Office of the State Treasurer

Good morning Mr. Chairman and members of the Assembly Budget Committee. As always, it’s a pleasure for Deputy Treasurer O’Cleireacain and me to appear before the committee.

Exactly 101 days ago Governor Corzine came to the Legislature and introduced a budget for FY 2007. That budget was designed to address a FY 2007 shortfall of $4.3 billion.

That budget was shaped around several principles that we have reiterated before the committee and the public on many occasions since that time:

We need to have real and achievable recurring revenues that match recurring expenses;

We must stop spending more than we take in;

We must stop borrowing and using gimmicks to pay today’s bills;

We must promote job creation and business growth in our state; and

We must protect the most vulnerable in our state.

We accepted the challenge of crafting a budget proposal that puts us on the road to addressing our long-term structural fiscal imbalance.

vWe also recognized and welcomed the necessity of working in partnership with the Legislature to create a budget for New Jersey.

The Legislature and the administration have agreed to numerous changes to the spending plan introduced on March 21.

The hospital bed tax has been scrapped.

The administration has accepted a higher surcharge on the Corporate Business Tax.

We have agreed to a delay in the phase out of the Transitional Energy Facility Assessment.

We have agreed to the higher revenue estimates put forth by the Office of Legislative Services.

We have agreed with the legislative leadership that we cannot afford to fund our pension system at 70 percent and have agreed to further lower the level of our payment to 60 percent.

We have agreed to drop the tax on water.

These agreements reflect the administration’s willingness to accept ideas within the broader framework of an overall budget resolution that reflects our commitment to restoring long-term fiscal integrity.

Well before the budget was introduced 100 days ago, this administration began the budget process in earnest.

That process began with public dialogue.

Governor Corzine traveled throughout New Jersey, conducting town halls in Montclair, Long Branch and Glassboro. We held a full-day summit on the budget in New Brunswick. Incorporating feedback from those meetings, he introduced his proposed budget in March.

After his budget address, the Governor again resumed his public outreach, traveling to town halls in Mount Laurel in April, Hamilton Township in May, and Brick and Paterson in June.

Our message was a simple and sobering one, and it resonated with people as they were given straight talk about the depth of New Jersey’s fiscal problems.

The message was getting across on Main Street, and it certainly was well understood by the credit rating agencies and investors who buy our debt.

The country is into the fourth year of an economic expansion, yet New Jersey, because of its fiscal management, has a deficit -- virtually alone among the 50 states. The Wall Street Journal put it succinctly, albeit painfully this week when it opined:

And I quote:

“At least 40 states are in the black and only a handful, such as the Gulf states wrecked by Hurricane Katrina and perpetually hapless New Jersey, are still spilling red ink.”

Unquote.

We not only face a deficit for the 2007 fiscal year but, unless we change course right now, we face shortfalls in future budgets that will dwarf the 4 and a half billion dollar deficit we face today.

The math of our budget is unforgiving and the solutions require distasteful but necessary actions. Throughout the budget process we have held ourselves to the discipline of applying a multi-pronged test to spending cuts and new revenues to balance the budget – Is it realizable and achievable in the upcoming fiscal year? Is it sustainable in the succeeding fiscal year? Will it stifle economic growth? Is it fair?

That’s our obligation to the constitution and to the duties of our offices.

We have said repeatedly that we don’t pretend to have gotten it all right, but we crafted solutions within the parameters of our principles.

It was only reluctantly that the Governor, who proposed $2.5 billion in cuts and spending restraints, came to the conclusion that the budget gap could not be closed with spending cuts alone.

Then, and only then, did we recognize that we needed to put in front of the people of the state of New Jersey the need to raise revenues. The largest source for that is an increase in the sales tax by one penny. We took that need and brought it to the public for open debate.

At the same time – 101 days ago -- we asked for alternatives – alternatives that were fair, realizable and achievable.

Now we find ourselves with a number of proposals that are brought forward at a time in the process where they can’t get the public airing they deserve. These include one to create a new tax – a payroll tax – a tax on the wages of working New Jersey residents as a partial substitute for the sales tax.

We have concerns about how this payroll tax, which would raise the maximum TDI tax on employees from $129 per year to $475 per year, would burden middle class wage earners in New Jersey. This payroll tax disadvantages working in New Jersey, could promote commuting outside the state and be viewed as a deterrent to job creation in our state.

Simply put, it is a tax on work, not a tax on consumption. It appears to us as another tax on hard-earned earned income. And therefore, while this tax passes part of our test, it does not meet the fairness test. It is the wrong tax at the wrong time.

