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April 1, 2010

RE: Request to Withdraw Budget Provision

Dear Mayor:

As you know, on March 18, the Division of Local Government Services (DLGS) issued Local Finance Notice 2010-08. That Notice includes the following.

  • Budget language regarding State aid distribution is being modified to reduce aid payments to those municipalities that use formula aid reductions as an add-on to the levy cap calculation.  In other words, any amount of state formula aid reduction used as a levy cap exception [N.J.S.A. 40A:4-45(b)(2), as shown on Line A-10 of the Levy Cap Calculation Workbook] will result in an offsetting decrease to CMPTRA/ETR formula aid payments.

We are writing to let you know that we have asked Governor Christie to direct DLGS to rescind this directive, and to withdraw the operative language from his budget proposal. We have also asked the Senate and Assembly Budget Committees to remove this language from the proposed budget, as soon as possible.
The Local Finance Notice is NOT based on current State law. It is based on a proposed provision in the Governor’s proposed State budget. DLGS has issued its operational guidance IN ANTICIPATION of Legislative acceptance of the proposed budget language. But beyond those procedural irregularities, it is, we believe, bad public policy.

This effort to penalize those municipalities who seek to take advantage of the levy cap exception of N.J.S.A. 40A:4-45(b)(2) will place in jeopardy in excess of $2 billion dollars of Corporate Business Taxes.  It would do so by activating the Energy Tax ‘poison pill’ provisions, which require the State to meet two tests each year. If those tests are not met, the State loses the power to collect the Energy Tax. First, the State must increase the total amount appropriated to all municipalities, through the Energy Tax, by the rate of inflation. Second, no municipality can receive less Energy Tax Property Tax Relief funding than it received in 2002.

The de facto repeal of Section 45(b)(2), by budget language, provides no benefit to the State.  Under the current statutory scheme, whether a municipality utilizes this legislatively provided exception does not add or subtract from the budget.  This provision will only prevent a municipality from passing on to its taxpayers the reductions in aid that the State will be providing. 

Further, this approach is entirely inconsistent with the spirit of P.L. 2007, c.62 which added the tax levy cap.  The legislative declarations accompanying that statute indicate, in pertinent part, that:

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k. The Joint Committee also found that the property tax is regressive in nature and that many low and middle income New Jerseyans suffer from a disproportionately high property tax burden;

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p. The Joint Committee found that property tax levy caps have been shown to hold down rising property taxes, and therefore, the Legislature should develop a property tax levy cap that accomplishes this goal but does not lead to unintended, adverse consequences (emphasis added);

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r. The Joint Committee also recommended that the levy cap should contain a narrowly crafted set of exceptions to provide flexibility during periods of rapid growth or local emergencies …. (emphasis added);

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bb.  The State recognizes that sustaining property tax reform at the local levels requires the State to be a full partner in the funding of local needs and that State aid must continue to grow so that the full burden of providing necessary services does not fall on property taxpayers.

One of the narrowly crafted exceptions provided for by the Legislature is the ability of municipalities to offset decreases in State formula aid.  The effort to supersede Section 45(b)(2) represents an attempt to repeal only one part of the statute imposing a levy cap on municipalities – one that the Legislature felt important enough to include in crafting those narrow exceptions that it enunciated.  A further effect of this de facto repeal is to lead to the type of unintended adverse consequences envisioned by the Legislature, forcing municipalities to either implement draconian service cuts or apply for the levy cap exemption anyway and face further cuts in State aid.  The net effect of the latter will be an ultimate reduction to zero of any formula aid for a municipality that seeks to avail itself of the legislatively provided exception of Section 45(b)(2). 

The reduction in formula aid, as a result of the above, to a level below that provided in 2002 appears inevitable for any municipality that seeks to employ this levy cap exception. We believe that a strong argument exists that once formula aid falls below the 2002 level, the provisions of N.J.S.A. 52:27D-441(b) and (c) (i.e., the “poison pill” provisions) will automatically be triggered.  The net effect of this will be the loss of more than $2 billion of Corporate Business tax revenue for this budget year.  This is a further reason for the Legislature to insure that the levy cap exception of N.J.S.A. 40A:4-45(b)(2) remains fully in place and available to all of New Jersey’s municipalities, without any penalty being imposed for its use.

Please contact your State Senator and Assembly Representatives on this. And, if you have any questions, contact Jon Moran at 609-695-3481, ext. 121 or jmoran@njslom.com.

Very truly yours,

 

William G. Dressel, Jr.
Executive Director

 

 

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