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Death By a Thousand Cuts: The Crisis in Government Services

Facing a $13 billion funding gap, NJ's state and local governments and school districts have to make deep cuts or reinvent the way they provide services.

Despite major savings from last year's pension and health benefits overhaul, New Jersey's state, county, and municipal governments and school districts will be taking in $13 billion less than they need to maintain services at current levels five years from now, according to a study by a blue-ribbon panel of former state officials and foundation leaders conducted for the Council of New Jersey Grantmakers.

Former State Treasurers Feather O'Connor Houstoun and Sam Crane, Rutgers University Public Policy Professor Ray Caprio, and CNJG President Nina Stack spoke for a bipartisan group of 19 policy experts yesterday when they warned that New Jersey would have to cut government services by as much as 20 percent over the next five years unless government officials at all levels are willing to change the way they provide services -- including such core services as education and police protection.

In releasing the Facing Our Future report, Houstoun, the treasurer under Republican Gov. Tom Kean who later served in Pennsylvania Gov. Tom Ridge's Cabinet, noted that "last year, we were talking about a crisis with a sense of urgency. But on reflecting, it's not so much like a tsunami as it is like global warming" -- a problem that goes unnoticed because the damage is incremental.

"Every time a budget is balanced without thinking about a better way to do it, a better aggregation of services, or government structure, means that we are missing a chance to protect" the high quality of services that citizens in New Jersey expect their state and local governments to provide, she said. "If there are gradual cuts, you don't remember what it was like when your child was in a class with 22 students and is now in a class with 28."

"We have a 19th century government facing 21st century challenges in tough economic times," said Crane, who served as treasurer under Democratic Gov. Jim Florio. "We need to try innovative ways of providing services."

The Facing Our Future team said New Jersey government officials need to consider a broad array of shared services, including county administration of school districts; regionalization of police, fire, and first aid services; countywide tax assessment; centralized purchasing and emergency response systems; and consolidation of municipalities along the lines of the recently approved Princeton Borough-Princeton Township merger.

The group criticized New Jersey for lagging behind other states in expanding e-government and consolidating information technology services, as well as in shifting the developmentally disabled from expensive state institutions to home- and community-based care.

The fiscal experts also urged the state to move quickly to adopt a sales tax on Internet purchases -- a proposal that is currently moving through the legislature -- and to maximize federal 50-50 matching funds by using the Medicaid program to cover health and behavioral health services in county juvenile detention centers.

"Business as usual cannot continue," Facing Our Future warned in the executive summary to its second report. "New Jersey cannot only grow, or only cut, or only tax its way out of the current and well-publicized budget problems. Over the next five years, the governor and legislature of New Jersey again will be unable to achieve a balanced budget as required without significant service, programmatic and personnel-related costs at state, county, municipal and school district levels."

Richard Keevey, the former state Office of Management and Budget director under both Republican and Democratic governors, and Caprio, a leading municipal government finance expert, updated their findings from last January's Facing Our Future to show that New Jersey state government will face a shortfall of up to $8.1 billion by Fiscal Year 2017; municipal governments will be up to $2.8 billion short; counties will face a $1.1 billion shortfall, and school districts will be more than $1 billion in the hole. The state government's funding shortfall will be $1.4 billion higher, if Gov. Chris Christie's income tax cut or the property tax credits on income taxes proposed by Senate and Assembly Democratic leaders are approved in June. But the fiscal experts who developed the Facing our Future report preferred to focus their analysis on the long-range funding crisis, rather than whether a major tax cut would exacerbate the problem.

Barring a large tax increase -- a highly unlikely scenario in a political climate in which Republicans and Democrats are competing over which tax to cut -- the impact of the overall revenue shortfall on government services will be major. In fact, Caprio noted, the elimination of 750 uniformed police and fire positions by municipal governments last year was just the beginning.

"The effect on public services -- including schools, public safety, transportation, and healthcare -- is severe and will be felt by virtually everyone," Facing Our Future concluded. "Already, we are several years into a slow degradation of government services, and are simply hollowing out government services rather than rethinking them. We will not feel the pain in a single year; rather it will be in the ongoing accumulation of lost services at all levels of government."

Crane noted that "all the national education studies say the key to a good education program is a good principal in the school, a good teacher in the classroom, and children ready to learn." That core, Crane noted, is not changed by shifting administrative functions to a countywide school district, like Fairfax County, Va., or as Hunterdon County Freeholder Director Rob Walton has recently urged. And if significant savings can be achieved without affecting basic services in schools, he asked, why can't the same lessons be applied to regionalizing police services or snowplowing?

The Council of New Jersey Grantmakers report marks the beginning of a new phase of activism by the Facing Our Future team -- one designed to empower citizens to demand high-level government services delivered more efficiently. "What does success look like?" Houstoun asked. "It's citizens asking their officials, 'Are you looking at the latest thinking on police deployment, or on sharing police and fire deployment?' If citizens aren't motivated to ask questions like that, officials will tend to whittle" away the level of services year after year.

