This is the first in a multipart series outlining New Jersey’s fiscal fundamentals, written by Richard F. Keevey, the former budget director and comptroller for New Jersey and currently a senior policy fellow at the School of Planning and Policy at Rutgers University. The idea behind this series is to demystify some of the state’s financial challenges, and put them in context of the broader issues New Jersey faces. It’s also intended as a way to underscore the importance of state government in a year that will see a new governor and a new Legislature chosen by voters. Follow this link to see the other stories in this series.
New Jersey state government in context
New Jersey has a strong central government. The governor has potent appointment and financial powers. New Jersey’s local governments like to tout their home-rule powers — and they’re correct in certain circumstances — but when it comes to municipal, county, and school finance the state’s powers and oversight are quite significant.
The office of the governor is viewed as the strongest in the country. Unlike many states, New Jersey’s governor (and lieutenant governor) are the only officers elected statewide, and all cabinet officers and principal state officials are appointed by the governor — unlike Pennsylvania, Delaware, and New York, for example, where several cabinet officials are elected.
The governor has both constitutional veto power to propose changes in enacted bills and absolute line-item veto to eliminate specific provisions in the Appropriations Act, including dollar amounts and language provisions. That veto can only be overridden by a three-quarter vote of the Senate.
The Legislature is composed of 40 senators, elected for four-year terms and 80 Assembly members, elected for two-year terms. There is a unified judicial system headed by a Supreme Court, which makes rules governing all the courts and has jurisdiction over admissions to the bar and discipline of attorneys.
All state court judges, including Supreme Court judges, are appointed by the governor with the advice and consent of the Senate, and are precluded from political activity and outside employment. If re-appointed after an initial seven-year term, judges receive tenure with a mandatory retirement age of 70. The governor also appoints each of the 21 county prosecutors with the advice and consent of the Senate.
The state government has overall responsibility for K-12 education; operates the $14-billion-plus state and federal Medicaid program; oversees statewide law enforcement via an appointed attorney general who has extensive policing powers; operates and oversees a transportation network of roads and rails; and is generally responsible for the majority of public-health and social-service programs.
The state has arguably the strongest set of local finance laws in the nation. The Division of Local Government Services, in the Department of Community Affairs, enforces an extensive set of financial laws and procedures, including approval of annual budgets for all municipalities, counties, and public authorities.
The Department of Education similarly oversees financial operation of school districts, albeit day-to-day powers are delegated to approximately 600 school districts. Numerous Abbott v. Burke supreme court decisions have given the state the powers to effectively determine the amount of state aid to be distributed to schools.
Given these extensive powers and influence, one might expect that the state government expends most public funds — but that would be incorrect. Approximately 73 percent of all spending is at the local levels of government, principally by the more than 600 school districts.
Revenues — by level of government
The state collects approximately $35 billion in revenue each year, principally from three taxes — the personal income tax, sales tax, and corporate income tax (CBT) — plus a wide variety of other taxes (motor fuels, insurance, and so forth), and revenues such as enforcement fees, lottery proceeds (now dedicated to the pension system), and casino taxes.
But as with expenditures, the state government does not collect the single largest revenue source throughout the state — the local property tax. In fact, the property tax is larger than the three principal state taxes combined. Let’s take a quick look at the major revenues in the state:
State Revenue Income Tax $14.4 billion Sales Tax $9.8 billion CBT $2.4 billion Other $8.1 billion Municipal, County, and School District Revenue Property Taxes $28.0 billion Fees, fines, etc. $10.0 billion (est.)
There are other revenues at each level of government, particularly federal revenue and related expenditures — but the above taxes are considered state-only collected revenue and associated spending. For example, in fiscal year 2018 the state government expects to receive and expend $15 billion in federal revenues. A further discussion of federal dollars and how they are handled in the state budget will be discussed later in this series.
Spending — by level of government
The state government has a $34.7 billion tax-supported budget for fiscal 2018, but this is misleading for several reasons, principally because only $19.6 billion of the total is expended for state-related services. Why? Two separate constitutional amendments mandate that all personal income taxes as well as one-half of one cent of the sales tax must be expended for property-tax relief. This essentially means the income tax and a small portion the sales tax are returned by the state to school districts and municipalities. As a result, approximately $53 billion (property taxes + income tax + one-half of one cent of the sale tax — and small amounts of fees and other revenues) is expended at the local level or by the state on behalf of local governments.
The aggregate percentage of spending throughout the state of New Jersey can be summarized as follows:
State Spending State government 27% Local governments K-12 Schools 42% Municipalities 20% Counties 11% Subtotal 73% Total spending 100%
Over the next few weeks we will discuss these state spending and revenue issues in more detail, including property taxes — as well as capital financing and debt, retirement costs, and topics related to surplus and deficits.