Office of the State Treasurer

TRENTON — New Jersey Treasurer John E. McCormac delivered the following testimony to the Senate Budget and Appropriations Committee today in support of Governor James E. McGreevey’s proposed fiscal 2005 State budget:

FY 2005 Budget Testimony of John E. McCormac
New Jersey State Treasurer
Senate Budget and Appropriations Committee
March 31, 2004

Mr. Chairman. Distinguished members of the Senate Budget and Appropriations Committee. Thank you for the privilege of appearing before you today to testify on the Governor’s proposed budget for fiscal year 2005.

This is my third opportunity to present to you a new budget for the upcoming fiscal year. And while no two budgets have been alike, all of them share one common thread – they are a statement of an administration’s priorities and a reflection of the State’s fiscal circumstances.

At this time last year and the year before, New Jersey’s budget reflected some painful realities. The Income Tax, New Jersey’s largest revenue source, lagged significantly behind projections. In FY 2003, for the second consecutive year, the State was on course to collect less from the Income Tax compared to the previous year.

Our second largest revenue source – the Sales Tax -- also fell below targets for the second year in a row and will grow only marginally in real collections in FY 2004 over the previous year’s level.

For two consecutive years, FY 2002 and FY 2003, New Jersey needed to take actions to close shortfalls that opened up in the current year budget due to under performing- revenues. We made some tough decisions to responsibly balance our books. Those decisions helped us keep our budget balanced for the current year, and to close FY 2004 with a higher surplus.

It is difficult for any administration to balance the State budget. But no administration has achieved – in one term or two -- what this one already has achieved in two years: Erase budget shortfalls of close to $20 billion.

The budgets over the last two years were commensurate with these economic times. Marginal revenue growth was matched with marginal budget growth, with total spending up by less than the rate of inflation from FY 2002 to 2003 and from FY 2003 to 2004.

In many ways, the small growth budgets masked the spending pressures brought to bear by the rising, inescapable costs for our government, such as spiking Medicaid costs and nursing home obligations.

We funded these mandates and tended to the core priorities of our budget, managing still to dedicate nearly one half of all spending to property tax relief and invest in vital services.

We could not make these investments without asking our government and citizens to make painful sacrifices.

We wanted to do more with state resources to offset local property tax increases.

We wanted to do more to improve the quality of education for our children.

We wanted to do more to protect our families, care for our elderly and tend to our sick.

We made the best of our funding opportunities with the resources available to us.

The groundwork for the budget for fiscal year 2005 was laid by the difficult decisions we made and the sacrifices we asked others to make over the last two years on both the appropriations and revenue sides of the budget. Without these sacrifices, New Jersey could not have been positioned to take full advantage of the increased revenue stream we are seeing today from a stronger New Jersey economy.

For the first time in two years, I am not coming to the Legislature to discuss a budget shortfall in the current year budget and to present a list of solutions.

While we still await the results from spring tax collections, our revenue growth has exceeded expectations and we conservatively forecast healthy revenue growth over the next 12 to 15 months.

Actual Income Tax collections for FY 2004 will still remain below the level reached in 2001, but we project to nearly equal the 2001 apex in FY 2005.

For the beginning of the current fiscal year, we had forecast a $250 million surplus. We built the surplus to $400 million, and intend to carry that level of surplus over into FY 2005. Despite this progress, we remain short of a having a level of surplus more in line with a $26 billion budget.

So as we enter a new fiscal year, we see FY 2005 as an opportunity to more fairly and compassionately meet the challenging needs of our citizens. At the same time, our new budget continues Governor McGreevey’s commitment to hold the line on bureaucratic spending.

Our record on this spending is clear – three straight budgets that cut spending on the operations of executive branch departments. When factoring out the increase in Human Services due to child welfare reforms in DYFS, operational spending for FY 2005 is down overall and budgets for 12 of New Jersey’s 15 state departments are smaller.

Funding on actual state departmental operations represents just 12.6 percent of budget spending. The portion of the budget that reverts back to New Jersey citizens in the form of grants and aid is 72.4 percent.

When you analyze the direct state services budget in greater detail, you will recognize that the overwhelming majority of spending is limited to such areas as public safety, and state institutions, with other major areas falling under the category of protection and support of children, families and the disabled. For these reasons, it is a dilemma for any administration to make significant cuts in spending without resorting to cuts in the grants and aid portion of the budget.

