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January 14, 2011

Re: DLGS Issues Guidance for CY 2011 Budgets

Dear Mayor:

The Division of Local Government Services has issued Local Finance Notice 2011-3 to provide direction and guidance on the application of the 2% cap.  This notice is the first of three notices to address the recently enacted 2% cap, preparation of CY 2011 budgets and CY 2011 levy cap referendum procedures. 

In addition to changing the four percent levy cap to two percent, the 2010 Cap Law eliminated the following cap provisions:

  • Levy cap waivers approved by Local Finance Board; staring with CY 2011 budgets there will be no Local Finance Board cap relief actions for any reason.
  • Automatic add-on to the levy cap base of state aid losses
  • Add-on for increases in the reserve for uncollected taxes
  • Cap levy reduction due to debt service reductions (“claw-back”)

Remaining unchanged and in effect are those waivers for certain individual municipalities previously approved by the Local Finance Board.

The 2010 Cap Law significantly changed the cap exclusion calculation.  There are several general exclusions: increases in debt service and capital expenditures; weather and other “declared” emergencies; pension contributions in excess of two percent; and health benefit cost increases in excess of 2 percent and limited by the increase in State Health Benefit rate increases (16.7 percent for CY 2011).    While some levy cap exclusions are treated as permanent add-ons, others will only be exclusions for the life of the specific appropriation.  Table 1 of the Notice lists each exclusion, its explanation, and treatment.

In addition to the general exclusions, the Division has determined that Shared Services recipients may exclude from their levy cap calculation increases passed on by the provider for the general exclusions described above.  In these cases, the provider must certify to their recipients the specific increases in service charges in their budget, the amount passed along to their recipients, who must budget the increases.   

The 2010 Cap does not permit increases in costs billed to local units from local authorities through service agreements (i.e., for solid waste or related services) or user fees (i.e., solid waste tipping fees) to be excluded from the levy cap.  The only exception to this will be payments required under a guarantee ordinance or deficiency agreement that is invoked by an authority, most likely though an emergency appropriation for debt service by the local unit. 

The 2010 Cap Law permits a municipality to hold a referendum to increase the levy above the 2% cap.  The law requires a 50 percent plus 1 vote for approval.   When needed by a municipality, levy cap referendum questions shall be combined with 1977 cap referendum questions in a single question.

To provide a consistent and cost effective statewide referendum process, municipal and county levy cap referendums will be held concurrently with school budget referendums.  This year’s school board election is scheduled for Wednesday, April 27.    Detailed guidance on the referendum process, including the form of the questions, will be issued soon. 

In the meantime, if a municipality is considering a referendum, the following elements should be considered:

  • A resolution will serve to trigger the referendum, not an ordinance.
  • Release of formula State aid allocations can be anticipated with the Governor’s budget address on February 22, 2011.
  • An introduced budget must include an estimated amount for the planned referendum, and there will be a single question for 1977 and 2010 levy caps
  • Budgets with a planned referendum and an estimated amount of excess levy must be introduced by March 7, with a final amount of the referendum amount to be set or a decision made to opt-out of the referendum by April 7.

At the same time a municipality proposes a budget with a referendum question, it should also consider and be prepared with budget solutions that can be implemented immediately if the referendum fails.  These plans may include layoffs, service reductions, or other actions to ensure levy cap compliance.  Keep in mind Transitional Aid requests must be made prior to budget introduction and there will be no additional discretionary aid programs available to municipalities for additional financial assistance if the referendum fails. 

The 2010 Levy Cap law also created provisions for levy cap banking, which will permit a local unit to reserve or “bank” any unused levy cap balance for up to three years, and use it as a permanent exclusion in any of those subsequent years.  The levy cap worksheet has been amended to calculate the levy cap bank.

Service Transfers have also been impacted by the 2010 Cap Law.  A service transfer occurs when one local unit transfers the responsibility and the cost of funding a service to another local unit or to a subordinate agency of the local unit, such as a utility or authority.  In these cases, the transferring local unit no longer has the responsibility of funding the cost of the service.

In these cases, there will be a levy cap base adjustment for both government entities, pro-rated as necessary for the period of time the transfer is in effect.  For the transferring local unit, the adjustment will be based on the prior year’s expenditure less offsetting revenues.  For the providing local unit, the adjustment will be the current year appropriation, less offsetting revenues the provider will receive.  Shared services are not considered transferred services and will not result in levy cap base adjustments

The Recycling Tax exception for amounts raised to pay the $3.00 per ton recycling tax still is in effect and the levy cap workbook provides an add-one for the amount budgeted each year for this purpose.  

In addition to the 2010 Cap, municipalities are still subject to the municipal appropriation cap, referred as the 1977 Cap.  The 1977 Cap Cost of Living Adjustment (COLA) rate for FY 2011 is two percent (2%), subject to the adoption of an ordinance for increase to 3.5% and banking.  See Local Finance Notice 2010-20 for specific details.  

In addition, all pension costs are subject to the 1977 cap, subject to the following adjustments:

    • For CY 2011, if the local unit did not defer a portion of its 2009 pension obligations the amounts budgeted for such obligations outside the cap in the prior year will be added to the Cap Base, prior to the application of the 2% limitation.
    • If the local unit deferred a portion of its 2009 payment, the increase in the CY 2010 pension obligations amount that is in excess of 3.5% of the CY 2009 100% pension obligations will be added to the CY 2011 cap base, prior to the application of the 2% limitation.

Finally, the 2010 Cap Law authorized the Director of Local Government Services to act as necessary to make levy cap interpretations on matters that were unseen when the law was adopted.  This authority will be used as necessary to ensure consistency with the statute.

It is expected that Transitional Aid Application will be made available in the near future, but only municipalities facing extreme distress (an inability to otherwise fund critical payroll or make debt service payments) will be eligible for funds and aid a condition of receiving aid will be to give up significant elements of self-governance.  An example of the Memorandum of Understanding that is required of recipients is online at www.state.nj.us/dca/lgs/lfns/11lfns/2011-3%20ta%20mou%20form.pdf.

The Division is currently finalizing the levy cap workbook. Information will continue to be forthcoming as soon as it is available and local units are asked to exercise patience as guidance is released over the next few weeks.  In the meantime, questions concerning unique circumstances can be emailed to the Division at dlgs@dca.state.nj.us.

Very truly yours,

 

William G. Dressel, Jr.
Executive Director

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