TESTIMONY BEFORE THE
SENATE BUDGET AND
APPROPRIATIONS COMMITTEE
MAY 17, 2000
ROLAND M. MACHOLD
STATE TREASURER

GOOD MORNING CHAIRMAN LITTELL AND MEMBERS OF THE COMMITTEE.

JOINING ME TODAY ARE DEPUTY TREASURERS PETE LAWRANCE AND MAUREEN ADAMS, DIRECTOR OF OMB CHARLENE HOLZBAUR, DIRECTOR OF ADMINISTRATION CHUCK CHIANESE AND DIRECTOR OF REVENUE AND ECONOMIC ANALYSIS, DICK KALUZNY. IN ADDITION, MOST OF MY OTHER DIVISION DIRECTORS ARE ON HAND TO ANSWER ANY SPECIFIC QUESTIONS YOU MAY HAVE.

REVENUES
I WILL BEGIN MY TESTIMONY BY PRESENTING YOU WITH AN UPDATE OF THE STATE'S REVENUE PROJECTIONS. SINCE JANUARY, THE ECONOMY HAS IMPROVED. NATIONALLY, THE Y2K INFLUENCED FORECASTS PREDICTING A LULL IN BUSINESS CONDITIONS FAILED TO MATERIALIZE. BUSINESS INVESTMENT IS GROWING, CONSUMER DEMAND REMAINS STRONG, THE GLOBAL ECONOMY IS REVITALIZED AND CALENDAR YEAR 2000 IS EXPECTED TO BE AS STRONG AS 1999.

THE PERFORMANCE OF THE US ECONOMY BODES WELL FOR NEW JERSEY. IT IS INTERESTING TO NOTE, HOWEVER, THAT TWO OF OUR EXTERNAL FORECASTING SERVICES - WEFA AND RUTGERS - HAVE DIFFERING VIEWS ON NEW JERSEY'S FUTURE. WE ARE, IN TURN, TAKING A MIDDLE OF THE ROAD APPROACH IN OUR ESTIMATES.

WEFA IS VERY OPTIMISTIC ON NEW JERSEY'S CONTINUING ECONOMIC GROWTH FOR CALENDAR YEARS 2000 AND 2001, WHILE RUTGERS BELIEVES THAT A SHARP MODERATION WILL OCCUR BEGINNING THIS YEAR. WE BELIEVE THAT GROWTH IN NON-FARM EMPLOYMENT WILL REMAIN STRONG IN 2000 (1.5PERCENT), BUT SLIGHTLY LOWER THAN THE GROWTH IN 1999 (1.7 PERCENT).

WE AGAIN ADOPT THE MIDDLE ROAD IN OUR NON-FARM EMPLOYMENT GROWTH ESTIMATES FOR 2001. WEFA ESTIMATES 1.7 PERCENT; RUTGERS 0.7 PERCENT, AND TREASURY 1.3 PERCENT.

WE HAVE REVISED OUR ESTIMATES OF PERSONAL INCOME GROWTH UPWARDS FROM 5.8 PERCENT TO 6.2 PERCENT IN CALENDAR YEAR 1999, FROM 6.1 PERCENT TO 6.3 PERCENT IN CALENDAR YEAR 2000 AND FROM 5.2 PERCENT TO 5.9 PERCENT IN CALENDAR YEAR 2001.

THE INDIVIDUAL TAXES HAVE PRODUCED MIXED RESULTS. IN MARCH OF THIS YEAR, WE EXPECTED THE GROSS INCOME TAX TO GENERATE $7.035 BILLION, GROWING 11.2 PERCENT OVER FISCAL YEAR 1999, AND WE ESTIMATED THAT THIS REVENUE WOULD GROW BY 7.7 PERCENT IN FISCAL YEAR 2001 TO $7.58 BILLION.

AT THIS TIME, BASED UPON THE IMPROVED ECONOMIC OUTLOOK AND OUR COLLECTION EXPERIENCE TO DATE, WE ARE INCREASING OUR ESTIMATE FOR FISCAL YEAR 2000 REVENUES FROM THE GROSS INCOME TAX TO $7.156 BILLION, A 13.2% INCREASE OVER FISCAL YEAR 1999. IN FISCAL YEAR 2001, WE ESTIMATE GROWTH OF 8.1 PERCENT, TO $7.738 BILLION. THIS REPRESENTS A $279 MILLION INCREASE FROM OUR JANUARY ESTIMATES OVER THE TWO FISCAL YEARS.

