|
 Mr.
Chairman. Distinguished members of the Senate Budget and Appropriations
Committee. Thank you for the opportunity to come before you to discuss
Governor Corzine's budget for FY 2007.
As
you know, Governor Corzine began his budget address by borrowing a line
from his predecessor about the condition of New Jersey's Finances. Governor
Codey said New Jersey "was pretty much broke." Governor Corzine
said Governor Codey "was pretty much right."
In
order to regain our path to fiscal solvency and responsibility, Governor
Corzine has espoused certain fundamental principals:
We
must stop spending more than we take in;
We
must stop borrowing to pay today's bills;
We
must rely much more heavily on spending cuts and savings than on new
revenues to balance our books;
We
must maximize federal revenues and reimbursements available to us;
We
must be smart in finding ways to mitigate the impact of these cuts to
protect the most vulnerable in our state.
And
finally, we must ensure that our fiscal policies encourage economic
growth in our communities and across our state.
Mr.
Chairman, while these principles are clearly reflected in this budget,
I will admit the math can be a little confusing. The budget contains
$2.5 billion in constrained growth and spending cuts. This budget eliminates
75 programs entirely. It also reduces appropriations below last year's
level for 130 programs, and reduces the rate of growth in FY 2007 for
approximately 30 programs.
Despite
these far reaching actions, total appropriations are still projected
to rise by more than nine percent, from $28 billion to $30.9 billion.
The growth in the proposed budget reflects the costs of various mandates,
contracts and the coming due of past deferrals. It is not a result of
large-scale spending initiatives launched by this administration.
When
spending reductions of the magnitude proposed in this budget exceed
the value of increased revenues, common sense suggests that overall
spending should be flat, if not lower, as compared to the current year's
budget. New Jersey's budget, however, defies this basic principle of
math.
The cost drivers in our spending plan are dramatic, the fiscal trap
doors are copious and the perils they pose to the State's fiscal solvency
are real and immediate. Absent our efforts to reign in the growth of
spending, New Jersey's budget was on a track to total close to $34 billion
in the next fiscal year. The simple fact is that many may object to
cuts in programs in this budget but without them, State spending would
be more than $2.5 billion higher in FY 2007.
The
challenges we face with the FY 2007 budget have been many years in the
making. Over the course of several administrations, the budget began
to stray away from the basic concept of matching recurring expenses
with recurring revenues. One-time infusions were incorporated into the
budget to help offset sudden cost increases or insufficient performance
of revenues.
In
the 1990s, the gimmicks ranged from changing the valuation methods of
our pension assets, to issuing a $2.8 billion pension bond. As pointed
out by the Benefits Review Task Force, the valuation change reduced
contributions to the pension system by hundreds of millions of dollars.
And, the pension bond used borrowed money, rather than General Fund
revenues, to make the pension system's unfunded liability disappear.
Well, the unfunded liability is back with a vengeance, topping more
than $12 billion today, and the debt service for the pension bond alone
will cost taxpayers about $180 million in the FY 2007 budget.
In
this decade, the structural shortfall was papered over in FY 2005 with
more than $2 billion in securitization bonds. The ripple effect of these
bonds is being felt for the first time this year, both in the form of
having to meet spending needs once supported by the revenue from the
bonds, and in the form of less General Fund revenue from cigarette taxes,
which now are dedicated to meeting bond holder obligations
At
some point in time, New Jersey's reliance on temporary, one-time solutions
evolved into an addiction. The addiction ultimately snowballed into
a structural imbalance. That imbalance today has become so acute, that
only structural and painful actions can steer New Jersey back on the
right path to fiscal responsibility.
Last
year the Legislature took a first step in that direction; this budget
proposes that we take a giant step down that path.
In
building his first state budget, Governor Corzine looked at the state's
finances with his eyes wide open. He saw a balance sheet undermined
by costs that were growing out of control, bills that had long been
deferred and fiscal resources that could not possibly rise to levels
needed to sustain the upward spiral of programmatic expenses.
We're
all familiar with the big, one-time revenue crutches:
Deferring
hundreds of millions of dollars in contributions to our pension system;
Diverting
hundreds of millions of dollars from the unemployment insurance fund
to pay for indigent care and Medicaid expenses;
Borrowing
tens of millions of dollars to pay out job creation grants for the states
business employment incentive program;
By
contrast:
This
budget appropriates $1.3 billion to meet obligations to the pension
system. This year's payment is larger than the combined General Fund
cash contributions to the system over the last nine years.
