Office of the State Treasurer

State Treasurer John E. McCormac delivered the attached testimony today before the Assembly Budget Committee.

John E. McCormac
State Treasurer
Testimony before the
Assembly Budget Committee
Thursday, May 20, 2004

Mr. Chairman, distinguished members of the Assembly Budget Committee. Good morning.

As we approach the close of another fiscal year and make final preparations to open a new one, New Jersey remains positioned to achieve what could not be achieved in the previous two fiscal years – a complete year in which targeted revenues meet or exceed estimates and fully fund budgetary needs. I come to the committee not with anemic revenues and a long list of solutions, but with a balance sheet that charts the success of Governor McGreevey’s fiscal and economic policies.

We know that maintaining a balanced budget in today’s climate requires reasoned planning, vigilant oversight, and exhaustive scrutiny. I commend every member of this committee for the time and hard work you have invested in the FY 2005 budget process. Together, our efforts will soon yield the enactment of a balanced, fiscally responsible budget that meets the challenging and diverse needs of New Jersey citizens.

New Jersey’s bottom line revenue picture continues to closely mirror the positive economic trends that have materialized in many forms over the course of the last twelve to 18 months under the leadership of Governor McGreevey.

These indicators include a gain of 12, 900 jobs during the month of March, marking the highest employment level since December of 2000, and the creation of 54,200 jobs since March of 2003. New Jersey now has 4,012,500 jobs – the highest rate since the peak of December 2000, prior to the effects of the national recession, when the State had 4,025,300 jobs.

At 5.2 percent, New Jersey’s unemployment rate has been lower than the national rate for 11 months in a row.

Last year, New Jersey ranked fourth in the nation in job creation and recorded more new jobs that all northeastern states combined.

New Jersey is also clearly an inviting place for new businesses. 2002 was a record year for new business filings. Last year, a new record of 70,566 businesses registered to do business in New Jersey. And this year, we are again on a record-breaking pace, with 28,292 new business filings recorded in Treasury’s Division of Revenue through the end of April.

There are multiple factors behind the staying power of New Jersey’s economic rebound.

First, Governor McGreevey has telegraphed a clear and unmistakable message that New Jersey is making the right investments to invite and induce business investment. From an enhanced BEIP program, to new investments in worker training and retraining, capital programs for our roads, schools and ports; from new funding tools to help biotech companies grow, to more funding for cancer treatment and stem cell research; from increased commitments to pre-school and after-school programs, to new investments in scholarship programs and innovation zones, “New Jersey means business” is not just a slogan, it is an attitude.

Second, this administration has cultivated a good business and employment environment by sending the right message about its fiscal policy.

For three straights budgets, this administration has held the line on bureaucratic spending. For fiscal years 2003 and 2004, the budget for department operations was down, by 2.5 percent and 1.7 percent, respectively. For FY 2005, this spending would be down again absent the increased staff commitment to the Division of Youth and Family Services. Even with the $125 million increase for the child welfare initiative, total spending on state executive departments is up just 2.5 percent.

And while the budget that Governor McGreevey proposed for FY 2005 is higher than the two sub-inflation growth budgets from FY 2003 and 04, the appropriations reflect new commitments to property tax relief and to areas of need that have been neglected and deferred for the last two years. The total budget also illustrates the spending pressures brought to bear from mandatory costs in such areas as Medicaid and nursing home care.

Our budget’s exposure to mandatory cost risk is significant. The budget stress from school funding requirements, homeland security needs, health care and benefit cost increases and a growing list of imminent or potential liabilities, is staggering. We have worked to build New Jersey’s surplus to $400 million this year. We must continue to build this cushion to better insulate the budget from factors that can jolt it from its constitutional balance.

FY 2004 – Revenues

New Jersey’s Big Three revenues – the Income, Sales and Corporation Business taxes, ran consistently with or ahead of projections over the course of the current fiscal year.

It has been especially gratifying to see the Gross Income Tax maintain consistent growth through the year, as it is the key barometer and underpinning of New Jersey’s economy. When examining the numbers behind the numbers of the income tax, it is clear why the growth has been steady and strong – withholding payments have grown by 7.5 percent through the first 10 months of the fiscal year and 6 percent alone over the last two quarters. And after opening all the envelopes this spring from income tax collections, we are further encouraged by the evidence of growth in capital gains income, another sign of an economy on the move.

The Gross Income Tax is now growing at a more than a 10 percent rate, versus the 5.9 percent pace forecast at this time last year. We expect our total collections to reach $7.4 billion for the fiscal year, which is $315 million higher than originally projected in the Appropriations Act adopted last June and $205 million better than revised estimates from this past February.