WE ARE INCREASING OUR ESTIMATES FOR THE GROSS INCOME TAX IN FISCAL YEAR 2000 BECAUSE OF THE IMPROVED COLLECTION TRENDS IN THE LAST FIVE MONTHS. WE EXPECT WITHHOLDINGS TO GROW BY 15 PERCENT COMPARED TO THE 10 PERCENT WE EXPECTED IN JANUARY. IN ADDITION, ESTIMATED PAYMENTS ARE UP 22 PERCENT VERSUS 15 PERCENT, AND FINAL PAYMENTS FOR CALENDAR YEAR 1999 ARE UP 23 PERCENT VERSUS 15 PERCENT.

IN FISCAL YEAR 2001, THE REVISED EXPECTATION FOR STRONG WAGE AND PERSONAL INCOME GROWTH IN CALENDAR YEAR 2000 AND 2001 WILL LEAD TO CONTINUED REVENUE GROWTH.

LOTTERY REVENUE, WHICH BENEFITED FROM THE RECENT TREMENDOUS ROLLOVER OF THE BIG GAME, HAS PERFORMED $7 MILLION ABOVE ORIGINAL PROJECTIONS. WE, HOWEVER, CONSIDER THIS A ONE-TIME OCCURRENCE. THE CASINO REVENUE FUND HAS BEEN REVISED UPWARD BY $5 MILLION FOR OVER THE NEXT TWO YEARS BASED ON UPWARD REVISIONS FROM THE CASINO CONTROL COMMISSION.

WHILE WE ARE OPTIMISTIC IN OUR ECONOMIC OUTLOOK, I MUST STRESS THAT SOME OF OUR TAXES HAVE NOT PERFORMED AS EXPECTED.

OUR ESTIMATE OF TOBACCO SETTLEMENT REVENUES IS OFF BY $22 MILLION, DUE TO LOWER THAN EXPECTED CONSUMPTION. NEW JERSEY, HOWEVER, HAS RECEIVED $9 MILLION IN INVESTMENT EARNINGS DUE TO DELAYS IN TOBACCO SETTLEMENT PAYMENTS. ENERGY TAXES ARE DOWN BY $234 MILLION, DUE TO CORPORATE RESTRUCTURING. BASED ON CURRENT COLLECTION PATTERNS, WE ARE REDUCING THE TRANSFER INHERITANCE TAX BY $75 MILLION.

IN SUMMARY, WE EXPECT FY 2000 REVENUES WILL BE $26.6 MILLION HIGHER THAN OUR FORECAST OF LAST JANUARY. FOR FY 2001, REVENUES ARE NOW FORECASTED TO TOTAL $21.065 BILLION. THIS IS AN INCREASE OF $138 MILLION OVER THE JANUARY BUDGET MESSAGE. AS A RESULT, THE COMBINED INCREASE IS $164 MILLION OVER BOTH FISCAL YEARS. AS YOU HEARD EARLIER FROM OLS, THEIR ESTIMATES ARE ALSO REVISED UPWARDS BY RELATIVELY SMALL AMOUNTS, AND WE HAVE NO SIGNIFICANT DIFFERENCES BETWEEN US.

EVEN RECOGNIZING THE INCREASED REVENUE ESTIMATES, IT IS IMPORTANT TO RAISE A NOTE OF CAUTION ABOUT ANY POTENTIAL IMPACT OF THE PENDING SCHOOL CONSTRUCTION AND TRANSPORTATION TRUST FUND BILLS ON THE FISCAL YEAR 2001 BUDGET.

DEPARTMENT OF THE TREASURY
I WILL NOW HIGHLIGHT SOME OF THE DEPARTMENT OF THE TREASURY'S ACCOMPLISHMENTS AND DISCUSS SOME AREAS IN WHICH I BELIEVE THERE IS PARTICULAR INTEREST.

AS YOU KNOW, TREASURY IS RESPONSIBLE FOR THE COLLECTION AND GENERATION OF MOST OF THE STATE REVENUE, WHICH SHOULD TOTAL $21.1 BILLION IN FISCAL YEAR 2001.

TREASURY IS ALSO RESPONSIBLE FOR MANAGING THE STATE'S OTHER ASSETS. FORTUNATELY, I HAVE VERY TALENTED COLLEAGUES TO ASSIST ME IN THIS AREA.

FINALLY, TREASURY PROVIDES A MULTITUDE OF STATEWIDE SUPPORT SERVICES. SINCE COMING ABOARD AS TREASURER, I HAVE A BETTER APPRECIATION OF THIS DEPARTMENT'S DIVERSITY, FROM PENSIONS TO TAXES TO PURCHASING AND CONSTRUCTION -- IT MAKES FOR A VERY BUSY DAY.

