Good morning Chairman Greenwald and members of the Assembly Budget Committee. My name is Kathleen Davis, Executive Vice President & COO for the Chamber of Commerce Southern New Jersey. Our Chamber is the largest business organization in the region. We are the South Jersey business community’s voice in Trenton, and are proud to represent our 1,800 members, 85% of whom are small businesses with 50 or less employees.
Last week, I had the privilege of participating in this Committee’s business roundtable. It was a great opportunity to outline the state of our business climate, and to spell out the reasons why businesses in our State struggle; reasons that are peculiar to New Jersey. Though we do not discount the impact of the national recession on our region’s business community, there are challenges faced by our businesses that are not shared by their competitors in other states. Our State is ranked last in the The Small Business & Entrepreneurship Council’s 2006 Small Business Survival Index; 49th in the country in terms of our tax policies, according to the Tax Foundation’s index; and 48th worst in the country in the percentage of outbound moves, according to the American Legislative Exchange Council’s 2007 report. And let’s not forget the Rutgers Bloustein School of Planning and Public Policy shows empirically the economic and fiscal consequences of the pattern of outmigration our state has been experiencing from 2002 – 2006. In 2005 alone, our state lost $7.9 billion in adjusted gross income, which resulted in the State collecting $236 million less in Gross Income Taxes. These studies and statistics demonstrate the real impact that policy decisions and state budgets have upon our ability to compete with other states in attracting and retaining business.
Taxes figure heavily in a business’s ability to continue to operate in New Jersey, and in a business’s decision to locate here. State spending has a direct impact on taxes. We have watched the budget grow by nearly 40% since the FY 2004 budget, from $23 .7 billion to $32.97 proposed in the FY 09 budget. We commend the Governor for holding the line on spending in his proposed budget. We know there are painful cuts in this year’s budget; however, we believe that more can be done to cut state operating expenses that could offset some of the more painful cuts proposed in higher education, charity care funding, municipal aid and the many deserving programs in our state that truly help people.
As you may know, our Chamber has been a strong and consistent voice in calling on government to reduce spending in order to offset the need to increase taxes. But, we have been unique in our approach to doing something about it. Four years ago, we formed our Board Council on Responsible Government Spending to work cooperatively with our leaders to implement best business practices in order to reduce spending. Our Board Council on Responsible Government Spending has published two reports containing 77 recommendations that represent about $1 billion in savings in state government operations. We are getting ready to publish our third report that will focus on the efficient deployment of labor in State government, and specifically the practices dictated by the Civil Service system and contracts with state labor unions that serve as roadblocks to fully utilizing and developing a highly efficient and talented labor pool. Some of these practices limit the savings that would be possible by some of the proposals the Governor has made in this budget.
One of the actions that the Governor has proposed is to reduce the total number of state employees by a minimum or 3,000 through a combination of an Early Retirement Incentive (ERI) Program, attrition and targeted layoffs. While this is definitely a move in the right direction, ERIs and layoffs are fraught with hidden dangers and costs.
For the first time in the state employee contracts approved last July, any time the state lays off a covered employee, they will be put into a “Displaced Worker Pool,” or DWP. Workers who have been displaced either due to layoffs or closure of institutions, will remain employed by the State for up to four or even six months, and continue to receive their full salary, health and all other contractual benefits, as well as continuing to accrue seniority. The state is to use the workers from this pool to fill vacant or newly created positions. Clearly, the DWP was designed to discourage employee layoffs, as savings from layoffs would not be experienced for six months, when accounting for the 45 days advanced notice that must be provided. Benefits for the workers in the DWP may be extended another two months. We recommend that the legislature proceed with great caution and with eyes wide open when it comes to mass lay offs of state employees.
We also have grave reservations about early retirement incentives. Past experience shows that early retirement incentives cost money, they do not save money. We do not believe that there is any need to incent state employees to retire early, as there are plenty of incentives for state workers to do so today. Even though the Governor changed the retirement age to 60, employees can still retire at age 55 with only a 5% reduction in benefits. And, employees still enjoy a pension calculation based on their three highest earning years, and the n/55 formula, which when implemented several years ago increased pension costs at all levels of government by 9%, as well as free lifetime medical benefits if they have accumulated 25 years of service. As we have pointed out in the past, these rich benefits cost taxpayer dollars, and these taxpayers are supporting state employee benefits far richer than what they receive themselves.