Keevey and Caprio reassessed the budgetary challenges facing state, county and, municipal governments and school districts in the wake of last year's pension and health benefits law that required teachers, police, firefighters, and other state and local government employees to pay more toward their pensions and healthcare, and barred unions from bargaining over healthcare benefits for four years.

The changes in the law pushed through by Christie and Senate President Stephen Sweeney (D-Gloucester) cut the state's future unfunded liability for state employee and teacher pensions by almost 30 percent to $25.6 billion, but state pension contributions will grow steadily from the $1.1 billion budgeted by Christie for Fiscal Year 2013 to $4.4 billion by Fiscal Year 2017, Keevey projected in his report on state government finances.

The New Jersey state government's unfunded liability for post-retirement medical benefits is $59 billion, and while the increased contributions built into the new health benefits law will keep state costs flat for a few years, annual costs will begin to rise sharply again after three years. Municipal and county governments face an unfunded pension liability of $10.6 billion and at least a $12 billion bill for retiree medical benefits.

Keevey's analysis of the New Jersey state budget noted that Medicaid healthcare coverage for the poor and disabled at current service levels, school aid, pension obligations and health benefits consumed 53 percent of the state budget last year and are projected to increase to 60 percent of state spending by Fiscal Year 2017. Continuing Medicaid at current service levels, covering built-in pension and health benefit costs, and providing a modest annual increase in school aid would cost more than state revenues are expected to grow even under aggressive revenue assumptions over the next five years.

Caprio, the lead author of the local government finance study, noted that because of cuts in state aid, New Jersey relies more heavily on property taxes today than it did a decade ago. In fact, property taxes now cover 63.2 percent of the cost of county government , 58.5 percent of municipal costs, and 53.5 percent of school bills.

State aid to municipalities totaled $1.727 billion as late as Fiscal Year 2007 -- the last year before the Great Recession decimated state revenues -- but was cut to $1.3 billion in Fiscal Year 2010, the year Christie succeeded Democrat Jon Corzine as governor. "Municipalities began pulling money out of surplus to cope with the cut," Caprio said, and now surpluses have been depleted, and the new 2 percent cap on local government spending is forcing cuts in services.

The elimination of 750 police and fire positions by municipalities last year shows the depth of the fiscal challenge. "You have to realize that with municipal, school, and county budgets, there's not complete fungibility throughout the budget," Caprio said. "There's a lot that municipal officials don't have control over." For example, the fixed costs of health benefits, pensions, debt service, insurance and reserve for uncollected taxes represented 37.5 percent of municipal spending in Fiscal Year 2010.

Meanwhile, Caprio noted, the built-in annual increments in the police salary scale for a department that is heterogeneous in age, with a significant percentage of officers going up in pay grade each year, could easily cost a municipality a 5 percent increase in its police budget. "If you have a 2 percent cap and revenues are not growing, you're immediately facing a shortfall," and the need for cuts elsewhere in the budget.

"More than 20 percent of all municipal spending goes to one area: Police," the Facing Our Future report noted. "When added to the spending for other emergency or safety services (for example, Fire and EMS, Other Public Safety), the total percentage rises to nearly 27.5 percent – more than one-quarter of a municipal budget spent on a single priority."

"Not surprisingly, police and safety services have been areas subject to cost reduction and hollowing out of services," the report noted in recommending that "rightsizing deployment" of police, fire, and emergency responders through regionalization of police services should be strongly considered as a policy option by local governments. The study cited the centralization of emergency response systems in Gloucester and Morris counties as a model.

The report cited Gloucester County's pilot program as a model for the implementation of countywide tax assessment on a statewide basis. "If you look at county assessment of property taxes, it's a major issue," Crane said. "We can save on municipal budgets, eliminate the need for costly reevaluations, and guarantee that every property is treated fairly across the region."

Not every innovation recommended is going to save money immediately, however, Crane cautioned. "Technologically, as a state as a whole, we rank pretty low on all national measures of using technology. We need to make some investments for long-term savings."

The Facing Our Future team cautioned that New Jersey's mismatch between expected revenue growth and government service needs can only be solved by long-term solutions and innovative thinking.

"We all must be involved in a comprehensive conversation about what the public expects in terms of public services, what they are willing to pay for them and how much they are willing to accept changes while preserving their value," said Stack. "New Jersey has a systemic problem, and only a comprehensive solution can resolve the long-term crisis."

Mark J. Magyar covers state and local government fiscal issues as editor-at-large for NJ Spotlight. The Independent Center's TownStats.org municipal budget website that Magyar created is funded partly through the Council of New Jersey Grantmakers, which serves as the umbrella organization for the bipartisan group of fiscal experts, academics, and foundation leaders who developed the Facing Our Future report.

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