Report Calls NJ Fiscal Woes “Dire” and “Intertwined”

Lee Keough | February 4, 2011 | Budget
Facing Our Future offers a neutral examination of the state's budget issues

New Jersey’s fiscal crisis is deep and wide, and affects every level of government service — schools, municipalities, county and state. The problems are so dire that we cannot grow, cut or tax our way out of it while still maintaining the quality of life provided by current service levels.

That’s the conclusion of a non-partisan group of former government officials who have put out a report called Facing Our Future under the aegis of the Council of New Jersey Grantmakers (CNJG). The 18 members of what’s called the Leadership Group include two former state treasurers; three former state Attorney Generals, one of whom also served as chief Justice of the New Jersey Supreme Court; a number of former state cabinet members, including a former independent candidate for governor; and other high-profile officials of both political parties.

The group hopes that the study will be seen as a neutral examination of the budget issues facing the state, so the public can begin to understand these issues without worrying that the numbers are colored by a political agenda.

“This is a quiet place for the public to understand the government and its finances at all levels,” said Sam Crane, principal of CraneConsulting and a former state treasurer under Gov. James Florio.

“We tried to play this straight down the middle and be as factual as possible. These are the facts, we need to debate what to do about them,” Crane added.

Five Years Out

The report looks at the state’s finances five years out. Using projections of moderate revenue growth, it concludes that without service cuts the state as a whole (state, municipal, county and schools budgets) will face a shortfall of $15.5 billion in 2016. That is in addition to the current problem of $94 billion in underfunding of public employee pension and health benefits.

In no year from 2011 through 2016, the report concludes, is New Jersey able to achieve a balanced state budget without significant service, programmatic and employee benefit changes.

A key objective of the report is to demonstrate how intertwined the state’s finances are and to explain how cutting one level of government can have a deleterious affect on other levels.

For example, since state aid makes up a significant portion of school and municipal budgets, cutting the state budget affects those programs. Yet state budget cuts have no impact on property taxes, which are the single largest source of government revenue (40 percent) — larger than the state income tax (17 percent) and sales tax (13 percent) combined.

To help the public understand where their money goes, the report provides a pie chart demonstrating how annual New Jersey tax revenues are divvied up (see Figure 1).

1 pub pie

Crane said the Leadership Group was formed about a year ago, after he was on a panel with other state treasurers discussing financial issues. He was alarmed when he realized how little the public — even informed, active citizens — understood the state’s financial fundamentals.

“It struck us how everything was being seen in silos — municipal, county, state, schools,” said Crane. “But they’re not silos. We have to deal with this as a whole. It’s not as if the cities are broke but the suburbs are okay. We see shortfalls everywhere.”

2 state

Feather O’Connor Houstoun, a former state treasurer with the Kean administration and president of the William Penn Foundation, noted that we face a systemic problem that is typically looked at on an annual basis. The fiscal issues are not fully addressed.

“The problem just gets pushed around if we don’t look at it globally,” she said. “If we don’t do that, what we will end up with five years from now is a hollowing out of services at all levels of government at a minimum of 20 percent.”

“That’s what we’re facing,” she continued. “So it makes sense to look at the problem now and protect the quality of services that we care most about.”

The current state of the economy has exacerbated the problem, said Crane, but it did not create it. He noted that the report shows that even with an aggressive five percent annual growth, it will take until 2014 to collect the same amount of revenues as 2008.

The depth, severity and duration of the problem is unprecedented, and the recession just made it worse, said Crane.

Conducting the Research

The research was conducted by Richard Keevey, a former state budget director and comptroller under two governors and currently a Rutgers professor in the School of Public Affairs and Administration and Ray Caprio, vice president of the Division of Continuing Studies at Rutgers.

The full report is available on the CNJG website.

Although the impact of the shortfalls are interrelated, the report does take a look at the budget gap at each level.

3 municipal

For instance, projecting a typical growth in costs for each year until 2016 and moderate revenue growth, the state budget would have a gap of $10.3 billion in 2016 (see Figure 2). Even using an aggressive growth scenario, the gap would be $8 billion in five years.

Similarly, municipal budget gaps would total $1.8 billion (see Figure 3). For that reason, the study estimates that as much as 20 percent of current municipal services may need to be eliminated. Although the newly enacted 2 percent property tax cap will furnish a significant “revenue control” on municipal spending, the study notes that the appropriation categories excluded from the cap — pensions, health benefits, debt service and capital investments — will reduce its effectiveness.

What’s more, state aid that made up 18 percent of municipal budget revenues in 2004 is projected to remain at no more than 10 percent a year, creating a further squeeze at the local level (see Figure 4).

4 bar chart

Counties, which provide judiciary, roads and bridges, parks and health services, face similar constraints. The study estimates an $842 million shortfall in county budgets in 2016 (see Figure 5).

Due to size and the amount of state aid they receive, schools pose a more complex problem (see Figure 6). The report concludes that if New Jersey’s school districts are to maintain current levels of service, they will need an additional $4.5 billion over the next six years. The annual gap in 2016 is projected to be about $1 billion.

Even given these alarming statistics, however, Keevey sees the biggest problem as the unfunded liabilities of $94 billion.

“That’s the biggest albatross around the state,” said Keevey. “One could argue that you can deal with the budget one way or the other, make reductions, streamline processes, etc. But you can’t get around the fact that we haven’t been funding the pension and health benefits systems and those are big numbers.”

Governors under both political parties have not funded the pension system since the Florio administration. Although the state legislature passed a bill requiring the system to be funded this year, Gov. Chris Christie said he will do so only if the legislature agrees to certain conditions. The health benefit system is currently running on a pay-as-you go basis.

5 county

Fundamental changes have to be made to correct the problem, said Keevey. It’s not enough to say we’ll get rid of “waste, fraud and abuse” or raise taxes. Although he says that streamlining municipal government would certainly help, it wouldn’t solve the problem by itself.

“Don’t be misled,” said Keevey, “Consolidation would be more efficient and effective — it’s crazy to have a Princeton Township and Princeton Boro, or for East Windsor to surround Hightstown. But we have a bigger problem than simple consolidation can solve.”

Yet one of the points raised by the report is the fact our government was created in the 19th century and now has services duplicated across the same municipality and county. Examples include county and municipal police, parks and recreation services, and public records.

6 schools

The report also notes that the level of technology available in our homes and businesses is not widely available in our government. These are issues that need to be looked at in light of the needs of the 21st century.

“We want to start a dialogue on how to tackle this long-term fiscal problem in a thoughtful and strategic way and not just with elected officials,” said Crane. “Maybe we have to structure ourselves differently but this is not just about home rule. I don’t know what the answer is. We may all have our own opinions. But what’s needed is a discussion based on facts.

“There is no one answer,” said Houstoun. “No silver bullets.” The group plans to continue an active outreach to community organizations and plans to do case studies of various municipalities in hold meetings to discuss the report.

The study was funded by the William Penn Foundation and Brian Maher, a private citizen and former owner of Maher Terminals, the largest container operation at the Port of New York and New Jersey. Further funding for the project is expected from the Geraldine R. Dodge Foundation, the Community Fund of New Jersey and other groups.

The group hopes that interested members of the public will visit the CNJG website to look at the details of the report and judge its underlying assumptions.