Office of the State Treasurer

Mr. Chairman, distinguished members of the Assembly Budget Committee, thank you for the privilege of appearing before you today to testify on the Governor's proposed $23.7 billion budget for fiscal year 2004.

Our state is in the grip of a national economic slowdown and uncertainty due to world events. New Jersey is one of 46 states facing a combined budget shortfall of $76 billion - the worst fiscal landscape, coast to coast, since World War II. Last year, we began applying the brakes on spending, so that appropriations could come in line with our revenues. In doing so, we took a giant step toward the goal of living within our means. With no major economic rebound yet in sight and little or no assistance from the federal government, it is clear that we must now go beyond just touching the brakes. We must slam on the brakes and bring all but essential spending to a halt. Our task is to change gears with regard to State spending policy and, in some cases, even throw budget policy in reverse. In doing so, we will firm up our grip on the wheel and lay the groundwork for long-term fiscal stability.

The State budget before you is more than a stand-alone fiscal document for FY 2004. The budget process itself has been an evolving exercise over a 15-month period of balancing New Jersey's books during these highly volatile fiscal times. The preparation of this proposal and the concurrent adjustments to the Fiscal 2003 budget included over a dozen times that my staff and I have combed through the entire State budget, department by department, division by division, agency by agency, and line by line in search of efficiencies.

The budget we present to the Legislature and to this Committee is balanced and responsible. It funds the core obligations and priorities of State government with no increase in sales, income or corporate taxes.

This budget cuts or defers spending for scores of programs, including many that the Governor, you and I support. As painful as this exercise in belt-tightening has been, it has allowed us to preserve funding for investments in children, property tax relief programs, and drug benefits for low-income seniors. And, our budget proposal preserves these core priorities while providing $94.8 million in spending on homeland security.

The journey to long-term fiscal stability begins with some very painful first steps. We first decided not to borrow and spend our way out of our problems. The Governor has also made it clear that we cannot tax our way out of them either, which is why he steadfastly rejects increases in the sales, income or corporate taxes. We have therefore crafted a budget that reduces spending growth by $3.4 billion, cuts State government operations by 4.4 percent, and comes in just 1.3 percent - roughly half the rate of inflation - above the budget adopted for FY 2003.

Despite considerable constraints, the Governor has made several notable strides that will improve the quality of life for New Jersey residents. He has proposed $2.5 billion in funding for highway and bridge repairs as well as improvements to our mass transit system. He has promised to fast track our school construction program, and 96 projects will be undertaken in fiscal 2004. By the end of next year, Governor McGreevey will have committed $4.2 billion to school construction.

The Governor's FY '04 budget provides $98 million for the acquisition of open space and calls for optimal use of the existing constitutional dedication in order to create an additional $100 million for open space preservation, especially in urban areas and the Highlands. This budget also devotes $18 million to the Cancer Institute of New Jersey for research toward a cure for cancer. Governor McGreevey has now provided this organization with $38 million to accomplish its goal.

Most importantly, this budget offers $20 million in new funding for the Division of Youth and Family Services. Of that total, $14 million will support operational improvements, and $6 million will allow DYFS employees to monitor at-risk children through a state-of-the-art computer system. Reevaluation of the State's vehicle fleet has further enabled us to deliver 160 additional cars to DYFS caseworkers.

We propose a balanced budget that allows us to set priorities in spending by making many tough choices. We have chosen to make property tax relief a top priority, but within the boundaries of our revenue stream and fiscal management strategies. The budget increases school aid and school construction aid by $200 million. It provides added resources for municipal governments and school districts to help support essential services. Unlike other states that are reducing or eliminating aid to local governments altogether, we have provided increases. No school district or municipality will see a reduction in funding in this budget, and the majority will receive an increase. In addition, the proposed hotel/motel tax will provide municipalities with the first significant additional State aid support in nearly 10 years.

Our resolve to help local governments and local property taxpayers is firm. We cannot, however, restrain the growth of local property taxes on our own. We need help from school boards and local governments. We've seen encouraging signs that localities are, like the State, holding the line on spending. They're making tough decisions, too, and the decisions are reflected in stable tax rates and flat or nearly flat spending. We recognize, however, that the austerity message has not reached enough stakeholders at the local level. Hiring practices by school officials, planning board decisions on new subdivisions, and town council votes on new appropriations all factor into the property tax rate, infinitely more so than State actions to maintain aid at level funding. When it comes to holding the line on property taxes, we must never ignore or underestimate the power of local accountability and decision-making. This power must be invoked universally to keep property taxes under control.

