CCSNJ Offers Testimony on FY2010 State Budget
Thursday, April 02, 2009

TESTIMONY BEFORE THE ASSEMBLY BUDGET COMMITTEE

FY 2010 STATE BUDGET

APRIL 2, 2009

Good morning, Chairman Greenwald and members of the Committee. My name is Kathleen Davis, and I’m Executive Vice President & COO of the Chamber of Commerce Southern New Jersey. We represent approximately 1,700 member companies that employ hundreds of thousands of people throughout the seven southern counties of New Jersey, Greater Philadelphia and northern Delaware.

This is the most challenging and sobering year for us in the business community. We are all feeling the effects of the recession. It is touching every one of our member companies, as well as our organization, and is forcing some tough decisions among employers. Zero salary increases, salary decreases, furloughs of days, weeks and even months, four day work weeks, and – a last resort – layoffs, are just some of the survival tactics in the private sector. We hear stories every day from our member companies – many of whom are small businesses – and their struggles to survive. Dozens of member companies have dropped their membership simply because they don’t have the money. They are hopeful that they will be able to come back in as a member in the second half of the year, or even next year.

Most troubling is the stark number of companies that have simply closed their doors. During 2008, nine of our member companies went out of business. So far, in just the first quarter of the year, eight member companies closed their doors. Another sign of the troubled economy is the Federal Reserve Bank of Philadelphia’s survey of our members. The fourth quarter 2008 survey results reported continued deterioration in business conditions and companies were less optimistic about future growth and expect further declines in activity and employment through the first half of 2009.

It is against this backdrop and the deep recession that we are analyzing this year’s budget with a much more critical eye as to its impact on business, especially the tax increases that will hit business at a time when they are in survival mode. And, there are three tax increases in this budget that will be imposed on the business!

The first is the expected increase needed to replenish the Unemployment Insurance Trust Fund – upwards of $90.00 per employee! That $4.7 billion in diversions are haunting us now. And, while $90 per employee may not sound like much, to an employer with 2,000 employees, it amounts to an additional $180,000. That money will now be tied up paying taxes rather than salaries and benefits of additional employees. We understand that next year, businesses will be facing another $2 billion tax increase to again replenish the UI fund, almost doubling the tax rate per employee.

Another tax increase in this year’s budget imposed on business is the extension of the 4 percent surcharge on the Corporation Business Tax that was due to expire this year, amounting to an additional $80 million bill to businesses.

And the third increase is one that may not sound like a business tax increase, but will certainly impact small businesses – that is the proposed increase on taxpayers who earn $500,000 or more. We respectfully recommend that the Committee pursue with the Division of Taxation some estimate of the percentage of these 44,000 taxpayers who are businesses.

Roughly 90 percent of businesses file taxes as individuals and therefore pay personal income taxes rather than corporate income taxes. Many of these taxpayers are likely small businesses – those incorporated as Limited Liability Companies, General Partnerships, Limited Liability Partnerships, and S Corporations.

It’s only been since fiscal year 2005 that the “half millionaire’s” income tax increase was implemented. I’m sure that the members of this Committee are familiar with the Rutgers Regional Report, “Where Have All the Dollars Gone? An Analysis of New Jersey Migration Patterns” published in October 2007. The report contained information that showed that the year following the half millionaire’s tax increase, a large number of New Jersey taxpayers filed their taxes from a different state. For the 2005 tax year, there were 28,900 more taxpayers who were filing their New Jersey taxes from a different state. The report states: “…the state’s ‘half-millionaire’s’ tax provides a powerful incentive to establish residence in lower income states, such as Florida (no income tax) and Pennsylvania (3.07 percent flat rate).”

While Governor Corzine and the Legislature have enacted some meaningful changes to State tax policies, we still struggle with the impacts of these policies. New Jersey’s tax policies have placed us at the bottom of the Tax Foundation’s 2009 State Business Tax Climate Index based upon the State’s third worst individual income tax, the tenth worst sales tax, eleventh worst corporate tax rate, and worst property tax. And, New Jersey also ranked last in the Small Business & Entrepreneurship Council’s Business Tax Index 2008. The State’s personal income tax rate at the time was 8.97 percent, the fourth highest in the country. If the proposed increase is adopted, we will be behind only California, whose tax rate is 10.3 percent.

This is a particularly perilous time to impose additional taxes on any business, but especially on small businesses. We believe that the need to increase income tax, UI tax, or extend the Corporation Business Tax can be at least partially offset. The Governor has made some tough choices in this budget in order to spread the pain. He has proposed a salary freeze and a furlough program for state employees. He has already implemented an employee furlough program for the remainder of this fiscal year. We recommend the governor implement a true salary freeze for state employees in FY 2010. That means no across the board increase, nor the annual step increase. We believe the step increases can represent millions of dollars more in savings.

Layoffs, hiring freezes, furloughs and attrition must be administered with flexibility and sensitivity. We know that there are lower wage workers in State Government and missing just one day of pay per month will be painful. We recommend that flexibility be built into the furlough program so that managers and others can absorb the furlough time of other employees, much like state employees can now donate their unused sick time to other workers.

