NJ Business Matters: The Blog of the CIANJ

Lurching Toward Real Reform

Sen. Barbara Buono yesterday announced her support for undoing a legislative gift to retired state employees, and for creating savings for New Jersey's overburdened taxpayers.

In 2001, as the state approached legislative elections and the economy was on more stable grounds, the legislature decided to do a favor for retired state workers. At the time, the formula for the amount of money a worker would receive in their retirement years was the number of years worked divided by 60 (n/60). For example, an employee working 30 years would receive half their salary during retirement (30/60=50%).

That changed in 2001 when the legislature acted unilaterally - not through the bargaining table - and changed the denominater in that equation to 55, which is where the formula still lies (n/55). That same worker with 30 years of service now gets 55% of their salary in retirement (30/55 =55%). The benefit increase did not only extend to those currently on the payroll, but to all retirees; even those who were living in Florida for 15 years.

What the legislature giveth, Senator Buono proposes the legislature can taketh back. CIANJ supports the roll back, as New Jersey needs to bring its retirement system more in line with the private sector and we applaud Senator Buono for showing the political courage to re-introduce the idea before the legislature.

As we maintained during the special session on property taxes, rebate checks are no substitute for the fundamental reform necessary in this state. Sen. Buono's proposal is a step forward in that effort. 

Gov. Seeks To Borrow Another $2.5 Billion For School Construction

Quick, you're a homeowner and you are under the burden of such crushing credit card debt that you plan to sell the family car, what do you do? Most of us would start by cutting up their credit cards. If you're the State of New Jersey...

In a last-minute bid to head off Supreme Court action, the Corzine administration announced yesterday it would ask lawmakers for at least another $2.5 billion to restart the troubled school-construction program in the state's poorest districts.

The plan to borrow another massive infusion of cash follows controversy about how the initial $6 billion was spent and comes just weeks after Corzine lectured lawmakers in his State of the State address on New Jersey's burgeoning debt.

All two of you regular blog readers know that on January 8 the Governor said our state was in such poor fiscal shape that we must exchange toll revenue for the next 75 years for upfront cash. Then, to be sure that investors who give us that cash are paid back, we must increase tolls 800% on New Jerseyans.

Remember that the first $6 billion spent by the School Construction Corporation (a government entity)failed to build half of the schools it was assigned to and that they spent an average of 45% more on school construction than the going rate. Now taxpayers are supposed to shrug this off and give a new government entity $2.5 billion because,

"We knew this was looming, and, frankly, if the governor didn't do something, the court would," Senate President Richard Codey said.

Checks. Balances. Scapegoats. 

Moving From Tax and Spend Policies

As this legislative session winds to a close, policymakers increase their focus on the 2008-'09 budget, which is facing a structural deficit of about $3 billion - the nation's third highest burden.

Tom Hester does a nice job of breaking down the Governor's avenues for addressing that deficit. Governor Corzine promises spending cuts are in order and will neither rule out nor promise a tax increase. And of course, there is the issue of asset monetization.

He hasn't said how much tolls may increase, though at least a 45 percent increase is necessary to widen the Turnpike and fix bridges on it and the Parkway.

Corzine wants to use money from the deal to pay at least half of the $32 billion in state debt and provide money for transportation needs.

The notion of 'selling' state assets in return for immediate funds is not fundamentally opposed to taxpayer interests, especially if it results in paying down the debt in today's dollars rather than tomorrow's. However, attached to it must be a guarantee that monies received will actually be spent for that purpose and some sort of mechanism must be developed to ensure toll rates are predictable and do not become overbearing.

Governor Corzine is scheduled to introduce his formal plan January 8th. 

Tax Revenues Up; $3 Billion Deficit Still Looming

When a state such as New Jersey is forced to run its budget on thin margins, small up-ticks become big news. Exhibit A is Saturday's Star-Ledger report on higher-than-expected revenue collections.

They say this year's budget appears to be holding steady so far. Acting treasurer Michellene Davis said yesterday tax collections are running about $300 million ahead of projections for the first four months of the budget year. That's more than twice the $133 million windfall the state realized by this time last year.

She said healthy income and business tax receipts have pushed total revenues to nearly $8.9 billion since July 1. On the downside, sales taxes were off slightly, and officials know most taxes will not be collected until the second half of the year.