FOR FISCAL YEAR 2001, THE RECOMMENDED BUDGET FOR THE TREASURY DEPARTMENT IS $2.1 BILLION. OF THAT AMOUNT, THE LARGEST PORTION OF THE FUNDING, $754.6 MILLION, IS BUDGETED TO FUND NJ SAVER, HOMESTEAD REBATES, THE SENIOR PROPERTY TAX FREEZE AND THE SENIOR, DISABLED AND VETERANS PROPERTY TAX EXEMPTIONS.

OTHER COMPONENTS OF TREASURY'S BUDGET INCLUDE: $424 MILLION FOR G.O. DEBT SERVICE; $445 MILLION FOR STATE AID; AND $350 MILLION FOR TREASURY AND THE IN-BUT-NOT-OF AGENCIES.

TODAY'S FOCUS, OF COURSE, IS THE FUNDING FOR THE DEPARTMENT'S OPERATIONS. THIS FUNDING IS USED TO SUPPORT A VARIETY OF IMPORTANT PUBLIC SERVICES THAT I WILL HIGHLIGHT NOW.

CONTRACT COMPLIANCE
AS YOU KNOW, GOVERNOR WHITMAN IS DEDICATED TO AFFIRMATIVE ACTION, AND THAT COMMITMENT IS REFLECTED IN THE RECENT CHANGE TO THE OFFICE OF AFFIRMATIVE ACTION IN PUBLIC CONTRACTS.

THE OFFICE HAS BEEN UPGRADED TO A DIVISION, NOW NAMED THE DIVISION OF CONTRACT COMPLIANCE AND EQUAL EMPLOYMENT OPPORTUNITY IN PUBLIC CONTRACTS, SO WE CAN BETTER MONITOR AND ENFORCE EQUAL EMPLOYMENT OPPORTUNITIES IN NEW JERSEY.

THE DIVISION IS HEADED BY JEANNE VICTOR, FORMERLY FROM THE ATTORNEY GENERAL'S OFFICE, WHO ENSURES THAT THE 2,000 PUBLIC AGENCIES AND THE 20,000 VENDORS WHO DO BUSINESS WITH THEM, FACILITATE EMPLOYMENT OPPORTUNITIES TO MINORITIES AND FEMALES IN NEW JERSEY.

SINCE THIS CHANGE, THE DIVISION HAS WORKED TO ENHANCE ITS SERVICES BY CREATING A RAPPORT BETWEEN THE INDEPENDENT TRAINING SCHOOLS, THE PUBLIC WORKS CONTRACTORS AND THE UNIONS. THIS RAPPORT SHOULD HELP TO STRENGTHEN THE SKILLS AND OPPORTUNITIES OF THE INDIVIDUALS WHO WOULD LIKE TO PARTICIPATE IN PUBLIC WORKS CONSTRUCTION PROJECTS. THIS PROCESS WILL BE IMPLEMENTED IN THE NEAR FUTURE.

DIVISION OF INVESTMENT
AS YOU KNOW, I AM VERY INTERESTED IN THE DIVISION OF INVESTMENT - WHOSE PERFORMANCE HAS ACTUALLY IMPROVED SINCE MY DEPARTURE.

STEVE KORNRUMPF, DIRECTOR OF THE DIVISION, AND HIS STAFF DESERVE MENTION FOR THE HIGH RATES OF RETURN THEY HAVE MAINTAINED ON THE STATE'S INVESTMENTS.

FOR EXAMPLE, THE ANNUAL RATE OF RETURN ON THE STATE'S $83 BILLION PENSION FUND ASSETS WAS 20.5 PERCENT FOR CALENDAR YEAR 1999; 21.3 PERCENT FOR THE PAST FIVE YEARS; AND 14.5 PERCENT FOR THE PAST 10 YEARS. THE NEW JERSEY PENSION FUNDS RANK AS ONE OF THE TOP INVESTMENT PERFORMERS NATIONWIDE OF ALL THE STATE PENSION FUNDS.

OFFICE OF MANAGEMENT AND BUDGET
AS YOU KNOW, CHARLENE HOLZBAUR WAS APPOINTED AS THE DIRECTOR/COMPTROLLER FOR THE OFFICE OF MANAGEMENT AND BUDGET LAST YEAR. SHE HAS DONE AN OUTSTANDING JOB SINCE THAT TIME.

