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Fiscal Reforms, Innovative Aid Guidelines Help Ensure Stability in New Jersey

There’s no guarantee against economic calamity, but state’s financial firewalls should provide reliable protection

Richard F. Keevey

This is part two of a two-part examination of how New Jersey’s system of government – and its fiscal oversight mandates – make it unlikely that any Garden State municipality will fall into a Detroit-like financial crisis leading to bankruptcy.

Towns, schools get billions in state aid

State Aid: A large part of the state budget (44 percent) is returned to local governments – with the majority of the money provided to school districts. In addition to direct aid payments to school districts, the state pays the school district’s share of pension and health benefits for retirees, as well as the employer’s share of Social Security contributions for current school district employees. This fact significantly lessons local government fiscal exposure. No other state pays for all three of these current and long term commitments -- a policy decision that further limits the potential for local government bankruptcy.

The total amount appropriated for school aid in FY 2014 is $12.4 billion – representing approximately 37 percent of the entire state budget – and is approximately $2 billion greater than the amount appropriated in FY 2011. State aid for municipalities and counties is much smaller. In FY 2014 the amount appropriated from all sources, including energy tax receipts, is $2.0 billion – an amount which is slightly greater then appropriated in FY 2011. In total the state provides $14.4 billion in aid to all levels of government. (1)

Local governments in distress: New Jersey has a long history of providing special assistance to cities in fiscal distress. Special programs dating back to the mid-1960s included formula-based programs such as “Urban Aid” and the “Safe and Clean Neighborhood Program.” These were followed in later years by discretionary allocations called Distressed Cities and Special Municipal Aid.

Today, the state’s Division of Local Government Services administers a program called “Transitional Aid.” This program provides assistance, based on applications, to the state’s most fiscally distressed municipalities. Transitional aid for FY 2014 is $95 million.(2)

The name of the program suggests that such aid is not intended to be permanent but rather “transitional,” based on the premise that municipalities receiving such aid will not need special monetary assistance from the state in the future. In fact, however, given the size of the aid to some of cities, it is doubtful that some municipalities will ever be able to construct a budget without this extraordinary state aid -- a fact recognized by past and current administrations.

A short history of the Transitional Aid Program is in order as it is now the principal state aid program for the most distressed municipalities.

Prior to FY 2011, the state had three municipal grant programs that provided special aid. One program provided $35 million to the state capital, Trenton; a “Special Municipal Aid” program disbursed $117 million to 12 municipalities; and an “Extraordinary Aid Program” disbursed $25 million to approximately 50 municipalities.

Beginning with the FY 2011 budget, the newly elected governor determined that some of these programs had virtually no conditions or criteria for awarding the grants and no specific accountability. The governor directed that these grants be consolidated into a new program called “Transitional Aid to Localities.” The intent was to award these funds only to municipalities in severe fiscal distress that agreed to pursue structural budget reforms and agree to state oversight.

Consolidating programs, setting fiscal constraints and reforms as a condition for receiving the grants , and allocating staff to enforce the new paradigm not only changed the focus of the program, but reduced the number of applications from more than 75 to fewer than 50 in FY 2011 and only 17 in FY 2012.

Most of the 75 municipalities that once received aid with little or no oversight chose to take steps necessary to balance their budgets rather than apply for aid and become subject to state oversight. Furthermore, of the 22 municipalities that successfully applied for Transition Aid in FY 2011, half have “graduated” from the program and no longer need or desire state funding to balance their budgets.(3)

The Division of Local Government Services publishes detailed descriptions of the application process, as well as conditions of assistance and specific oversight provisions.

Debt Structure of Local Governments(4): As noted, state law imposes limits on the debt of municipalities, counties and school districts. Specifically, once a jurisdiction reaches a debt level in excess of a certain percentage of the assessed value of property in the community, they must apply to the Local Finance Board for permission to issue additional debt. During this process, the Local Finance Board examines the budget, the audit and other financial documents to determine if the jurisdiction has the resources to fund the debt.

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