"Many statehouses around the country are seeing mixed revenue pictures, and are wary of trends fueled by slowed consumer spending, tightening credit and higher prices for energy," said David Rousseau, the governor's fiscal policy advisor. "We should expect to see these trends influence New Jersey revenues and will remain cautious as our fiscal picture comes into clearer focus in the weeks ahead."

The budget gap is still forecast at about $3 billion dollars heading into the next fiscal year. At some point, the legislature and governor are going to need to make a decision as to whether we maintain the status quo or opt to cut spending and become serious about spurring economic activity. Even in the 21st Century, it is difficult to grow an economy with fewer people around to do the growing.

Sometimes, It's Good to Be Reminded of the Obvious

Regular blog readers have heard the drumbeat before, but it is worth repeating - next year New Jersey faces a structural deficit of about $2.5 billion. To put that in perspective, this year's budget was above $33 billion, with about $3 billion used to pay off part of our existing debt. In the end, the legislature must choose between spending restraint or raising taxes.

The administration has pledged the need to "grow our way out" of NJ's present fiscal state. In today's Opinion Journal, former DE governor Pete DuPont details the model laid out by the federal government,

Tax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends. Those reductions have raised federal tax receipts by $785 billion, the largest four-year revenue increase in U.S. history. In fiscal 2007, which ended last month, the government took in 6.7% more tax revenues than in 2006.

These increases in tax revenue have substantially reduced the federal budget deficits. In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007. That last figure is just 1.2% of GDP, which is half of the average of the past 50 years.....

[T]here have been 49 consecutive months of job growth as a result of the economic expansion induced by President Bush's 2003 tax rate reductions.

Let's hope members of the legislature read the Opinion Journal.

Cause and Effect

State Senator Tom Kean wrote an op-ed for yesterday's Asbury Park Press outlining the reasons for next year's projected budget shortfall and the necessity of a budget which utilizes spending cuts versus the business-as-usual model of tax increases.

New Jersey's income tax structure is progressive. More than 50% of state income taxes are paid by the top 4% of wage earners. Those high wage earners tend to have large portions of their income in corporate partnerships and investments which are not reported until the end of the year, making budget forecasts on thin margins a tricky busiuness.

New Jersey's high wage earners are also heavily reliant upon Wall Street success compared to other states. Kean aptly writes,

Given the recent downturn in the nation's housing, credit and financial markets, many economic observers expect state revenues will fall significantly short of expectations. The current state budget assumes a nearly 8 percent projected increase in income tax revenues. Those reduced collections, combined with a structural budget gap that Corzine last week projected as high as $3.5 billion, present a serious challenge to the state's fiscal stability.

In both the city and state governments in New York, Mayor Michael Bloomberg and Gov. Eliot Spitzer have acknowledged the slowdown in the economy and are beginning to reduce government spending in anticipation of a reduction in income tax revenue collections.

The Governor's office is preparing for such changes with next year's budget cycle. Sunday's Record tells of a high-level meeting at which Department heads were told to find $3 billion in cost savings. Of the state's $33 billion budget, certain gubernatorial priorities and 'mandatory' spending is considered off-limits - - about $18 billion worth. That means the remaining $15 billion requires a 20% cut. While it would still leave major areas for savings untapped, a $3 billion reduction should at least prevent digging even deeper into taxpayers' pockets. Maybe those 72,000 departures we blogged about last week are making an impact. 

Another $800 Million in School Construction Money Borrowed

New Jersey's Economic Development Authority has approved the borrowing of another $800 million in school construction money, adding to the $8 + billion already borrowed and the $33.7 billion New Jersey already owes.

The NJ Schools Development Authority is the successor of the state's School Construction Corporation. That's the same School Construction Corporation which managed to complete barely a third of its assigned projects, leaving buildings unfinished as a lack of oversight cost the state's taxpayers billions of dollars.

Today's Star-Ledger reports,

The $800 million loan, endorsed unanimously by the New Jersey Economic Development Authority at its regular meeting in Trenton, will cover the school program's expenses for about eight months, officials projected.