We remain cautiously optimistic about the upward trend of Sales Tax. Sales Tax revenues have outperformed original 04 estimates by $115 million and revised estimates by $35 million. Collections have grown sharply in each of the last three quarters, 4.5 percent, 5.3 percent and 7.2 percent, and the trends favor continued strength. US consumer durable goods expenditures are forecast up 4.6 percent in 2004 compared to 3.3 percent in 2003. And, in its most recent report on New Jersey, the Federal Reserve tracked gains in house permits and other indicators, and forecasts positive growth over the next three quarters.

The Corporation Business Tax has been revised upward to $2.5 billion in collections for FY 2004. The CBT performance wholly debunks the arguments from naysayers that our reforms would trigger a mass exodus of businesses and jobs from New Jersey. The evidence documents that nothing could be further from the truth

Strong economic performance has yielded $24.9 billion in total revenues for FY 2004, which is about $511 million above the target of $24.4 billon as revised in February. The increased revenues make it possible to build the ending FY 04 surplus from $400 million to $800 million and still address a list of approximately $156 million in supplemental spending needs for the current fiscal year.

Some of these supplemental spending needs include:

• A $41 million appropriation for New Jersey higher education institutions. As you will recall, the FY 2003 budget contained reduced support for New Jersey colleges, and delayed the final $41 million payment. This supplemental funds that delayed payment this fiscal year.

• Also notable on the supplemental list is a $23.3 million disbursement of CBT revenue to constitutionally dedicated funds.

With these supplemental appropriations, we anticipate total spending for FY 2004 will be approximately $24.7 billion.

At this time, I would like to discuss FY 2005 revenues

FY 2005 – Total revenue

New Jersey’s improving economy means that the unemployed are finding work, employees are receiving better compensation, consumers are spending more, new businesses are starting and existing businesses are doing well.
This all translates to revenue growth for the Big Three Taxes – the Income, Sales and Corporation Business – which we have revised to come in 2.2 percent above original estimates for next fiscal year. Total revenues have been revised upward from $26.25 billion to $26.43 billion, an increase of $181 million over the February estimates.

FY 2005 – The Income Tax

It will have taken four hard and painful years, but we now expect the income tax to reach the level of collections recorded in FY 2001. During that year, New Jersey collected $7.9 billion from its number one revenue source on the strength of job creation and capital gains performance. The Gross Income Tax, however, tumbled with the rest of the economy in the ensuing months, to $6.7 billion in FY 2003, the lowest total since 1999.

As I alluded to in testimony on FY 2004 revenue, this tax has been the undisputed dividend of an economy driven and fortified by Governor McGreevey’s sound economic policies.

We anticipate collecting $8 billion in revenue from the Gross Income Tax in FY 2005, $182 million over revised estimates. Please keep in mind that this total does not include additional revenue from the proposed increased in the upper income tax brackets, as the Governors FAIR initiative is separate from this budget process.

I will also ask the committee to keep in mind that the projected $8 billion in income tax collections is approximately $1.3 billion more than what New Jersey received from the income tax in FY 2003. After recovering from the depths of the recession, we are expecting a return to healthy but more moderate growth increments in the income tax from year to year. In plainer terms, we are not expecting the income tax to grow by close to $1 billion every year, nor are we planning our future spending around such accelerated revenue growth.

FY 2005 – The Sales Tax

The Sales and Use Tax is perhaps the steadiest, most reliable and least volatile barometer of the economic activity that drives New Jersey’s budget.

We have raised Sales Tax estimates by $25 million over Governor McGreevey’s budget recommendation for FY 2005. This is a modest adjustment that follows a fiscal year in which virtually flat growth was forecast.

FY 2005 – The Corporation Business Tax

In February of this year, we revised CBT collections for FY 2004 to $2.25 billion, and have revised 04 collections again to $2.5 billion. For FY 2005, we are anticipating the same level of revenue from this source -- $2.5 billion.

The Surplus

While there have been significant upward adjustments of revenues in New Jersey’s spending plan, there has not been a corresponding increase assigned yet to the financial cushion that the State must draw upon for emergency and unexpected expenses.

As I stated earlier, this administration has built the surplus from nearly zero in FY 2002 to $400 million over the last two years. Despite this progress, the surplus is still too small. For a budget of this size, New Jersey would be far better off with a reserve fund of between 2 and 3 percent. I would add that rating agencies which make determinations on New Jersey’s credit look at a state’s surplus account closely.

As such, one of the top priorities of this administration is to use a significant portion of the increased revenues to continue the surplus rebuilding process. A safe surplus positions New Jersey to manage the sudden, volatile expenses that can come with homeland security, public health emergencies, extreme weather conditions, court mandates and other costly items that defy our revenue crystal ball.

Beyond the investment in surplus, the administration recommends $274 million in additional investments for New Jersey’s priorities, such as property tax relief, education, homeland security and quality of life improvements for our citizens. The spending items reflect the McGreevey Administration’s objective to return the rewards of our budget and economic policies to New Jersey citizens quickly and in a fiscally responsible manner.

