Over the strong objection of state unions, New Jersey Gov. Christine Todd Whitman yesterday signed a fiscal 1995 budget that relies on $1.3 billion in pension fund cuts to pay for a promised income tax reduction.

Whitman said her budget marks only the third time in the past 40 years that spending in the new budget is lower than in the previous year.

"Make no mistake about it," Whitman said. "Cutting taxes made this smaller budget possible. Without that discipline -- without a spendless, taxless philosophy -- curbing government's appetite for growth is nearly impossible."

The $15.7 billion budget, which the legislature approved earlier this week in a strictly partisan vote, is expected to come under attack in the courts from state unions. They argue that Whitman's decision to drastically reduce the annual amount New Jersey contributes to the pension system will put future retiree benefits at risk.

Whitman said her actuaries have determined the system can withstand the contribution reductions, but union actuaries dispute the claims.

Rating agency analysts say they are still sorting through the various claims to determine whether the budget has put New Jersey's double-A ratings at risk.

"We've been concerned about the reliance on reducing contributions to health and pension systems to offset the tax reduction without any corresponding reduction in retiree benefits," said Stephen Hochman, vice president and assistant director of state ratings at Moody's Investors Service, which rates New Jersey Aal.

Hochman said Moody's plans to meet with New Jersey Treasury Department officials over the next several weeks to determine whether "added risks" to the budget from the pension reforms will create budget pressures "soon enough to warrant a change in the state's credit position."

The pension reforms are the linchpin to Whitman's second installment on a campaign promise to cut New Jersey's income tax rates 30% over her first three years in office. A 5% reduction took effect May 1, and the new budget includes a 10% reduction, which takes effect after Jan. 1. The fiscal year begins July 1.

The two cuts are expected to reduce state revenues by almost $650 million, according to state officials.

Whitman's budget also maintains a $450 million surplus, which she said was necessary to meet any unexpected revenue shortfalls, provide for any needed supplemental appropriations, and to retain the state's high credit rating.

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