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Opinion: Our Fiscal House is Fragile — on Two Counts

New Jersey doesn’t need just short-term financial fixes; it needs a long-term strategy of reform

Richard F. Keevey
Credit: Amanda Brown
Richard F. Keevey

New Jersey is at a critical juncture with large fiscal gaps projected in both the annual and capital budgets. Solutions have been proposed but we probably need more. And, more importantly, we need a long-term strategy for how best to address the problems.

Overview

The fiscal future of New Jersey is fragile and, as such, will challenge those of us who want to fund ongoing programs, and make needed infrastructure improvements.

We have struggled to balance our budget for a number of years. We have the second-lowest credit rating of any state. Our pension system is one of the worst funded in the nation; some consider it the worst. Our infrastructure is rated D+ and getting worse.

The good news: The current year’s budget is balanced as is Gov. Phil Murphy’s proposed budget for fiscal year 2020. A $1 billion surplus is projected at the end of both years. This is a record level — assuming the revenue estimates are accurate.

But we do know that both the income and sales-tax collections for this current year were reduced by the administration by almost $500 million compared to the Appropriations Act signed on July 1, 2018. Let’s hope there is no further erosion of revenue collections and that projections for next year are accurate.

A Wall Street rating agency suggests otherwise and the Office of Legislative Services (OLS) has not released its estimates. So, let’s wait until the end of April when a more accurate accounting of income-tax collections for the current year is available; that will also give us a hint for the next fiscal year.

Outlook

Now, some not good news: Based on reasonable projections of future revenue growth and future spending demands, the gap in the state budget will reach between $ 3.3 billion and $ 4 billion in the next few years, principally driven by increasing pension needs and health benefits but also by other demands such as funding for the K-12 school aid formula, Medicaid and health costs, higher education and transportation needs.

If the economy stumbles the situation will be worse.

The story at the local level is also stressful. Property taxes are very high; they’re usually viewed as the worst in the nation. Unless we make significant changes, property taxes will increase each year — they have done so every year for the past 40 years, albeit in recent years the increases have mellowed, thanks to spending caps and limits on arbitration. Last year the increase was 2.2 per cent, about the same growth rate for the last seven years.

Many argue we simply have too many municipalities and school districts, and numerous state and local authorities. Sadly, most do not share services. And, of course, a driving cost at the municipal and county level is also pension and health benefits.

Most would say that we need a plan to address this problem. Some argue that economic growth will cover the shortfall. Others say, “Cut the bureaucracy.” Still others insist we should reduce taxes and not worry about the impact on programs.

Each of these recommendations is a poor and incomplete prescription.

In my view, we need to address the pension and health benefits systems; the school financing formula; the number and configuration of our K-12 schools, and the way our municipalities and counties deliver services. And then, maybe more taxes.

Where most of our tax money is spent

The majority of spending in New Jersey is at the local levels of government — 73 percent versus 27 percent by state government.

The cost centers are summarized as follows:

  • Schools — 42 percent

  • Municipalities & counties — 31 percent

  • State government — 27 percent

Remember also that in addition to paying for pension and health benefits for its employees the state funds pension and retirement health benefits for all K-12 teachers, plus the school districts share of Social Security, totaling approximately $4 billion. You will not find these costs in the budgets of local school districts or in the property-tax levy.

All state income taxes ($16 billion) and ½ a penny of the sales tax ($750 million) is returned to local units of government where it is expended, principally for K-12 schools.

The local property tax, which is the largest single revenue source in the state — $29.5 billion (more than the income, sales and corporation taxes combined) — is collected and expended at the local level; again, principally for schools.

Infrastructure and capital planning

Let me observe two critical items about New Jersey’s infrastructure — the second half of our fiscal dilemma. First, the American Society of Engineers rates our infrastructure as D+. Furthermore, based on the report entitled “State Budget Crisis Task Force,” co-chaired by Paul Volcker, the total infrastructure needs for New Jersey are projected to be in excess of $135 billion over a ten-year period, including large sums for transportation, wastewater treatment, stormwater management and drinking water. (I participated in the preparation of that report.) I checked the other day on the most recent Environmental Protection Agency report to Congress on drinking water and wastewater costs for New Jersey and the numbers are now even bigger than previously estimated.

Second, New Jersey does not have an effective Capital Improvement Plan. One would think in this six-year capital plan (which is issued each year) the above $135 billion would appear, but it does not. Furthermore the last several bond issues approved by the voters were never in the plan. It seems as if the governor and the Legislature come up with the bond-issue-du-jour approach and ask the voters to approve certain current hot-button items without informing the voters that there are many other critical needs that should be considered. I am sure the items approved were desirable, but I bet if you stacked them up against the other $135 billion, they might not have been the first priority.

And, yes, we already have very high levels of debt. Annual debt service on bonds issued is 11 percent of the budget, one of the highest among the 50 states and we rank fourth in debt per capita.

Final observation

The Path to Progress bipartisan report developed by the New Jersey Economic and Fiscal Policy Workgroup and co-chaired by Sens. Steve Sweeney, Paul Sarlo and Steve Oroho is an excellent start as it addresses many of the above issues and makes recommendation to change the structure of pensions and health benefit programs, consolidate school districts, leverage state assets, and require more shared services among municipalities and counties. (I participated in the preparation of Path to Progress.)

Making decisions on where to allocate limited budget dollars is critical as are decisions on overall tax policy — including how much taxes are needed, from what source, and who should pay.

And so too is the need to have a comprehensive handle on the state’s capital needs and costs as these decisions will require the issuance of substantial amounts of new debt.

The fragility of our fiscal situation is clear. We need to step back and approach these problems more comprehensively. We must project our spending needs and funding sources over a five-year period and not just in the traditional one-year-at-a-time manner. Currently, we are looking at a $3.5 billion to $4 billion future budget gap and a capital investment need of almost $140 billion. We need a new and more thoughtful approach.

Richard F. Keevey is the former budget director and comptroller for New Jersey —appointed by governors from each political party. He held two presidential appointments — as CFO at HUD and deputy undersecretary of Defense. He is currently a distinguished practitioner at the Bloustein School of Planning and Policy, Rutgers University and a lecturer at Princeton University. He is an elected Fellow of the National Academy of Public Administration.

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