This
budget uses General Fund revenue to pay for charity care.
We're
going back to pay-as-you-go funding for the BEIP grants, directing about
$160 million from the general fund for this program in FY 07.
We're
slashing non-recurring revenues by more than 70 percent compared to
last year's level, from $1.8 billion to under $500 million.
Paying
our bills in this manner means that our bottom line will increase in
FY 2007. However, the appropriations amount is indicative of not more
base spending, but of a more transparent accounting of what we spend,
as well as a more straightforward connection between recurring expenses
and recurring resources.
Let
me touch briefly on the challenges we face with recurring expenses,
and explain how we are working to restrain this growth.
In
addition to the $1.1 billion increase in pension funding, benefit costs
continue to place major strains on state finances. Health care costs
for retired and active public employees are each rising above the $1
billion level in FY 2007.
To
help relieve the upward pressure of these costs, the FY 2007 budget
proposes several growth constraints, including a mandatory, 10 percent
premium share for unclassified, non-aligned employees, and mandatory
use of generics and mandatory use of mail order prescriptions for all
active state employees. These reforms will yield State budget savings
this year, and the savings will reoccur in succeeding fiscal years.
Medicaid
costs continue to place significant strains on the budget. But, again,
the FY 2007 fiscal plan seeks economies and efficiencies in order to
shave the growth of these expenses.
For
example, the budget proposes to achieve $145 million in pharmaceutical-related
savings through bulk purchasing options for both the Medicaid and the
State Health Benefits program.
Another
$17 million will be saved in Medicaid and the SHBP by changing the reimbursement
methodology for prescription drugs. And, our Medicaid costs will be
further controlled by asking for a $2 co-pay on prescription drugs in
fee for service and managed care plans, with a co-pay limit of $10 per
month. This initiative will yield $13 million in savings without placing
an undue burden on Medicaid participants.
The
budget also makes good on Governor Corzine's commitment to leverage
and maximize federal funding available for State administered programs.
The proposed hospital provider assessment of 5.5 percent will generate
a federal match of $215 million to be distributed to hospitals statewide,
and will target much deserved relief to hospitals with a higher than
average Medicaid client base.
We
recognize and respect that many hospitals object to the provider assessment.
There will be objections from various constituencies impacted by the
health care reforms we propose. However, in reality, there is simply
no way to reduce spending and leverage the resources available to us
without causing pain. In many respects, leaving hundreds of millions
of dollars in federal revenue on the table would be more painful and
more tragic to New Jersey. As articulated by Governor Corzine, we sought
ways to mitigate the impact of these actions to protect the most vulnerable,
while also being true to our constitutional responsibility for a balanced
budget.
Under
better circumstances, we would also devote far more resources to our
important aid programs, particularly those that provide much-needed
property tax relief. But, to those who would argue that this budget
is not responsive to State aid needs for property tax relief, we would
point their attention to the fact that this budget includes funding
for more than $15 billion in property tax relief. That's almost 50 percent
of total State spending dedicated to property tax relief. Of this amount,
$10.4 billion is in support of local school districts for FY 2007. This
represents an increase of approximately $1 billion over FY 2006.
With
a budget shortfall of approximately $4.5 billion, reductions and economies
represent only a partial solution to our structural problem.
Achieving
balance and regaining some solid fiscal footing moving forward requires
more sacrifice in the largest section of the budget -- the three-quarters
of our spending devoted to aid and grants.
As
such, we've recommended that our large formula aid programs, for both
school and municipal assistance, be funded in the aggregate at current-year
levels Aid to our senior public universities, county colleges and independent
colleges has been cut by 10 percent, and increases for fringe benefits,
estimated at $122 million will be absorbed by the public colleges.
The
belt is tightening around State government operations as well.
Total
Executive Branch operational spending on Direct State Services for FY
2007 is cut by $196.7 million, or 5.9 percent off a base of about $3.3
billion. It is important to note that Executive Branch operational spending
represents only about 10 percent of all State budget spending.
A
total of 1,000 positions will be eliminated government-wide. This reduction
will impact 1 out of every 15 employees who do not serve "at a
post" and will save the State approximately $67 million.
