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New Jersey’s Laws and Fiscal Safeguards Make Municipal Bankruptcy Unlikely

Functions of Local Government: A wide range of activities is authorized by law for municipalities, but the details are rarely mandated. The largest single function is police protection, followed by public works.

County government frequently serves as the jurisdictional unit within which a state function is carried out. Historically, the court system and welfare systems were county functions overseen by the state; however, constitutional changes in the early 1990s transferred the financing of courts and family support systems to state government. Counties play a role in financing and staffing the prosecutor’s office and running certain correctional institutions. County public health activities have increased, and many counties support a library system. Many counties also provide centralized solid waste and recycling collection and disposal systems.

While municipalities were historically permitted to establish special districts, they are limited to fire districts. There are several residual districts from earlier times, 11 solid-waste collection districts and two water districts.

Municipalities and counties are also permitted to create authorities for such functions as utility (water and wastewater), redevelopment, housing, parking and other specialized purposes. Many counties have “improvement” authorities encompassing a wide range of services and also serving as a financing agency, with authority to issue revenue bonds for a variety of purposes. Today, there are over 300 individual municipal, regional and county authorities.

Legislation has existed for many years to encourage municipalities to share services. Since the 1970s, the state has engaged in a variety of grant-based and support programs to encourage these efforts. Today, because of rising property taxes and the rising costs of government in general, many municipalities and counties have entered into shared-service agreements.

Land-use planning is one area where there is a constitutional basis for municipal home rule. Virtually every municipality in the state has adopted a zoning ordinance and has both a planning board and a zoning board of adjustment, while some small municipalities have taken advantage of state law that permits a single “Land Use Board.” (8)

Fiscal oversight of local governments

Overview: New Jersey has one of the strongest set of laws in the nation – dating back to the 1930s – giving state government extensive powers and oversight over local finances. The Division of Local Government Services in the Department of Community Affairs and its Local Finance Board enforces laws and procedures that allow the state to oversee the key financial operations of all municipalities, counties, authorities and special districts. The Department of Education, similarly, oversees financial operations of school districts.

The separate state statutes that give the division its responsibilities include:

  • Local Bond Law (N.J.S.A.: 40A:2.)

  • Local Budget Law (N.J.S.A.: 40A:4-1 et seq.)

  • Local Fiscal Affairs Law (N.J.S.A. 40A:5-1 and the Local Authority Fiscal Affairs Law (N.J.S.A. 40A:5a)

  • Local Public Contracts Law (N.J.S.A.40A:11)

  • Local Government Ethics Law (N.J.S.A. 40A: 9-22)

For example, state law limits how much debt local government may issue. For municipalities, the limit is 3½ percent of the three-year average equalized (market) valuation; for counties, it is 2 percent; for school districts, it is 4 percent of the same base. Exemptions and procedures allow borrowing above the limits, but only with the review and approval by the Local Finance Board (see discussion below concerning the board). Annual debt statements must also be filed with the Division of Local Government Services 30 days after the close of the fiscal year.

In addition, the Division of Local Government Services regulates local government budgets and financial affairs in considerable detail. For example, according to statute, balanced county and municipal budgets must be submitted, approved and certified each year by the division. (9)

The division prescribes the procedures and forms, and oversight of the Local Budget Law, including a calendar of public hearings that must be followed in submitting the budget and receiving approval from the division.

The division does not judge the amount or purpose of appropriations, but it does insure that the budget is balanced, that required procedures have been followed, and that all necessary items (i.e. debt service, pension payments, etc.) have been fully included in the budget -- and, equally important, that revenues are not overstated.

A statutory provision requires all municipalities to budget for a “reserve for uncollected taxes.” The tax levy must be increased to allow for less than full tax collections, based on prior year tax collections.

The division requires filing of unaudited annual financial statement 40 days after the close of the fiscal year. This document is critical for review of the annual budget as it includes realized revenue, tax collection rates, and surplus from prior year operations.

The division also requires an annual audit of each county and municipality, with a copy filed with the state. In addition, recent procedures issued by the division require the local government body to meet with the external auditor and review the opinion and the management letter. The procedures also require the chief financial officer to describe how the local unit will correct the problems identified in the audit and submit a corrective action plan to the government body and the division.

The Local Finance Board (an arm of the Division of Local Government Services) has five members appointed by the governor with advice and consent of the Senate. It has extensive statutory powers and responsibilities, including the power to issue rules and regulations which are binding on all local units under the board’s jurisdiction. The board must also approve the creation of all local authorities. Local authority budgets and financial reporting are subject to budget review, similar to counties and municipalities.

Furthermore, the Local Finance Board has the authority to assume supervision of the financial affairs of local units that fall into fiscal difficulty. This authority requires specific conditions, such as defaulting on bond payments or otherwise showing a need for extraordinary assistance and oversight. (10)

Going into 2013, there were no municipalities subject to full control of the Local Finance Board, but in the past various municipalities have been under control of the board. Within the past two years as many as six municipalities have been under control of the board, including Atlantic City, Union City and Asbury Park.

The release of these municipalities from Local Finance Board oversight is due in part to the “Transitional Aid” program (see discussion below)

In addition, the Division of Local Government Services provides technical assistance, oversight and extraordinary financial assistance to any municipality in need of extra assistance to maintain financial viability.

The division also oversees a professional certification process to insure that key financial managers in the municipality and county are properly qualified. It issues certifications for the Chief Municipal Finance Officer, the Chief County Financial Officer, the Certified Tax Collector, the Qualified Procurement Officer, and other professional positions. (11)

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