We are also recommending the state pursue measures to ensure that the state labor force is deployed in the most efficient manner. In this economic emergency, programs that serve the residents of this state need to take precedence. Unemployment, welfare, food stamps and other programs designed to provide financial and other assistance to the general public – that is, taxpayers – are needed now more than ever. For example, we understand that the state hired 100 people help handle the overwhelming work load of those filing for unemployment benefits. We believe that hiring 100 people could have been avoided there been an easy process in place to temporarily reassign underutilized employees in other state departments to fill those new slots.

Further, there needs to be an assessment of the number of unfilled federally funded positions, including identifying and prioritizing those that need to be filled immediately, and do so with employees who are not being fully utilized in other departments. It just doesn’t make common or fiscal sense to not allow the easy movement of employees with the right skills into federally funded positions, or to fill an immediate need in other agencies, if that’s where they are needed! Making reasonable changes to the Civil Service System now through the adoption of an Executive Order is called for.

We are now at a crisis point where the excesses of the past are bearing down and demanding solutions and actions. The growth in the size of the state government workforce and the benefits afforded public employees at all levels of government has become seriously unsustainable. Our organization has sounded the alarm about the high cost of these benefits for many years and in the past five years we have issued nearly two dozen recommendations to reduce employee related expenses. Employee benefit costs for the State have increased by more than 100% since 2002, totaling about $4.3 billion in the FY10 budget. They would have reached $5 billion were it not for the proposed reduction in the contribution to pension debt service, which is just putting off the inevitable. That $5 billion represents a two and one half times increase since 2002. The time is now for real reform.

In future budgets, taxpayers will begin to see the benefit of savings achieved by adoption of legislation that made changes to state employee benefits. Those changes include increasing the retirement age to 62; increasing the eligibility threshold for membership in the pension program to $7,500; capping the defined benefit salary limit; increasing the employee contribution to their pension by .5%; and imposing a mandatory defined contribution plan for elected and appointed officials.

But, much more needs to be done or we will continue to have to feed the ever growing need of pension and health benefits budgets. As was the case last year when small, incremental – but symbolically very important – changes were made to health and retirement benefits, we urge you to make more of them as part of the overall budget for 2010. Changing the retirement benefit calculation from n/55 to n/60 would yield tremendous savings at all levels of government. Changing pension benefit calculation based upon the five highest earning years – rather than the three highest, as is the case today – will also yield savings and bring fairness and reason to what are among the most generous benefits in the country. Finally, we support limiting enrollment in the State Health Benefits Plan to those who work a minimum of 35 hours per week. All of these changes can be made only for future employees in order to protect the benefits of current employees.

It was disturbing to read in the budget that 10,000 – 15,000 dependents of state employees are receiving benefits for which they are ineligible, representing $9 million in taxpayer dollars. It leads us to believe that there are other savings that can be realized through stronger oversight and by making further changes to state employee benefits. We believe that the 1.5% salary contribution toward health insurance costs should be changed to one tied to premium costs, the percentage increase of which probably outpaces salary increases. Changes to plans can also hold the line on costs for state government.

The State should explore innovative programs like Camden County’s Healthy Employees Consortium, which can yield significant savings in health benefits costs in the future. Camden County is partnering with the Center for Health Value Innovation, private employers, brokers and the healthcare community to collect and analyze employee medical, pharmaceutical, workers compensation and disability claims in Camden County with the goal of developing programs to control cost & improve health. Claims data will be analyzed to identify specific healthcare conditions that are driving healthcare costs within the employee populations of the consortium companies. The idea is to identify and manage disease patterns using all available data; develop benefit design changes to improve work and lifestyle behavior; change behaviors in order to affect long term outcomes; and finally reduce the financial and health risks that lead to a better quality of life, and reduce absenteeism and presenteeism.

We are heartened to know that this administration continues to pursue reductions in the state’s operating expenses. Many of the reductions are related to recommendations made by our Board Council on Responsible Government Spending. The Governor notes $40 million target in savings by adopting management efficiencies in the 2010 budget. The state has saved significant dollars by adopting best business practices in the areas of procurement, fleet management, space utilization, information technology and energy. We applaud the administration’s efforts to pursue further savings opportunities in food purchasing, courier and mail services, hardware maintenance, and consolidating printing. We are proud to have played a role in sharing best business practices with the Department of Treasury, which is adopting some of our recommendations in order to yield savings. But again, more needs to be done and we believe can be, with strong leadership from the Governor, his cabinet and senior level individuals in the Executive Branch.

Lastly, the federal Fiscal Stabilization funds can make a difference in jump starting the economy by funding projects that are “shovel ready.” We were pleased to see that the Governor established a team led by his chief of staff, Ed McBride, and the state’s comptroller, Matt Boxer, to oversee the stimulus spending. We have the utmost respect for these two leaders, and we are hopeful that the Governor will consider adding representation from the minority party to this team. A clear process for submitting projects for consideration for funding would be very helpful to the business community.

You certainly don’t have an easy task before you, and next year may be at least as difficult. We hope that this committee will consider our recommendations for saving taxpayer dollars. As always, we stand ready to assist in pursuing the recommendations of our Board Council on Responsible Spending and to offer private sector expertise and experience. Thank you for the opportunity to present the position and recommendations of the Chamber of Commerce Southern New Jersey.