Dear Mayor:

With the passage by the legislature and the impending signing of A1/S20, the State legislators and Governor Corzine have decided that municipalities, counties, and school districts cannot adequately manage their respective budgets. The new law, if enacted, will impose an artificial 4% cap on the tax levies from year to year. This tax levy cap will be in addition to the spending cap that has been in place for many years. Like the spending cap, the tax levy cap has some significant exclusions from the 4% limit on taxation increases. The most significant of these exclusions is the increase in the payments to the State of New Jersey for the various pension system obligations, increases in employee health care, and increases in debt service. In addition the law grants the Local Finance Board the authority to hear petitions for further exclusions for increases in energy costs, other insurance, and loss of non-recurring revenue. There is also an increase to the levy permissible for the local tax value of new ratables, again, similar to the spending cap.

The purpose of this alert is to bring to your attention a section of the law that may have a significant impact on your towns ability to manage this tax cap levy. Section 10 (B) (6) states that any anticipated DECREASE in debt service shall be deducted from the exclusions mentioned above, thereby decreasing the actual amount of the allowable tax levy increase. If the amount of debt service decrease is significant it may eradicate most or all of the exclusions that the legislature recognized as expenses that are basically out of local control.

This section is significant for many reasons:

1. There is no similar “penalty” in the spending cap legislation that we have been working with for years. Debt Service is simply excluded from whatever the index rate (now COLA) increase is determined to be. If the tax cap exclusions are modeled after the spending exclusions why is debt service treated differently?
   
   
2. For years, Mayors, administrators and finance officers alike have had to manage the inevitable increases in the labor force, product cost, employee benefits, and government imposed sanctions all while delivering the increases in services that the public demands and deserves. The ability to refinance and restructure debt within the framework of the bond law and market fluctuations has provided significant savings to municipalities and counties. The Local Finance Board recognizes the significance of this budgetary tool and they regularly grant their approval to such undertakings. The dollars saved can and have been funneled back into the budget to provide increased and better services or to simply offset the escalating costs of the services already provided. All this has been done within the framework of good fiscal and debt management.
   
   
3. The new law would now penalize government for these attempts by eliminating the ability to place debt service savings back into the budget for additional services or to offset other increases. With this one section of the new law the reasons for towns to do refinancing and restructuring of existing debt service is rendered moot.

A bond rating analyst has called the current changes and pressures weighing upon local government the “perfect storm”. Public demands for services, public demands for tax decreases, legislative pressure to provide both.  We have stated here before that the new law did not accomplish its original intention of a hard 4% cap, but at the same time it has severely tied the hands of local elected officials more so than ever.

The striking out of Section 10(B) (6) before it becomes law, while not a magic bullet, may provide some relief. At the very least it would eliminate the penalty for good fiscal management.

Since this legislation is presently awaiting action by the Governor, it is imperative that you contact him immediately at:

Honorable Jon Corzine
Governor, State of New Jersey
The State House, PO Box 001
Trenton, NJ 08625
Phone: (609) 292-6000   Fax: (609) 292-3454

If you have any questions, please contact Jon Moran, Sr. Legislative Analyst, at (609) 695-3481, ext. 121

Very truly yours,

                                                                        William G. Dressel, Jr.
                                                                        Executive Director