Another proposed alternative is an entirely new plan to extend the general sales tax to computer services and downloaded business software. We’re still unsure exactly how that tax would work.

What we do know is that a broad sales tax on computer services was in place in Pennsylvania from 1991 through 1997 and was abolished.

|We know that a tax on computer services was implemented at a 6 percent rate in Connecticut in the early 1990s and that rate was phased down to 1 percent by 2001. Connecticut collects a mere $10 million a year from the tax, far from the estimated $101 million in this new proposal. Their experience raises serious questions about this proposal.

In addition, this new tax targets the use of technology which we understand to be the prime source of efficiency gains that make New Jersey businesses more competitive.

We believe this is a difficult tax to enforce and collect and it is easy for businesses to legitimately avoid the tax by obtaining these services outside the state.

Experience has dictated that large companies operating across jurisdictions are successful in finding ways to avoid these taxes by doing this kind of work in other jurisdictions. The small business that’s located on Main Street in New Jersey has no way to avoid it.

We fully support the modernization of the sales tax and our proposals to accomplish that have been widely debated. Believe me; I’ve heard a lot of it. And while we fully support the goal of expanding the sales tax, it is unfair to do so without giving ample time to fully understand the implications or without giving those affected a chance to comment and be heard.

In sum, we’ve identified $613 million of revenue increases in the Assembly’s proposed budget that are entirely new, have not received a full public consideration or are based on numbers with which we cannot agree.

We are equally concerned about the reductions on the appropriations side of the Assembly’s budget proposal.

In order to introduce the budget in March, we had to identify $2.5 billion of reductions in expenses. We immediately initiated a process and turned to the painful task of reducing spending in some of our most important aid programs.

We have identified in the Assembly’s proposal $753.2 million of additional cuts. Of those cuts, we believe that fully $358.3 million of them are either not achievable and reliable or not sustainable, or fair. For example, we know there is great concern by members of this committee and others in the Assembly about the efficiency with which we have approached our responsibilities in child welfare.

Our commitment is to do the best job we can in protecting our children. Not giving Commissioner Kevin Ryan the resources that he feels he needs to protect our children does not pass our tests of fairness. If we fail to provide adequate resources to protect our children, we will once again find ourselves once again in a situation where the court hands us another mandate that dictates how we spend our money and requires us to spend more.

We are committed to finding ways to provide services to people more efficiently and cheaply, and our budget has made a commitment to do that by eliminating 1,000 positions. We have also set a goal for ourselves for achieving at least $50 million more in managerial efficiencies over the course of the year and, of course, we don’t intend to stop there.

We welcome specific suggestions on how to reduce expenses. On top of efficiency measures taken over the last year and already reflected in our budget, our $50 million goal is extraordinarily ambitious. However, now the Assembly asks us to find an additional $104 million in efficiencies. Just saying that we can make up savings of $104 does not pass our test of what is realizable and achievable in this fiscal year.

In addition to $358 million in cuts that we believe are not achievable, we have identified an additional $60.9 million in unavoidable spending in the next year. Those needs have not been addressed in the Assembly budget proposal. In May we also proposed an additional $21.4 million in proposed spending reductions, which have not been accepted by the Assembly. All told, we have identified $1 billion of differences. Some of those differences, like the proposed payroll tax, we disagree with as a policy matter.

Some, like the proposal to extend the sales tax on computer services, we disagree with because they have not received a fair hearing from the public. Some, as in the case of additional efficiencies that we don’t know how to achieve in government, don’t meet the test of being realizable and achievable in this fiscal year.

In total, the challenge facing us is close to $1 billion of difference across revenues and spending. Let me be clear.

When we analyze the Assembly budget proposal, we find there are $613 million in revenues that we feel are either unfair, unrealizable or can’t be done and $360 million in reductions that are either unrealizable or can’t be done, and the combination of those two means that we’re short about $1 billion, which roughly equals what we have proposed with the penny increase in the general sales tax.

If you look at this another way, we have reached agreement on $3.3 billion in solutions to a $4.3 billion problem. We’ll keep working with you toward a solution that is best for New Jersey.

Governor Corzine and we are committed to working with the Legislature to finding how to close that $1 billion gap in a way that meets our objective of achieving a structural balance in our budget and serving the long-term interests of the people of New Jersey.

I thank you for this invitation to appear before the committee. I welcome the opportunity to meet with you later in the day and work together on a balanced budget for FY 2007.