When the 30-year bonds are is sued early next month, the school program will have used up all but $1.7 billion of the $8.6 billion that lawmakers authorized it to borrow. Officials of the New Jersey Schools Development Authority, the panel in charge of the school building program, earlier this year identified 27 ongoing school projects that they say will consume the balance of the funds allocated to the program.

The authority has asked lawmakers to authorize another $3.25 billion in borrowing to enable construction to continue on other projects that have been suspended for lack of funds.

Both you regular blog readers will remember that last week, the state approved $1.25 billion in borrowing for highway construction and maintenance.

State Borrows Another $1.25 Billion

From NJ.com:

Even as Gov. Jon Corzine works on a secret plan to pay down New Jersey's long-term debt, the bill continued to grow this morning, as a state transportation panel approved borrowing up to $1.25 billion to pay for highway and mass transit projects for another year.

The new loan, to replenish the state's Transportation Trust Fund, is the second of five annual installments of debt Corzine and lawmakers authorized when they restructured the trust fund last year.

Issuing Debt to Pay for Relief Which Was Funded By A Tax Increase

New Jersey is considering taking out a short-term loan to cover $2 billion in costs as the state awaits expected "revenues" (aka taxpayer money) to come into Trenton. Today's Record reports the loan coincides with the $2.5 billion property tax rebate plan. Senator Lance aptly notes the program is not sustainable following this year,

The fact that the state is borrowing money upfront to cover the costs of the property tax rebates is further evidence that the program is not sustainable, said Senate Minority Leader Leonard Lance.

"I think it's an indication of a much more serious matter next year, when we will not be able to pay for the program because we don't have enough revenue," said Lance, a Hunterdon County Republican.

This year's rebates will be paid for with revenues from last year's 1-cent sales tax hike.

However, a new source of funding has yet to be determined for next year, if the rebates are to be repeated.

Next year the state expects to start off the budget season with a $2.5 billion structural deficit.

We've added a lot of readers since the days of the special session on property tax reform, so here are some of our thoughts on the program:

• Businesses pay the nation's highest property taxes twice - once by virtue of paying about one-third of the state's overall property tax package and then again through higher wages needed to attract and retain talent seeking a high quality of life. Despite paying one-third of property taxes collected, it is seldom noted businesses are ineligible for the program.
• Any degree of property tax relief is appreciated, but short-term relief is no substitute for the long-term reform measures needed.

Of course, all this heightens the need for a new school funding formula and to reduce spending. Before plans such as asset monetization can be considered, spending patterns must be altered. If you're going to sell off the family car to pay off your credit card, you'd better cut up the card. That has yet to happen.

The Road Less Traveled

The state's debt is the topic du` jour and while our first two posts focused on how government managed to amass such a burden (here's a hint: they were too generous with taxpayer money), the Star-Ledger depicts part of a potential solution - the privatization of toll roads. The paper offers a profile of New Jersey's only privately operated toll road and the benefit it has provided Atlantic County the past 75 years.

At a time when Gov. Jon Corzine is figuring out ways to cash in on state assets such as the New Jersey Turnpike, Roger Hansen, the route's owner, believes the governor should let private firms run New Jersey's toll roads.

"I personally think private industry can do a better job than government," said Hansen, a longtime Atlantic County developer. "We have a tremendous amount of patronage in all the toll roads in New Jersey. I know you could run it much more efficiently if you run it as a for-profit entity, and I think it could be just as safe."

The toll road is a throwback to an era when entrepreneurs, not governments, routinely ran roads, bridges and railroads.

Hansen said early in Atlantic City's history, developers eager to populate the shore ushered tourists to beachfront guest houses on private railroads. Built by Norwegian immigrant Ole Hansen, Roger's grandfather, the Margate bridge opened in 1932 and has been privately run since. The Hansens and another local family, the Capaldis, bought the route in 1964.

The Department of Transportation estimates the bridge handles more than 11,000 cars daily and even provides discounts for elderly and low-income drivers. It is regularly maintained and never suffered a major mechanical failure - while still turning a profit and charging $1 per trip. The private sector providing a quality service at low cost - who'd have guessed it.

Click here for the Ledger's full story. 