The aforementioned increases in school aid and DYFS funding, along with this budget's promise to protect children in all areas of human services funding, are a clear indication of Governor McGreevey's commitment to children and an investment in their future. This budget also provides for our most needy and vulnerable senior citizens. The proposed changes in the PAAD program are necessary to preserve and maintain funding for lower-income and fixed-income seniors. The changes will have a minimal impact on the participants in the program.

The program modifications we propose today will not remove any seniors from State-funded prescription drug benefits and they will make it possible to keep the program strong and open to eligible seniors for many years to come. In other words, today's sacrifices will yield tomorrow's payback in the form of fiscally healthy and secure programs for PAAD and Family Care.

We are funding our priorities without abandoning our commitment to government's core responsibilities. That's why this budget retains an average $500 SAVER check, with some rebates ranging above $800, for more than 900,000 New Jersey homeowners with incomes below $100,000.

Our budget will also provide the full Homestead rebate check of up to $775 to 1.6 million senior and disabled households and tenants.

These programs combined deliver almost $1 billion in rebate checks to more than 2.5 million households in New Jersey. It is a remarkable achievement to maintain this level of direct cash aid to property taxpayers at a time when the Property Tax Relief Fund - otherwise known as the Gross Income Tax revenue stream - continues to fall significantly below budgeted forecasts.

And we are doing more. We are continuing the expansion of the property tax deduction on the State Income Tax, which will now be worth $347 million to New Jersey property owners. This expansion is expected to cost us an additional $12 million in Fiscal 2004, but we are honoring it.

We are moving ahead with the final phase of the $83 million property-tax deduction for veterans and for their surviving spouses. This promised final phase requires an increase in spending of $13.3 million in Fiscal 2004.

The administration will also allow local governments to save $200 million in pension payments for police and firefighters. This action is needed to alleviate pressure that would have been placed on local property taxpayers due to increased payments stemming from previous legislative enactments.

When you combine the rebates, tax deductions, municipal aid, and school aid components, the budget provides more than $12 billion in direct and indirect property tax relief - more than half of the entire Fiscal 2004 budget proposal. Of every dollar budgeted, 51 cents goes to rebates, tax deductions and State aid.

We will fight to save these programs cooperatively with this Committee and with the full Assembly as we work through this difficult budget process. I believe that the Administration and the Legislature share the common goal of preserving property tax relief in even the most challenging fiscal times.

While we acknowledge that preservation is not possible without painful sacrifices, we ought to take a measure of pride in recognizing our joint success to date in preserving property tax relief.

When I appeared before the Legislature last year, some doubt lingered about the authenticity of the budget shortfall we were discussing. I think the intervening year has set aside any question that our predictions about declining revenue were very close to the mark.

Though projected totals fall within one percent of our own estimates, problems persist. Our revenues are generally flat this year, but would need to climb to $27.7 billion in order to fund mandated appropriations from automatic and programmed spending increases. We cannot afford that level of appropriations, and we cannot function legally or constitutionally with a $5 billion shortfall in Fiscal 2004. We can and must bring appropriations in line with revenues.

Let me review the major State revenues.

Of particular concern is the underperformance of the Gross Income Tax. In FY 2002, New Jersey actually collected $1.2 billion less in income tax revenue compared to actual collections for FY 2001. We are seeing some growth in the GIT in FY2003, but we have lowered our end-of year target from $7.3 billion to $7 billion. We conservatively forecast $7.5 billion in GIT collections for FY 2004. We expect that April collections will provide us with stronger indicators for this revenue's performance during the balance of FY 2003 as well as for FY 2004 and we monitor these on a daily basis.