OMB AGAIN RECEIVED, FOR THE NINTH CONSECUTIVE YEAR, THE GOVERNMENT FINANCE OFFICERS ASSOCIATION'S DISTINGUISHED BUDGET PRESENTATION AWARD FOR THE FISCAL YEAR 2000 BUDGET. THE ASSOCIATION HAS ALSO RECOGNIZED OMB, FOR THE 6TH CONSECUTIVE YEAR, WITH A CERTIFICATE OF ACHIEVEMENT FOR EXCELLENCE IN FINANCIAL REPORTING FOR NEW JERSEY'S COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR 1998.

PENSIONS AND BENEFITS
AS YOU MAY HAVE HEARD, MARGE MCMAHON, WHO DIRECTED THE DIVISION OF PENSIONS AND BENEFITS FOR ALMOST 10 YEARS, RETIRED IN DECEMBER. SINCE THEN, TOM BRYAN HAS BEEN SERVING AS ACTING DIRECTOR AND I MUST ADD, HAS DONE AN EXCELLENT JOB.

IN THE PAST SEVERAL MONTHS, THE DIVISION HAS IMPLEMENTED STATUTORY CHANGES THAT HAVE BEEN MADE TO SEVERAL PENSION FUND SYSTEMS. THE REDUCTION IN EMPLOYEES PENSION CONTRIBUTIONS IN PERS, FROM 4.5 PERCENT TO 3 PERCENT, AND THE PASSAGE OF THE 20 AND OUT BILL IN PFRS HAVE REQUIRED A GREAT DEAL OF ADMINISTRATIVE ACTIVITY BY THE DIVISION.

I AM PLEASED TO REPORT THAT AS A RESULT OF THE REDUCTION IN EMPLOYEE PENSION CONTRIBUTIONS IN PERS, AND SOME OUTREACH ON OUR PART, PARTICIPATION IN THE STATE'S DEFERRED COMPENSATION PLAN ROSE BY MORE THAN 10 PERCENT LAST YEAR. ALSO, THE PLAN'S NET ASSETS INCREASED BY MORE THAN $223 MILLION, OR 29 PERCENT, TO OVER $983 MILLION.

THE DIVISION HAS ADDRESSED THE PENSION ABUSE PROBLEMS DETAILED IN THE SCI REPORT ISSUED OVER A YEAR AGO.

THE DIVISION HAS RESOLVED ALL OF THE PENSION ABUSE CASES MENTIONED IN THE REPORT, AND HAS RECOUPED SOME OF THE OVERPAYMENTS MADE TO THE PENSIONERS, OR IN SOME CASES HAS DETERMINED THAT THE LAW WAS NOT VIOLATED.

IN ADDITION, THE DIVISION MADE SOME IMPORTANT CHANGES TO THE PENSIONABLE SALARY RULES THAT SHOULD REDUCE FUTURE ABUSES TO THE RETIREMENT SYSTEMS.

PROPERTY MANAGEMENT AND CONSTRUCTION
AS YOU KNOW, THE PENDING CONSTRUCTION OF THE DIVISION OF REVENUE BUILDING WAS HALTED, DUE TO THE GOVERNOR'S DETERMINATION THAT THE DIVISION IS BETTER LOCATED IN THE CAPITAL CITY. AS A RESULT, PROPERTY MANAGEMENT AND CONSTRUCTION HAS BEEN LOOKING FOR AN ALTERNATE SITE WITHIN THE CITY OF TRENTON.

WHILE AN ALTERNATIVE SITE HAS NOT BEEN IDENTIFIED AS YET, THE DIVISION PLANS TO RELOCATE THE STATE POLICE TROOP C HEADQUARTERS ONTO THE REVENUE BUILDING SITE WHERE SITE INFRASTRUCTURE IMPROVEMENT HAD BEGUN.

ALTHOUGH THE COSTS ASSOCIATED WITH THE PROJECT ARE $10.2 MILLION, I ESTIMATE THAT THE NON-RECOVERABLE COSTS WILL BE IN THE AREA OF $1.3 MILLION.

PURCHASE AND PROPERTY
AS ALWAYS, LANA SIMS WORKS HARD TO ENSURE THE DIVISION OF PURCHASE AND PROPERTY CONTINUES TO IMPLEMENT STATE PROCUREMENT STATUTES IN A FAIR, RESPONSIBLE MANNER. SHE HAS ACCOMPLISHED MUCH IN THE PAST YEAR, MOST NOTABLY, ENSURING THAT THE DIVISION STAYS ON TOP OF TECHNOLOGY.

