The statehouse in Trenton
By Michael G. McGuinness
Prior to the pandemic in mid-March, NAIOP NJ had planned to convene several experts to examine New Jersey’s fiscal challenges, controlling costs at the local level and pension and benefits reform. In the subsequent four months, our national GDP has plunged 33 percent and New Jersey’s unemployment rate is a startling 16.6 percent, as budgeted state and local revenues are hemorrhaging. COVID-19 has made matters far worse and the budgetary pains and economic slowdown will be significant and sustained under any scenario. Our state and local elected officials must now make difficult decisions that do not jeopardize our future. To help us better understand these issues, I consulted with noted fiscal expert Richard Keevey, former budget director and comptroller for New Jersey under two governors, and Mark Pfeiffer, senior policy fellow and assistant director with the Bloustein Center for Local Government Research at Rutgers University. Both have extensive experience with public policy and fiscal issues at the local, state and national levels. Following are their answers (starting with Mr. Keevey) to the questions I posed. (Note: answers have been edited for brevity).
Q: Given the severity of New Jersey’s financial crisis, what actions would you recommend?
A: The business of government cannot be business as usual; unfortunately, not all existing programs can be continued. I suggest the following:
- Eliminate all new and most expanded programs in the original budget totaling $1.1 billion, including increases for school aid.
- Immediately inform school districts that they should assume no increase of state aid from the previous year and develop contingency plans for a 10 percent cut.
- Defer all salary increases for the next 15 months and replace only critical positions.
- Eliminate all programs (in current year) that the governor put in reserve ($920 million).
- Eliminate the same programs in the next budget including Homestead Benefit and Senior Freeze.
- Initiate furlough program through Sept. 30, 2020 for employees not critical for direct state operations (excluding institutional care, police protection and certain staff for programs whose mission must be accomplished). Nonessential employees should be furloughed. The same needs to occur at local government levels.
- Include increases for Medicaid. Given the significant layoffs occurring in the general economy, more help with medical bills might be needed.
- Reduce significantly proposed pension contributions for FY 2021 ($4.6 billion proposed).
Q: What are your thoughts on the governor’s plan to borrow $10 billion?
A: The agreement between Gov. Phil Murphy and legislators to allow nearly $10 billion in emergency state borrowing is bad public policy with ruinous long-term consequences. It is a mistake to sell bonds to balance the FY 2021 budget. It is prohibited by the New Jersey State Constitution and will ruin the state’s finances for years. The good news is a four-person select committee of the Legislature must approve the sale before the governor can sell the bonds. The bad news is they might do so. The governor estimates an approximately $8 billion shortfall, although it may be less. This would be a one-time revenue source. What does the state do the following year — sell more bonds? Furthermore, this creates a “triple whammy,” since any federal aid will likely be one-time and debt service of at least $350 million will be annually required. Some argue that revenues and taxes will return to normal levels to cover these one-time items. This is not possible. After a much less disastrous 2007-2009 recession, it took New Jersey six years to return to prior revenue levels. Other difficult, but doable, options are available: relying on more federal assistance; deferring planned appropriations of $3.7 billion to the pension system for FY2021; leveraging or securitizing state-owned assets and transferring assets to pension fund; and some level of tax increases (likely sales and income). Better to bite the bullet now than to invite fiscal struggles for years thereafter.
The full text of Richard Keevey’s position and response to above questions are found here: Selling bonds to balance New Jersey’s budget is a big mistake and How to meet the financial challenges facing New Jersey.
Now let’s turn to the municipal level. For this portion, I posed questions to Mr. Pfeiffer, whose career spans 37 years in New Jersey local government administration as a municipal administrator in several municipalities and 26 years with the state Department of Community Affairs’ Division of Local Government Services.
Gov. Murphy recently stated that New Jersey schools face a $1 billion cut without federal aid. New Jersey has close to 600 school districts, which I find unacceptable and wasteful, given the high costs associated with the administrative and facility infrastructure. Senate President Steve Sweeney’s Path to Progress report calls for consolidation that could save over $1 billion and provide a better education for students.
Q: What kind of savings and benefits can be achieved with consolidation and how can we promote more of this?
A: With 590 local boards of education plus about 90 individual charter schools, there are arguably more school management organizations than we need. But there is also over 150 years of strong public support for local control of schools. There have been conflicting academic studies that looked at cost savings from consolidating districts, but consolidation must consider the impact on educational outcomes as well as cost. Informed expert analysis from the Path to Progress report concluded that a flexible approach, focused on merging non-K-12 districts into their receiving high school district to achieve improved academic outcomes and cost savings. However, estimating savings in advance reflects guesswork or a goal. Only an initial perhaps pilot effort, a bottom-up approach and informed data analysis will provide guidance for an expansive effort.
Many communities have been transformed through a developer’s collaboration with a town using PILOTs (payments in lieu of taxes) to incentivize long-term private-sector investment and achieve local goals (infrastructure improvements, site remediation and affordable housing), which benefit the community. Currently, this is the only incentive available for developers, as state incentive programs are all but nonexistent.
Q: How would you improve and reform the PILOT program and what’s your rationale?
A: Our PILOT program and redevelopment process is a remnant of New Jersey’s development patterns of the 1980s when getting new construction in cities was difficult. It survives because the development community and its professionals support elements evolved to adapt it to current needs. From a public policy perspective, it’s a square peg of policy stuffing itself into the round hole of market demand. We can do better. We should convene a comprehensive professional study to look at our current practices and make sound recommendations for redevelopment incentives that are necessary for the unique development markets that make up New Jersey in the 2020s. That may take some time.
In the meantime, we need to encourage smart stewardship of PILOT revenues. I like the idea of a municipality adopting a PILOT revenue plan outlining how funds from a given project will be spent. It should be done in consultation with its board(s) of education and its county government, requiring consensus between the governments. It also requires a dose of public participation, transparency and a dispute resolution process. There are a few variations on this theme to make it work. This approach will provide outcomes that are a better fit in today’s environment.
In closing, I would say that operating an effective government should always be guided by the core principles of being nimble and cost-effective in providing services to constituents efficiently, and continual reinvention and modernization of operations. This is how elected officials and public servants can be fiduciarily responsible in the same way that successful private-sector businesses serve their customers.
Michael McGuinness is CEO of NAIOP New Jersey and has led the commercial real estate development association since 1997. NAIOP represents developers, owners, asset managers and investors of commercial, industrial and mixed-use properties, with 830 members in New Jersey and over 19,000 members throughout North America.