All
told, the growth constraints and programmatic cuts total about $2.5
billion, yet well short of erasing a total shortfall of $4.5 billion.
The
balance of the shortfall is largely made up through a series of revenue
enhancements, including a one penny increase in the State Sales Tax;
an extension of the Sales Tax to various services to keep pace with
modern changes; a 2.5 percent surcharge on the Corporation Business
Tax; and a 35 cent increase in the Cigarette Tax.
The
combination of cuts and revenue enhancements, while dramatic in size
and wide in scope, underscores the true message of this budget and this
approach to budgeting.
The
approach is simple -- we as a state have to pay the bills for the operations
of government.
There
is no reason to doubt our capability to do so, given the proper discipline,
and our revenues are proof positive that New Jersey's economy remains
diverse and healthy.
Let
me briefly discuss revenues.
We
project FY 2006 revenues to be $321 million, or 1.2 percent above targets.
This performance is due in large part to the Gross Income Tax, which
is revised upward to $10.6 billion, an increase of $250 million compared
to June 2005 certified revenue estimates. This represents an increase
of 11 percent rather than the 8.4 percent growth anticipated last June.
The
Corporation Business Tax is estimated to generate $2.8 billion in FY
2006, which is $403 million above original estimates of $2.4 billion.
The strength in the CBT and Gross income tax collections offset underperformance
of the sales tax, which is now estimated to generate $6.7 billion, or
2.5 percent under targets.
For
FY 2007 we anticipate continued healthy growth in our income tax. We
forecast the GIT to rise by 9.7 percent to $11.6 billion.
With
an increase and extension of the sales tax, we're forecasting a $1.7
billion increase from this revenue source, bringing total collections
in FY 2007 to $8.4 billion.
The
revenue forecast for the CBT is down by $282 million in FY 2007 to $2.5
billion. This decline takes into account the lost revenue due to the
resumption of the full net operating loss deductibility, the reduction
in the tax rate on S-Corporations from 1.33 percent to 0.67 percent
and the addition of a 2.5 percent surcharge.
Calibrating
these revenues to a more sound approach to spending is a prudent step.
It makes it possible to meet several key but modest policy objectives
of this administration.
One
of the Governor's top priorities, adding 10 percent to the property
tax rebate level from FY 2005, is one of the sacrifices of the budget.
The available fiscal resources make it only possible to increase last
year's rebate by 10 percent. This increase still means that the maximum
rebate for senior and disabled residents will rise to $1,320, while
the maximum rebates for non-seniors would increase to $385.
The
property tax burden carried by the state's low and moderate income seniors
will also be alleviated through the Senior property tax freeze program.
The FY 2007 budget provides for a $20.5 million increase in funding
for a program that last year provided property tax reimbursement checks
averaging more than $600 to152,000 senior households.
Tax
relief is coming in the form of a 100 percent refundable credit of income
taxes for the working poor. Governor Corzine's proposal will eliminate
the income tax burden on 414,000 households, and significantly reduce
the income tax on an additional 200,000 taxpayers.
The
Governor has also proposed key, realistically funded initiatives in
his budget to:
Help
low income families find affordable housing;
Assist
working families with after school care needs by doubling funding to
New Jersey After 3,
Combat
gang violence through the creation of a specialized law enforcement
unit in the Attorney General's Office;
Fight
hunger through new investments in food pantries statewide;
Expand
Kidcare coverage to 50,000 more children;
and
target new resources to helping families with special educational needs.
To
be clear, we cannot and will not shrink from our responsibility to begin
attacking the budget's structural deficit. This combination of strong
spending restraints and moderate but necessary revenues put us on the
path to fiscal stability and responsibility.
Mr.
Chairman, over these first 70 days, this administration has made an
honest effort to understand and remedy the fiscal ills surrounding this
budget. I have the highest respect for the experience of this committee
and the dedication you all have to the budget process. I welcome your
ideas and suggestions for finding less painful ways to cut and restrain
State spending.
Despite
the challenges posed by the State's financial difficulties, we have
taken steps to achieve the objectives of making sure the State no longer
spends more money than it takes in; minimizing impacts of budget cuts
on the most vulnerable New Jerseyans, and laying a foundation for strong
economic growth in the future.
I
would be happy to answer any questions you have on the budget at this
time.
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