We are, however, spending less on the bureaucracy, which enables us to direct more State resources to our priorities, particularly to areas that were under-funded as we worked to close budget shortfalls of several billion dollars over the last two years. And, we can make these investments without burdening our working families and our senior citizens with an increase in the sales tax or the income tax.

Governor McGreevey’s fiscal 2005 budget also provides more than $12.9 billion of direct or indirect property tax relief, a $660 million increase over FY 2004. It is significant to note that the growth in spending on property tax relief programs over the last two years has outpaced the growth of the revenue source responsible for paying for these programs –the Gross Income Tax – by about $2.5 billion.

The proposed budget increases State support of education by $445 million to an historically high total of $8.6 billion – one-third of the budget -- in the next fiscal year, boosting aid to all school districts by at least 3 percent. The Governor’s budget expands preschool programs – for both Abbott and non-Abbott districts, fully funds the highly successful reading-coach project, and introduces a public/private partnership called New Jersey After 3. This initiative will support after school programs between 3 pm and 6 pm for 20,000 elementary school students in districts throughout the state.

Also new for FY 2005 is a $5 million program to provide aid to school districts experiencing above average enrollment growth, a $5 million program for low-income, non-Abbott districts that implement proven student improvement programs, and another $5 million for incentives to model districts that develop and implement administrative efficiencies that set the standard for delivering maximum student performance at a minimum cost to the taxpayer.

The reading and math scores of New Jersey children are among the highest in the nation, and our efforts in these areas have been lauded by the National Institute for Early Education Research. The FY 2005 budget builds on these achievements.

Our investments continue in New Jersey’s school construction program, the largest capital program of its kind in the country. The budget provides $274 million in school debt service aid. Prior to Governor McGreevey taking office, this program was virtually at a standstill, with only 204 contracts and $83.4 million obligated by January, 2002. Today, the school construction corporation is now building or renovating approximately 1,300 schools, covering 1,802 contracts, $2.7 billion in obligations, and creating classrooms for the 21st century and generating thousands of living wage jobs.

We’re doing more to help seniors on fixed income offset their property taxes.

For New Jersey’s direct relief programs, the FY 05 budget allocates an additional $25 million for the Senior Property Tax Freeze program, making it possible to provide freeze checks this July to approximately 130,000 senior and disabled citizens. That’s an increase of nearly 50,000 over the number of participants who received a check last year when budgetary restrictions were in place. Filers who received checks averaging $212 last year will see their benefits this year rise to an average of $436.

The FY 2005 budget will preserve Homestead Rebate checks of up to $775 for eligible filers. The budget also preserves NJ SAVER rebates, averaging $250, to over 1.1 million New Jersey homeowners, allocates $86 million for the Veterans Property Tax deduction and $361 million for the Property Tax deduction on income tax forms.

Approximately $1.76 billion is targeted for municipal aid, including a $25 million increase in formula aid. We will provide $8 million in grants to counties and municipalities for costs associated with the e-911 system.

The budget will also fund $6 million for stormwater management grants, $2.3 million in DEP grants for tire clean up and $4.2 million for Regional Efficiency Development Incentive grants, a $2.2 million increase over last year’s level.

And, again, we are able to fund these priorities and make these investments while also providing a record level of aid to our educational system.

The Governor’s budget recognizes the economic importance of a highly skilled and educated workforce. The FY 2005 fiscal plan dedicates nearly $2 billion to our higher education system, earmarking $68.3 million in new funding to senior public colleges and universities and $6.1 million in additional aid to county colleges. More than $270 million will be provided for student financial assistance through Tuition Aid Grants, the Educational Opportunity Fund, and the NJ STARS program. NJ STARS is a new doorway to free tuition at a New Jersey county college for students who graduate in the top 20 percent of their high school class.

For two years we have deferred many expenses that have a direct bearing on the health and welfare of our citizens and our quality of life. Fiscal problems run in ebbs and flows; the challenges of our society are unrelenting. We cannot in good conscience tolerate conditions resulting in children starving, classrooms crumbling, seniors facing frightful decisions about their care and compromised security during a time of heightened fears over terrorism.

This budget leverages our improving revenues to address these daunting concerns.

We’re providing an additional $140 million over the next 15 months to implement major, fundamental reforms to DYFS, recasting New Jersey’s approach to managing caseloads, improving foster care, reaching at-risk families and protecting children.