The spending includes:

$32 million increase in municipal aid. Governor McGreevey’s budget already includes $1.76 billion in targeted municipal aid, including a $25 million increase in formula aid. As proposed, the Governor’s budget provides $8 million in grants to counties and municipalities for costs associated with the e-911 system. The budget also funds $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.

In an effort to help municipalities offset the growing and sudden costs associated with homeland security, the administration proposes a $32 million municipal fund for this purpose. This revenue provides an additional layer of public safety and another source of property tax relief. As with several other appropriations in the budget, this funding is necessary to help offset the absence of sufficient federal aid for top public priorities. Local governments around the country spend $70 million a week every time the Department of Homeland Security raises the country's alert level from yellow to orange. Couple this with the fact that there is a $7 billion logjam on federal first responder funding, and it is easy to understand why local budgets are in crisis.

Additional funding the Senior Property Tax Freeze. The Governor’s budget more than doubled the funding for the senior freeze program for FY 2005, which will allow 50,000 program applicants who did not receive a check last year to receive a check this year. By using about $20 million of the windfall from New Jersey’s improving economy in FY 2005, we will be able to provide checks this year to first time senior filers, rather than asking them to wait a year for their freeze benefit. This funding re-opens the program to all eligible seniors.

Increased community provider benefit -- Recognizing the importance of the community provider network that provides services on behalf of the State to many of the most vulnerable citizens we propose to increase the 1 percent cost-of living-adjustment in the Governor’s proposed budget for community providers to 2 percent. We are committed to working with the Legislature in an attempt to increase the COLA even further. This represents an additional cost to the budget of $22.5 million.

School Construction Expenses – New Jersey’s school construction program is moving forward at a faster and more successful pace. Market conditions and project readiness warranted additional bonding of $300 million this fiscal year, which will boost debt service payments for this program in the FY 2005 budget. An additional $31million in funding is required to meet the brisk demand for building new, state-of-the art schools in our communities.

Highlands – Consistent with the funding agreements and drinking water provisions necessary for the New Jersey Highlands preservation, the administration proposes $11.5 million in new funding.

Higher Education Enrollment – In order to address the higher education community’s concerns about New Jersey senior public colleges and universities experiencing higher enrollment trends, the administration proposes to offset these pressures through a $7 million special growth adjustment fund. Just as the Governor’s budget has created a special fund to help school districts experiencing accelerated enrollment growth, the administration recognizes that colleges receive no such compensation in their formula aid and need additional relief to manage enrollment-driven costs.

Lead Hazard Control Assistance Fund – Pursuant to a law authored by Senator Ron Rice, we are increasing a special fund to remediate the health dangers from lead hazards. The original budget contains $7 million for this purpose; we propose an additional $7 million for the special assistance fund.

Bayside Locking System – The administration recognizes imminent need for a new and modern locking system for the Bayside prison and recommends $6.9 million in capital investment for this purpose.

Criminal Pool Attorney increase – Pool attorney rates were increased this past fiscal year for attorneys litigating DYFS cases. We recommend $4.5 million in funding so that this rate increase can be extended to outside pool attorneys who are retained to supplement the caseload carried by public defenders.

These line items constitute the majority of approximately $274 million in additional funding requests for the FY 2005 budget. Absent from this list are priorities that I know that the administration and the Legislature share, such as an increased commitment to Charity Care. The administration shares your commitment to help keep New Jersey’s hospitals and health care system safe and secure. We have increased funding to our hospitals in the proposed budget to help better compensate them for the growing responsibility they assume for treating the uninsured. Chairman Greenwald, we recognize your leadership in this area and we are prepared to work with you and the Assembly on ways to better address these challenging needs.

Also absent from these recommendations is additional funding for drug courts, which help the State better address the core problems and victims of drug crimes. Again, we are prepared to work with the Legislature to address additional ways to support this program.

The additional spending for these priorities still leaves New Jersey with a surplus of $700 million for FY 2005. We urge this committee to recognize that this $700 million does not reflect additional school funding commitments to the Abbott districts. As a result of these constitutional and Supreme Court mandates, we face significant obligations in school funding. We understand that Commissioner Librera will make determinations on supplemental appropriations in the weeks ahead, so we urge the Legislature to keep this factor in mind as we move to close out the current and finalize the new fiscal year spending plan.

Mr. Chairman, I thank you for the opportunity to present an updated and upbeat revenue picture to the Legislature. The revenue growth is testament to the Governor’s economic policies, which have created more than 54,000 jobs in the last year, making New Jersey a national leader in job creation and business investment.

While the increased revenue is excellent news, we recognize the need to plan with due caution because the growth rate, although steady, is likely to level off in the months ahead. The adjustments we’re recommending address immediate and priority needs without over-projecting the revenue stream and committing it to higher, recurring spending. We know from experiences in the recent past that this fiscal policy can be a recipe for disaster.

Thank you for your time and attention. At this time, I welcome any questions from members of the committee.