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Long range fiscal challenges face the state of New Jersey

keeveyrichard011810_optBY RICHARD F. KEEVEY
COMMENTARY

New Jersey has serious budget problems. I know from personal experience that the State will have a difficult time managing its finances in the coming years. I do not know how the state's fiscal house will ultimately be mended, but I am quite certain there will be large scale changes. The gap between revenues and program needs continues to grow — and no easy solution is discernable.

The budget is in balance for the current fiscal year, but it was achieved by making $10.8 billion in reductions to current service requirements, and by skipping a $3.1 billion pension contribution. Governor Christie and the Legislature made difficult but needed decisions.

The current budget, although a good start, has not solved the problem — much more needs to be done. Projections for the foreseeable future, suggest that because of the structural deficit that was created during the mid-1990 and never properly addressed, the problems still exist.

Here is what needs to be done:
  • Bring long term spending commitments into line with the revenue base
  • Change the funding structure for retirement benefits
  • Gain control over school aid formulae, and other mandates, and contractual obligations
  • Deliberate carefully about reductions to safety-net programs
  • Address the total state enterprise - state and local governments, including schools
  • Improve the business climate while maintaining needed resources

COMPOSITION of SPENDING

It helps to consider some basic information:

Unlike the federal budget, where the budget is invariably in deficit — with no solutions except borrowing — the state of New Jersey is required to have a balanced budget without borrowing for operations.

The composition of the $28.4 billion state budget is such that the majority of the expenditures are made to assist organizations outside of state government — only $6.0 billion, or 20%, is spent for state operations.

Seventy-three percent of the budget consists of state aid payments to municipalities, counties and school districts; and grants-in-aid to non- government entities and individuals for such items as: Medicaid; homestead rebates; universities, including student assistance.

The remaining seven percent services debt on bonds previously issued for transportation, environmental needs, etc.

THE MAJOR CHALLENGES

The fiscal problems facing the state can be understood by focusing on these major issues:

Spending commitments are far greater than the revenue base

Sixty-two percent of all revenues come from the income and sales tax. During the current recession the income tax decreased from $12.6 billion in FY 2008 to $9.8 billion. But, spending demands cannot decrease in the same proportion, as existing formulae for schools, retirement benefits, and case driven Medicaid requirements -just to name three — continue to increase rapidly. On a projected basis these expenditures far exceed the revenue structure.

The state has unfunded liabilities in excess of $87 billion for promised retirement benefits.

The state pays the employers' share of pension and retirement health benefits for its employees and school district teachers. The budget for health benefits alone is $2 billion. No monies were provided for required pension obligations — either in the current budget, or for most of the preceding 15 years.

The Governor recently signed legislation that reduces commitments to 1/7 of the required amount for next year, with progressive increases in the following years. But this change does not solve the problem.

So, the Governor has proposed nine major pension changes, including raising the retirement age, and increasing employee contributions. Such changes would fund the pension systems at a 90% level over the next 30 years.

Similar long range changes have been proposed to address health benefit costs, including increasing employee contributions.

These two issues are the greatest albatross surrounding the state's finances. Time is critical — without immediate action the pension funds, for example, will soon be empty.

The Governor and the Legislature have little control of large items of the budget because of mandates, contractual and constitutional obligations, and federal requirements.

Using school aid as an example, the Supreme Court has ruled the State has a constitutional obligation to fund schools at certain levels, especially for the poorest districts. Given the existing formulae it is estimated that $13.5 billion is needed by the year 2015 — almost 40 percent greater than now raised from the income tax. In the current year, the Governor put a ‘halt' to school aid increases, and most likely this ‘spending pause' will continue. The underlying school formulas, and other requirements/mandates, need to be re-examined so requirements can be matched with revenues.

Social program needs will increase, particularly for the Medicaid program.

These programs provide necessary safety-nets to protect our most vulnerable. This challenge presents a moral dilemma for decision makers as reductions will likely be necessary in program content, and eligibility — which could negatively affect our most needy. Reductions need to be carefully deliberated.

Control Local Spending practices.

Spending policies at the local level must be addressed. Consider, for example, that the local property tax is $24 billion, which is 20% more then collected by the state from income, sales and corporation taxes — furthermore, all state income taxes are returned as aid to local governments, principally schools.

Failure to address the total enterprise will not solve our dilemma, as tweaking parts of the equation will not be a sufficient remedy.

The state is a high cost place to do business.

It is very difficult to gain consensus on the ideal tax structure at the state or local level, or which business incentives will bring about the greatest return to foster economic development and expansion. These elements need to be carefully analyzed so legislation is crafted to expand business, and provide the necessary resources so the state can re-emerge as a good place to do business, and live.

CONCLUDING COMMENTS

Several cost drivers were necessarily reduced by the Governor in the current year, but the major constraint on spending remains the availability of revenue. Thus, it is not practical to approach future budgets singularly from a current service needs projection. Instead the budget should be developed within revenue constraints.

Every constituent group will claim its services are critical. Consider, for example, the recent outcry from the arts community, teachers, municipalities, and transit riders when this current budget was implemented — and, one might argue these groups are not our most needy.

The state might also consider rationalizing the tax structure to reflect changes in the economy, for example, broadening the sales and corporation tax base (but decreasing the rate); reviewing property tax exclusions and deductions; and dealing with the growth of internet sales and services.

On the spending side, serious thought needs to be given to prison policy; personnel and management changes, particularly needed arbitration amendments; and government-wide reorganizations, consolidations and the sharing of services. In the past these and other actions might have been considered too difficult to undertake — now they are critical.

But, these changes will not solve the structural imbalance — hard choices are necessary. The national economy has had a large impact, but many years of bad fiscal practices have dealt this Governor an unusually bad hand. No economic recovery or magic bullet will come close to solving the problem. We need dramatic, structural and immediate changes.

Richard F. Keevey is "the Distinguished Practitioner in Residence" at the School of Public Affairs and Administration, Rutgers University-Newark. Previously, he held appointments fom two New Jersey Governors as State Budget Director and Comptroller; and from the President as the Deputy under Secretary of Defense for Finance; and the CFO for the U.S. Department of Housing and Urban Development.

THIS COLUMN ORIGINALLY APPEARED IN THE RECORD

GM

 

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