The FY 05 budget preserves the nation’s premier prescription drug program for New Jersey seniors without any eligibility changes and no asset test.

We’ve provided an additional $5 million to open 750 more assisted living slots for Medicaid-eligible seniors.

We’re allocating new funding to caregivers in county offices around New Jersey so that they can help our elderly and their families receive proper care and services in their own home. We worked closely with the AARP to address the best and most effective ways to deliver home-based programs and services to our seniors. We believe that our joint efforts, as demonstrated through this budget, will make a real difference in the quality of life of our senior citizens.

The budget increases funding to lead testing for expectant mothers, cancer screening and detection and Women’s Health Awareness Programs, and makes no changes to the Family Care program.

We’re taking steps with this budget to provide more stable, reliable funding to our hospitals so that they can meet their charity care and Medicaid expenses. Our efforts will strengthen a network of hospitals that make up New Jersey’s health care safety net.

Governor McGreevey is establishing New Jersey as the first state in the nation to back stem cell research with a financial commitment by recommending $6.5 million in funding for the Stem Cell Research Institute. The budget also commits $40 million to Cancer research and doubles funding, to $5.7 million, for New Jersey’s Cancer Education and Early Detection program. This will make it possible to screen 20,000 more women for breast and cervical cancer.

We are providing an increase of over $5 million to open new wings and facilities at the State’s three Veterans’ homes to care for the brave New Jerseyans who served our country in the armed forces.

And our investments in homeland security include $33 million to purchase 400 new State Police vehicles, graduate new trooper classes, upgrade e-911 systems and protect our nuclear facilities.

The budget provides the largest one-year increase in State history for NJ Transit, which will keep fares stable with no rate hike, and additional support for New Jersey Arts, History, and Culture and Tourism programs. Thanks to the Legislature’s providing of the funding source necessary – the hotel-motel tax – we have a stable and reliable funding mechanism for these programs.

These new and increased investments are made possible by a combination of our continued emphasis on belt tightening on the state bureaucracy and the fiscal pressure relief provided by improving revenues.

With these investments, New Jersey’s budget for FY 2005 is $26.3 billion, which is $1.7 billion higher than the adjusted budget for FY 2004.

As I indicated earlier, each budget to date has contained inescapable spending growth pressures, and the next fiscal year is no different. It is more than coincidental, and not surprising, that these cost increases virtually match the $1.7 billion differential between the FY 2004 adjusted and FY 2005 proposed budgets.

To those who suggest that New Jersey spend less in FY 2005, we respectfully direct your alternatives to the two available areas of the budget that can be cut – The 72.4 percent portion that goes back to New Jersey taxpayers in the form of grants and State aid, and the small slice of direct state services that this administration did not cut, such as increased resources for DYFS, the State Police, and our health and senior programs.

Let me now review major State revenues.

As I indicated earlier in my testimony, the Gross Income Tax has re-emerged as the driving force for New Jersey’s economy and New Jersey’s budget.

We predicted a 5.9 percent growth rate for the GIT for FY 2004. We now predict a 7.5 percent growth rate for the current fiscal year and 8.3 percent growth for FY 2005.

We continue to track an upward trend in employer withholdings, which is consistent with the other positive job and economic indicators for the New Jersey economy.

Those indicators include:

	The creation of 25,000 jobs in 2003, the highest job growth among all the northeastern states – combined;
	Ten consecutive months that the unemployment rate remained below the national rate;
	And, another record year in 2003 for new business filings in New Jersey.

This job and economic growth hasn’t happened by accident.

It is a direct reflection of Governor McGreevey’s policies to invest in the school and road capital programs, revamp of the Business Employment and Incentive program, turn brownfields into sites for economic development and stimulate jobs and economic growth in Camden, the Meadowlands and Atlantic City.

The New Jersey Sales tax is also outperforming original estimates for FY 2004, growing at a five percent pace, compared to the 3.9 percent rate anticipated last June. We anticipate that the Sales Tax will grow by 5.5 percent in FY 2005.

The Corporation Business Tax again performed well for New Jersey in FY 2004, with total collections expected to reach $2.2 billion. We anticipate that the CBT base will decline to approximately $2.1 billion in FY 2005. The growth of $145 million for this revenue source in FY 2005 reflects the continuation of the net operating loss suspension of approximately $275 million.