LANA HAS BROUGHT THE STATE'S PURCHASING INFORMATION ON-LINE. THE DIVISION'S WEBSITE PROVIDES AN EXCEPTIONAL AMOUNT OF INFORMATION THAT IS INTENDED TO FACILITATE AND INCREASE ACCESS TO THE STATE'S PROCUREMENT PROCESS. WITH APPROXIMATELY 4,000 VENDORS DOING BUSINESS WITH THE STATE, AND 1,500 LOCAL AGENCIES PIGGYBACKING ON THE STATE'S CONTRACTS, PROVIDING ONLINE INFORMATION WILL STREAMLINE THE PROCESS.

DIVISION OF REVENUE
I WOULD LIKE TO COMMEND PAT CHIACCHIO, DIVISION OF REVENUE DIRECTOR, AND HER STAFF FOR THE EXCELLENT JOB THEY DID THIS TAX SEASON. THE DIVISION OF REVENUE COLLECTED $1.1 BILLION IN GROSS INCOME TAXES FROM 2.9 MILLION TAXPAYERS DURING THIS TAX SEASON.

AS YOU KNOW, A MAJORITY OF THE REVENUE COLLECTED BY THE STATE WAS CONSOLIDATED INTO THIS DIVISION. AS A RESULT, THE DIVISION RECEIVES OVER 12 MILLION DOCUMENTS PER YEAR. THIS INCLUDES 3.3 MILLION INDIVIDUAL INCOME TAX RETURNS, 4.4 MILLION BUSINESS TAX FILINGS, 3.5 MILLION MOTOR VEHICLE LICENSES, REGISTRATIONS AND FINES AND VARIOUS OTHER DOCUMENTS. IN ADDITION, THE DIVISION WILL ALSO RECEIVE ANOTHER 200,000 PIECES OF MAIL FOR LICENSE RENEWALS FOR DEP AND CONSUMER AFFAIRS THIS YEAR.

THANKS TO TECHNOLOGY, WE HOPE TO REDUCE THE AMOUNT OF PAPER THE DIVISION RECEIVES. YOU MAY HAVE HEARD THAT THE DIVISION HAS PUT ITS BUSINESS REGISTRATION APPLICATION AND BUSINESS FORMATION SERVICE ONLINE. THIS SERVICE SHOULD IMPROVE EFFICIENCY, ACCURACY, AND RESPONSIVENESS AT THE DIVISION, AND, AT THE SAME TIME, PROVIDE THE USER WITH AN EASIER METHOD FOR FILING.

DIVISION OF TAXATION
BY NOW, HOMEOWNERS IN NEW JERSEY SHOULD HAVE RECEIVED THEIR 1999 NJ SAVER PROPERTY TAX REBATE APPLICATION. TO DATE, ABOUT 815,000 INDIVIDUALS HAVE FILED FOR THE REBATE, WITH 740,000 TELEFILING, 72,000 FILING BY INTERNET AND 2,500 FILING PAPER APPLICATIONS.

OF COURSE, THE DEADLINE FOR FILING DOES NOT END UNTIL JUNE 30TH, BUT I WOULD LIKE TO COMMEND TAXATION DIRECTOR BOB THOMPSON AND HIS STAFF FOR WORKING SO HARD BEHIND THE SCENES TO ENSURE THAT THE TECHNICAL PROBLEMS WE EXPERIENCED LAST YEAR DID NOT RESURFACE.

IN ADDITION, TREASURY IS WELL-SERVED BY SOME DIVISIONS I DID NOT MENTION IN MY TESTIMONY. I WOULD LIKE TO THANK CHUCK CHIANESE IN ADMINISTRATION, BOB MAHON IN LOCAL GOVERNMENT BUDGET REVIEW, GINNY HAINES IN LOTTERY, BOB RUSCIANO IN PROPERTY MANAGEMENT AND CONSTRUCTION AND JIM POOLE IN PUBLIC FINANCE FOR DOING A SUPERB JOB EVERYDAY.

CLOSING REMARKS
I WOULD LIKE TO TAKE THIS TIME TO AGAIN PRAISE THOSE WHO WORK IN TREASURY FOR THEIR PROFESSIONALISM AND DEDICATION. WHILE TREASURY'S DUTIES RUN THE GAMUT FROM TAXATION TO BUILDING AND CONSTRUCTION, I AM FORTUNATE TO HAVE COLLEAGUES WHO KNOW THEIR JOBS AND DO THEM WELL.

AT THIS TIME I WILL ANSWER ANY QUESTIONS YOU MAY HAVE. THANK YOU.