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Size Doesn’t Matter -- Study of NJ Municipal Government Costs Concludes

Rutgers analysts question ‘conventional wisdom’ that consolidation of state’s 565 municipalities would produce property tax savings

pfeiffer-caprio chart

What do Alpine and Harding, two of the state’s wealthiest enclaves, have in common with Newark, Camden and Trenton, three of New Jersey’s largest and poorest cities?

All five spend more than $2,000 per person on municipal government services -- 50 percent more than the average for the state’s 513 nonresort communities, Raphael J. Caprio and Marc Pfeiffer, who head Rutgers University’s Local Government Research Center, discovered after a comprehensive analysis of municipal spending.

In a study entitled “Size May Not Be The Issue,” Caprio and Pfeiffer noted that the wealthiest suburbs and poorest cities have the highest cost of local government services, reflecting the willingness of affluent taxpayers to pay for a higher level of services and the greater need of poorer populations for more police protection and social services that are paid for primarily with state aid.

Meanwhile, rural communities with low populations that are often considered prime targets for municipal consolidation have the lowest-cost municipal government services per person in the state -- directly countering the assumption that “consolidation of small, inefficient municipalities” would lower property taxes, the study said.

“We may need to rethink the conventional wisdom that forcing municipalities into larger organizations will be more effective, more efficient, and/or less costly,” Caprio and Pfeiffer concluded. “It should also give pause as to whether we should be advocating with uncompromising vigor that consolidation of municipalities is a solution to the state’s high property-tax problem.”

The Caprio-Pfeiffer analysis runs directly counter to the arguments advanced by Republican Gov. Chris Christie that municipal consolidation -- starting with the merger of his hometown of Mendham Township and neighboring Mendham Borough -- makes sense, and the push by Senate President Stephen Sweeney (D-Gloucester) to take a “big stick” approach to shared services by forcing municipalities to adopt cost-saving shared services or face a loss in state aid.

While Caprio and Pfeiffer argue that New Jerseyans generally get the level of municipal government services they want -- or, in the case of the poorest cities, the level of government the state is willing to pay for -- Christie and Sweeney argue that it is in the interest of all New Jerseyans to lower property taxes to enable the state to entice new businesses and home buyers, and to make it more affordable for cash-strapped senior citizens and middle-income families to stay.

Caprio, a public policy professor who often testifies in interest-arbitration cases, and Pfeiffer, a former deputy director of the state Division of Local Government Services, billed their analysis as the first in a series of studies focused on understanding “the differences in costs among municipalities and the extent to which consolidation, shared services, or other strategies might be effective in controlling local government costs.”

Their analysis concluded that previous studies suggesting that smaller municipalities are inherently inefficient -- and, therefore, that municipalities with fewer than 2,000 residents should be encouraged or forced to merge, as former Assembly Speaker Alan Karcher once urged -- were skewed by statistical analyses that included resort municipalities. These 50 Shore towns have disproportionately high per capita costs for municipal services not because they are inefficient, but because their year-round population is low and they have to spend a lot on police and other services for the thousands of tourists who flood in every summer.

With the Shore towns excluded, the cost of municipal services per person in municipalities with less than 3,600 residents is not appreciably different for municipalities with 11,500 to 40,600 residents -- and lower than the cost for cities and suburbs with more than 40,600 residents that make up the top 10 percent of municipalities by population.

That $1,340 per-person cost for municipal government services includes large suburbs like Toms River, Cherry Hill, and Middletown, but it is cities like Newark ($2,167), Trenton ($2,162) and Camden ($2,095) that drive up the cost.

Interestingly, the three cities with the highest costs per resident were actually smaller cities -- Weehawken with 12,554 residents ($2,893); Harrison, population 13,620 ($2,839), and Secaucus, population 16,264 ($2,785).

The study also questions the validity of the often-cited statistic that “New Jersey has more municipalities per square mile than any other [state] in the country,” which is used to justify the “folk hypothesis” that New Jersey has “too many municipalities and too much government.”

That statistic, however, simply reflects New Jersey’s status as the most densely populated state in the country, Caprio and Pfeiffer noted. With 15.6 government units per 10,000 population, New Jersey actually has about half as much government as the national average, and lags just behind New York (17.7 government units per 10,000 residents) and far behind both Pennsylvania (38.5) and Delaware (37.2).

In fact, New Jersey ranks just 34th in the nation in the number of general governments per capita, the study pointed out.

Groups like Courage to Connect NJ have held up the recent consolidation of Princeton Borough and Princeton Township as evidence of potential cost savings and service improvements that can be achieved through municipal mergers.

However, Caprio and Pfeiffer assert that the fact that the Princetons were the first successful consolidation since Vineland and Landis Township merged in the early 1950s shows that New Jerseyans do not believe mergers will save money. The problem is that both municipalities need to save money for a merger to go through, and the anticipated cost savings are usually smaller than the increased taxes that the more affluent of the two municipalities will incur.

“In the last 30 years, Chester Borough and Township studied it twice and determined it would not work in part because it would increase school taxes in the Borough,” the study noted. “Sussex Borough and Wantage Township formally studied it, and voters in Wantage decided against it. A study commission in Hardyston Township and Franklin Borough (and for a while Hamburg Borough) looked at it and found it would increase school costs and taxes and decided against it.”

Even if two towns that merged achieved a 5 percent savings on the two-thirds of their budgets that are not fixed costs, those savings would amount to just 0.88 percent on a typical property tax bill, which would translate into an annual savings of $66.27 for a homeowner paying $7,500 in property taxes, the Rutgers experts calculated. That is because municipal taxes represent just 28.5 percent of the average property tax bill. School taxes make up 52.2 percent of overall property taxes, county taxes another 18 percent, and special assessments the remaining 1.3 percent.

Caprio and Pfeiffer noted that New Jersey municipal governments have entered into hundreds of shared services agreements since the 1970s, but contend that shared services are not a “panacea” to lowering government costs.

While the issue of controlling property tax costs has dominated New Jersey’s tax-policy debate for decades, the Rutgers policy experts contended that too little attention has been paid to one of the biggest drivers of local property tax increases -- namely, cuts in state aid to municipalities.

In the wake of the Great Recession of 2007-2009, New Jersey’s cash-strapped state government cut unrestricted aid to municipalities from $1.727 billion in 2007 to $1.303 billion in 2010, reducing state aid from 15.4 percent to 10.6 percent of municipal budget revenue.

Of the $1.36 billion increase in property taxes over that three-year period, $423.7 million was needed just to make up for the cuts in state aid. As a result of those state aid cuts, property taxes rose from 51.7 percent to 58.3 percent of local municipal budget revenue.

“In effect, close to one-third of the statewide property tax increases experienced between 2007 and 2010 could be attributed to simply offsetting revenue loss from aid the state itself could not provide,” the authors noted. Caprio and Pfeiffer asserted that policymakers should stop pursuing the “folk hypothesis” that “consolidating our way to savings” and focus instead on solutions to the underlying problem. They called for an in-depth analysis of the impact of the 2011 pension and health benefits law, the municipal budget-cap laws, and the overhaul of the interest arbitration statute for police and firefighters to “determine their actual impact beyond the superficial attention they have received.”

They questioned whether “we need to design improved need-based property tax relief programs” that focus not just on senior citizens, but on lower-income property taxpayers, and suggested that creation of a new blue-ribbon commission to focus on property tax issues is “overdue and warranted once again.”

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