Mr. Chairman, there are some who argue that the revenues raised in this budget support a seven percent increase in appropriations in FY 2005 over FY 2004. We argue that the appropriations increase is actually only 4.4 percent when you take into consideration how we account for certain revenue sources that are part of the FY 04 budget but will not repeat in FY 2005.

Specifically, neither the diversion of $325 million in unemployment insurance funds we use for charity care and Medicaid expenses nor the $433 million in federal stimulus aid we use for nursing home expenses are accounted for as “on-line” budget spending in FY 2004. They fund expenses, however, that are real and growing in FY 2005. For the coming fiscal year, New Jersey will not receive the federal stimulus aid, and our UI diversion is limited to just $100 million. These two items alone require us to backfill $658 million in off-line budget spending with $658 million from different sources that are accounted for in the FY 05 budget as “on line.”

To meet the challenge of balancing the budget, offsetting the loss of hundreds of millions of dollars in federal aid, and avoiding an increase in the sales and income tax, we have proposed a series of targeted revenue enhancements.

These include:

	A 45-cent increase in the cigarette tax, dedicated to Charity care. The increase will raise $135 million in revenue. Future revenue from this increase will be securitized to provide additional budget relief for FY 2005;
	Changes to the Realty Transfer Fee, raising $70 million. The increase will not affect homes valued below $150,000;
	A $115 million package of funding related to charity care, with new assessments on ambulatory care facilities and outpatient visits, paid by the health insurer;
	A $199 million package of surcharges on pollution sources, including a new Petro-Chemical Environmental Impact Fee, increases in the Spill compensation fund and surcharges on the sale of new tires, hazardous waste disposal and on air toxic emissions;
	Prepayment of four years worth of registration fees on new car purchases, raising $90 million and sparing motorists the inconvenience of renewing their registration every year with the MVC;
	A $200 surcharge for the offense of “unsafe driving.” The surcharge, plus a separate increase in the existing surcharge for accumulating six points, will raise $50 million. Future revenue from these sources will be securitized to provide additional budget relief in FY 2005;
	A 1 percent assessment on home sales in excess of $1 million, paid by the purchaser;
	And, a $33 million cell tower assessment, to be paid by the wireless industry, dedicated to graduating two State trooper classes, purchasing 400 State Police vehicles, upgrading our e-911 system and protecting our nuclear facilities.

The revenues make it possible to manage the increased burden of mandatory spending, such as rising costs for health care, statutory growth of aid programs and debt service, while doing far more to fund our priorities.

It would be unrealistic to expect that everyone involved in the budget process would be in unanimous agreement with the revenue enhancements contained in this spending plan. If you disagree, we only ask that you identify an alterative funding source to replace the revenue you wish to take off the table. Or, if your alternative is to replace a revenue with a corresponding cut in spending, we would ask that you tell us where to cut so that we can maintain a balanced budget.

As I indicated at the beginning of my testimony, this is a budget that reflects both an administration’s funding priorities, and the state’s fiscal circumstances. Those circumstances are vastly improved over the last budget, with New Jersey on target to collect over a billion dollars more following two years of sacrifices and two years of sound investments by Governor McGreevey in job creation and business growth.

As we put ourselves on the right track, we are positioned to help more children attend pre-school and afford college.

As we turn the corner, we are better able to help New Jersey families who want to see their loved ones receive better health care.

The dividends we see now make it possible to train more New Jersey workers, provide seniors with affordable prescriptions, improve women’s access to mammograms and protect the most vulnerable among us – our elderly and our children.

As always, I want all members of the committee to know my policy is to keep my door open to you. I invite you to call my office and to come in for a visit so we can discuss any items in this budget. I am always receptive to your ideas.

I also wish at this time to recognize the many employees in the Office of Management and Budget and Treasury departments, as well as my fellow cabinet officials and their staffs for their tireless effort in getting this budget to you. Representing OMB are Director Charlene Holzbaur, Deputy Director Bob Peden, and Directors Gary Brune, Kathy Steepy and Jacki Stevens. Representing Treasury are Deputy Treasurer David Rousseau, Chief of Staff Caroline Ehrlich, Assistant Treasurer and Legislative Affairs Director Gerry Gibbs and Communications Director Tom Vincz.

I would be pleased to answer any of your questions.

Thank you.