As you know, New Jersey is especially sensitive to downturns on Wall Street. This is because of our large proportion of higher-income residents, our proximity to the financial markets and our heavy reliance on Income Tax revenue from options, bonuses, and capital gains income.
In the last three years, revenue from capital gains has fallen 65% from $1.17 billion to $395 million, and personal income tax revenue was down 13% last year.
On the positive side, Corporate Business Tax revenues have ended a 20-year pattern of free-fall. The $1.97 billion we project for FY 2003 is essentially on track for projected collections and, based on current information, we acknowledge the possibility that revenue could be even higher. We will carefully monitor this tax revenue over the next six weeks. While the number is slightly above our target for the year, we recognize that FY03 collections reflect some one-time accelerations that were intended to address last year's budget shortfall.

One is the acceleration of third-quarter estimated payments for large corporate taxpayers from September 2003 to June 2003, which puts five estimated payments into the FY 2003 budget.

The other is the one-time retroactivity of the CBT/AMA reforms, making the effective date January 1, 2002.

And during this fiscal year, we also asked business taxpayers to forward 25 percent of their 2002 estimated liability by December of 2002. We received a strong response from that speed up, collecting $429 million for the month, but we are cautious about what that level of collection means for the balance of the fiscal year.

All of these factors play a role in what Treasury estimates for FY 2004 collections. Volatility and economic conditions aside, we are comfortable with our estimate of $1.823 billion for FY 2004, which was the same target booked for the FY 2002 budget, when the Legislature passed the LLC/LLP loophole closure legislation.

We remain cautious about our expectations for the Sales Tax because of sluggish retail sales. We revised FY 03 sales tax collections downward by $172 million and expect little to modest growth in the sales tax for FY 2004, projecting $6.3 billion in total collections.

These Big Three revenue outcomes can support the balanced budget we present to you today. They cannot, however, sustain the growth of spending that was pre-programmed into the budget during the late 1990s and early 2000s when revenues were growing at an annual rate of 10 to 11 percent. That is why this administration comes to you with a budget that cuts deeply into programmatic spending and, even more importantly, suppresses the growth of future spending to ensure that we can maintain balance between incoming revenues and outgoing expenditures.

In simple terms, our revenues are stagnant, and we need a common-sense combination of spending cuts, spending deferrals, and revenue enhancements to hold our budget steady until our national economy and equity markets return to days of reasonable growth.

One of the largest hurdles we've had to overcome in the face of a $5 billion shortfall is the obligation to our pension system.

We take seriously our responsibility to maintain the health and security of the public employee pension system. Pensioners have a guarantee that benefits will never be compromised or jeopardized, and we treat that guarantee as ironclad.

In observing our obligation to the health of the pension system, we recognize the realities of today's pension economics.

The statutory changes that accompanied the 1997 Pension Bond Deal have allowed New Jersey to skip employer contributions to the pension fund for seven years. Now, due to poor market conditions that have brought down the value of our investments, that annual bill must be addressed again.

Fiscal 2004 presented us with the challenge of making a $750 million payment to our pension fund, in addition to scheduled debt service payments on those pension bonds that stand at $163 million now and increase rapidly.

Like any family confronted with an unexpected balloon payment on a debt obligation, we have elected to manage the pension contribution with a prudent and responsible installment approach. This includes use of assets that were set aside for State use in the Benefit Enhancement Fund to fund the on-going normal pension costs resulting from the "N/55" benefit enhancement that was enacted in 2001. Use of these assets now serves a similar purpose because, in addition to "N/55" normal costs, it is helping to fund the basic system normal cost. Our payment schedule for the next five years then assures a prudent and rational approach to re-instituting employer pension contributions during these difficult budget times.

Of course, none of these fiscal questions concerns the ability to make retirement benefit payments today. Our pension plans remain sound, and our employees, retirees, and beneficiaries need not be concerned about our ability to remit monthly pension checks. The only effect that the use of scheduled payments and the use of the Benefit Enhancement Fund will have is to protect the programs funded in the Fiscal 2004 budget.

This is admittedly a complicated solution but the alternatives are deceptively simple and even more painful. Managing the contribution is key to preserving funding for the priorities of investments in children, property tax relief, homeland security and services and programs for New Jersey's most vulnerable citizens. And by giving local governments the same phase-in on their employer contributions, we are protecting their budgets from sudden and drastic increases and providing additional property tax relief to New Jersey residents.

Our budget for Fiscal 2004 again depends on proceeds from the securitization of the revenue from the National Tobacco Settlement. We are counting on $1.3 billion from the sale of tobacco bonds as revenue. The bond sale was executed two months ago and the proceeds are in our accounts.