Bills In The Drawer

Piggybacking on today's first blog post is another story from the Record which further details New Jersey's mounting debt crisis. Adrienne Lu's article focuses on the pensions and benefits owed state workers and how escalating healthcare costs are burdening taxpayers in ways most do not imagine.

The private sector has moved from a defined benefits system to one of defined contributions. That allows companies to budget properly as they know future costs. The New Jersey government has not changed, leaving taxpayers on the hook for benefits owed with little control over costs. It is a nationwide problem exacerbated by other fiscal issues in the Garden State.

Earlier this year, the Governor successfully negotiated a plan to have new retirees contribute 1.5% of their pensions toward their own health benefits, only to have the state government unable to develop the necessary mechanism by the agreed upon deadline. That plan was nixed and now those same retirees can skip the payments if they participate in a "wellness program" (something the teachers union agreed to earlier this year), but as The Record notes,

It turns out that "wellness program" doesn't even exist yet.

The swapping of a health care contribution for a yet-to-be-created wellness program is the latest example of just how difficult it will be for the state to keep both health care and pension costs for government workers in check on behalf of taxpayers, who pay the highest property taxes in the nation.

Mark Perkiss, a spokesman for the Treasury Department, said the state is waiting to receive proposals from vendors before deciding what the wellness program will entail.

"The problem is the state is in a financial crisis," said Sen. Stephen Sweeney, D-Gloucester, who is also a labor union official. "We don't have the money to pay our bills. It's only going to get worse."

If we fail to change the status quo, then the problem will get much worse. In the interim, the legislature and administration have a slew of proposals developed during the special session on property tax reform that remain idle on their desks. Implementing more of those would be a start, as would a freeze on new benefits - including those with yet unknown costs such as paid family leave.

That's Billion...With a "B"

Today's New York Times once again outlines how New Jersey, through administrations and legislatures for more than a decade, managed to accumulate a $58 billion shortfall in public retiree care. The complete story is available here, but the Cliff's Notes version can be quickly explained in three paragraphs,

In 1994, New Jersey decided to stop setting aside money in a fund to pay for health care for its retired public workers. The savings paved the way for a big tax cut.

Meanwhile, hundreds of thousands of public workers were being told that as long as they worked 25 years, the system would provide virtually free health care for them when they retired, often when they were as young as 55....

When New Jersey stopped funding its retiree health plan 13 years ago, it also stopped trying to keep track of the cost. That created the illusion that the long-term obligation was zero, not billions of dollars, and made it easy for the state to enhance its already rich benefits.

Regular blog readers already know that future retirees were expected to pay a small percentage of their pension toward health benefits, which would have produced some savings and marked a significant deviation from past unaffordable practices. However, the state was unable to develop a program by the contractual deadline, meaning some could opt out by participating in a wellness program.

The article also highlights the fact the NJEA negotiates with New Jersey's more than 600 individual school districts (thus giving them 600 opportunities to increase benefits).

Meanwhile, retired teachers have dodged the bullet entirely. Their union, the New Jersey Education Association, negotiates contracts with school districts and not with the state, and the state has not asked them to chip in for their premiums....

Another problem is that for years, New Jersey has allowed towns, school boards and other local governments to set pay and benefits. School districts, which contribute to health care only for active workers, can help their own budgets by negotiating small pay increases and reassuring their employees that the state will retain ample retirement packages. The state then has to come up with the money.

You get the idea, and regular blog readers know the CIANJ is pushing for all options to be available. Reworking our disjointed school funding formula, bringing public employee benefits more in line with the private sector and yes, asset monetization, must all be considered if our over-taxed businesses and residents are going to be able to remain in the state. 60% of residents have reported they cannot keep pace with cost of living increases - the most unacceptable number of all.

Red Jersey

The Star-Ledger is reporting that the Economic Development Authority has agreed to have New Jersey take on an additional $150 million in debt to fund special needs housing.

The new loan will be repaid by motor vehicle fines paid by scofflaw drivers over the next 31 years.

It is the final installment of a $200 million plan lawmakers approved in 2005 to borrow against future motor vehicle fine revenues to develop apartments, condominiums and houses for individuals with special needs....

Besides raising $150 million in new funds, the state plans to issue another $425 million in bonds to refinance portions of an earlier set of motor vehicle revenue bonds that were issued to balance the state budget three years ago.