbacks, which of course will be contrary to exactly what’s needed for the battles that are being fought on the front lines.”

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Michael Symons is State House bureau chief for New Jersey 101.5. Contact him at michael.symons@townsquaremedia.com.