When we first decided to sell tobacco bonds last year, it was not our plan to use the combined total of $2.7 billion this quickly. We had intended to use tobacco bond proceeds in declining amounts over the course of three to four fiscal years. But we were left with no real choice. It would prove very difficult to make even more painful budgetary reductions while these proceeds sat idle in a bank account.

The Fiscal 2003 budget relied on $1.075 billion in tobacco proceeds. The bonds were sold last August, netting New Jersey $1.5 billion. Declining revenues and the failure of the federal government to deliver the funding from waivers to which New Jersey is entitled left us no choice but to draw down the remaining $413 million in unused bond proceeds from the August sale. We will use this $413 million to close a gap in the current budget and to ensure a sufficient surplus to protect our cash flow and try to preserve our credit rating.

Through the securitization of tobacco proceeds, we successfully shifted the risk of a decline or loss of this revenue stream from taxpayers to investors. We took New Jersey out of the tobacco business, and away from the fluctuations and perils of the cigarette manufacturing industry.

These risks became clearly evident two weeks ago when the U.S. Justice Department proceeded to the next step in its consumer fraud lawsuit against the major tobacco companies like Philip Morris. The federal government is seeking more than $280 billion in damages from the major cigarette companies, which prompted several to announce that such a loss would push them into bankruptcy.

While major, these solutions dig us only partway out of our deep fiscal difficulties confronting us today. Reliable, recurring revenues represent New Jersey's most promising hope to craft and maintain a balanced budget as mandated by the Constitution.

Our revenue proposals for real estate transactions, hotel room occupancies, casino gambling and cigarettes are small and carefully selected. These few increases allow us to maintain many existing programs and help provide the basis of Wall Street's decision to leave New Jersey's favorable credit ratings untouched. If these proposals are not enacted, additional spending cuts would be unavoidable, and, to date, no additional spending cuts have been suggested. Alternatively, new revenues would need to be generated in order to replace any that are not adopted. We judge that none of these enhancements will have a measurable negative economic impact.

Let me be clear that no fee increases -- however minor -- are desirable. They are, however, pieces of a comprehensive solution to the chronic fiscal problems that face this and future administrations and Legislatures. They are bitter medicine, but they are crucial, recurring elements to nursing New Jersey back to fiscal health and stability.

Our combination of solutions make it possible for New Jersey to reign in spending, control annual budget growth, fund core priorities, and preserve property tax relief. Moreover, our solutions allow us to achieve fiscal balance without resorting to raising the income, sales and corporate taxes.

n closing, I ask that you look at this budget as a total package. It is easy to focus on one specific item and espouse the virtues of that program and why it should not be reduced or eliminated. We vetted, debated and agonized over every single line item before presenting this document to the Legislature. If we look at the overall budget however, and examine where our priorities as a State should be, people might better understand the rationale behind our proposals.

We understand the importance of every program that was or is in this budget. However, as we moved through this process, it became clear that if we were going to make decisions to eliminate health care coverage for thousands of people in need that we had to take a harder look at programs such as arts, history, technology and business assistance. It is our hope and our goal that restorations for these programs will come swiftly as our economy improves and our fiscal controls take hold of the budget process.

I appreciate your attention and your patience. I thank you in advance for your fair consideration of our budget proposal for Fiscal 2004.

And, like last year, you should all know my policy is to keep my door open to all of you. I invite any of you to call my office and to come in for a visit so we can discuss any of these provisions in more detail. I am always receptive to your ideas. And I would be remiss if I did not recognize the many employees in the Office of Management and Budget and Treasury departments, as well as all State fiscal officers and my fellow cabinet officials for their tireless effort in getting this budget to you. Representing OMB are Director Charlene Holzbaur, Deputy Director Bob Peden, and Directors Bruce Perelli, Gary Brune, and Kathleen Steepy. Representing Treasury are Deputy Treasurer David Rousseau, Chief of Staff Caroline Ehrlich, Assistant Treasurer Carmen Armenti, Legislative Director Gerry Gibbs and Communications Director Tom Vincz, as well as many others in the audience. At this time, I would be pleased to answer any of your questions.

Thank you.