Let’s take a look at what happened the last time there was an early retirement incentive offered to State employees. In 2002, Governor McGreevey offered an early retirement incentive program in order to reduce the State government workforce and more than 4,300 employees took advantage of that program. Between 2003 and 2006, the state government workforce grew by 8,110 employees, from 76,291 to 84,401 employees, an increase of 10.6%. All of those employees who retired were ultimately replaced; therefore, there were no savings realized, and we’re all still paying the tab for those 4,300 plus people who took the retirement in 2002.
Though Governor Corzine acknowledges that backfilling early retirement positions is a concern, past practice shows that this indeed does happen, and the end result is having more employees receiving costly retirement benefits, including free health insurance for them and their families. According to the Governor’s budget document, post retirement medical liability alone represents $58 billion in long term obligations, and when coupled with the $25 billion unfunded pension liability, represents almost three quarters of the state’s long term obligations. Those figures almost dwarf the $32 billion in long term debt that the Governor is trying to pay down in his debt restructuring plan.
We do not believe an early retirement incentive offering is called for. Further, one must proceed with caution on this issue because as of January 2007, 16,271 state employees will have 25 years of service; 10,494 have between 20 and 24 years of service. Every year, thousands of state government workers separate from state service. In 2006 alone, 6,037 employees left government service, including retirement and resignations. We believe a better, less costly way to reduce the state government workforce is through attrition. Setting a goal for total number of employees (that accomplishes the Governor’s 3,000 person reduction) is a better approach and one that does not contain the trappings of the increased costs of early retirement, funding employees who are not working for a period of four to six months, and would avoid the other disruptions of layoffs. We would be happy to share with the administration successful plans of how other governmental entities and the private sector have achieved workforce reductions through attrition.
Reducing the state workforce is definitely called for. Between 1998 and 2005, New Jersey’s ratio of FTE per 10,000 residents increased by 8.3%, while the national average increased just 1.8%. In 2005, New Jersey had 575 FTEs per 10,000 residents compared to the national average of 538 per 10,000. By contrast our neighboring states of Pennsylvania, Maryland and Delaware experienced FTE decreases in that time period, as did our economic competitors (North Carolina, South Carolina, Florida and Texas). Only one state in our region, New York, had a higher FTE rate than New Jersey.
These numbers matter, as employee benefit costs this year alone, including health benefits, post retirement medical, pension and debt service on pension accounts, and employer taxes are close to $5 billion – that’s 15% of the total state budget!
We recognize that the Governor did make some progress in last year’s contract negotiations, including employees contributing toward their health benefits for the first time, increasing employees’ contributions to their pensions, increasing the retirement age from 55 to 60, requiring newly appointed and elected officials to enroll in a defined contribution plan, and limiting the salary used in pension calculations to the maximum Social Security tax limit (which is $102,000 in 2008). However, only 3.2% of state workers in 2007 made in excess of $100,000; therefore, the savings from this change will be minimal at best. Further, while requiring state workers to contribute toward their health insurance premiums, doing so based upon salary will not help to continue to offset increases in health insurance premiums. Remember that these health insurance benefits are available to workers who work as little as 14.5 hours per week. For a state government worker making the average salary of $57,901, this amounts to $868.52 per year for medical benefits. This is in stark contrast to the private sector.
We know from research conducted to produce our second Board Council on Responsible Government Spending report, that private employer health insurance plans present a more balanced burden between the employer and the employee than is found in the public sector. All of the employers we surveyed required their employees to contribute toward the health insurance premium, versus requiring a contribution based upon percentage of salary. The minimum contribution toward the premium was 8 percent, and the largest was 54% for a family plan.
As an employee of a small business, the Chamber of Commerce Southern New Jersey, I pay $442 per month to insure my three person family. That amounts to $5,305 per year. You’ll have to excuse the fact that I, and many other taxpayers, do not believe that there has not been enough done on the state level to bring employee benefits more in line with the private sector.
The cost of employee benefits have driven the escalation in the state budget every year, accounting for nearly half of the so-called “mandatory” increases. It’s time to start making legislative changes to bring these costs under control, including changing n/55 to n/60; changing the retirement formula so that is based at least on the last ten years of earning; limiting health care benefits for part time employees, and no benefits for contract employees; as well as other changes to the pension system. It’s incredible that about one in eight New Jersey residents is enrolled in the State Health Benefits plan!
The Chamber of Commerce Southern New Jersey stands ready to continue to work with you and other state policymakers to reduce government spending by employing best business practices. We look forward to sharing with the members of this committee the recommendations contained in our third Board Council on Responsible Government Spending report.
Thank you for your time and consideration of our thoughts on the Fiscal Year 2009 State budget.
Tuesday, May 21, 2013
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