“Next year, we are going to have a real problem dealing with a lack of revenue,” said councilman Richard Dyas at the Sept. 8 Borough Council meeting.
Dyas spoke those words as part of a council discussion on the state of Metuchen’s finances, where he warned of the challenges Metuchen will face next year due to more than $300,000 in pension contributions the borough will have to pay to the state.
Looking ahead, the borough will need to identify sources of revenue, such as increasing taxes, encouraging business development, and/or making budget cuts. It also faces pressure from the state on the issue of consolidation of services with Edison and the county.
Five months after its formal introduction, the Borough Council last week formally adopted its $14.2 million 2009 municipal budget. The amount to be raised by local taxes is $9.3 million. Residents will see an increase in their tax bill of $82.83 per year for a household at the borough’s average assessed value of approximately $190,000, according to comments made by Mayor Thomas Vahalla at the meeting.
Dyas said that he believed the state had an “ulterior motive” for its rules governing how municipalities calculate their budgets, and that motive was consolidation.
“I do believe the state is still driving to have consolidation of municipalities,” Dyas said. “I think the 4 percent cap and all the things they are doing to us that we are reacting to is with that in mind. That is the difficulty of where we are, and I think that is the ulterior motive for all of it.”
Beginning with the 2008 municipal budget, the state capped the amount a municipality can raise via taxation from one year to the next at 4 percent in a bid to prevent major property tax hikes for New Jersey homeowners.
“I agree,” replied Borough Administrator William Boerth. “The state wants the borough of Metuchen to consolidate. Now, there is no rationale because the state has not proven that large municipalities are run better than small ones. A lot of our tax money goes to support large inefficient municipalities. But somehow, the governor and legislature over the years have determined that small municipalities are bad, that they should be gotten rid of and consolidation is the method for reducing property taxes. That is the mindset we have to deal with.”
According to Boerth, this tax money that goes to the large cities – Abbott districts – is income tax money which if distributed equally would provide more tax relief to suburban towns like Metuchen.
Until now the borough had been operating on a temporary 2009 budget. If instead of approving the budget the Borough Council had decided it was necessary to hold further budget hearings, it would not have been able to get tax bills out to residents in time to operate the government.
“If this budget is not adopted in its current form, there is a possibility we can run out of money, pure and simple,” said Boerth at the meeting. “We need to get the tax bills into peoples’ hands by Oct. 15 so we can have tax money to operate government by November. Anything that would require a re-introduction or hearing on this budget would require us to borrow money to operate, which I don’t recommend, or [we would have to] begin to shut government down.”
The fiscal situation that Metuchen faces going into next year can be explained as follows:
• Earlier this year, Metuchen chose to defer paying nearly $344,000 in pension contributions to the state in order to be eligible to receive extraordinary aid. This deferral also prevented the borough from having to make substantial cuts to its budget or lay off employees. The $344,000 total deferred pension contribution consisted of nearly $250,000 to the police and fire retirement system and more than $94,500 to the public employee retirement system. Municipalities like Metuchen that chose to participate in the deferral will pay this money, plus interest, to the state beginning in 2012 over a period of 15 years.
• In 2008, the borough had received $500,000 in extraordinary aid, but for 2009, the borough did not receive any.
• The borough now has to deal with the fact that it did not receive the extraordinary aid. Moreover, the pension deferral in 2009 was a one-time deal, and next year, barring any intervention by the state, Metuchen will resume making its pension contributions.
• Now, stay with this for the following, as it’s not as complicated as it looks. The state imposes on municipalities two types of limits, called caps, on the way they determine their municipal budgets.
1) The first type of limit is called a levy cap, which is a 4 percent cap on the year-over-year increase in property taxes the borough can assess. In other words, since in 2009 the amount to be raised by property taxes in Metuchen is $9.3 million, for the 2010 budget the borough can raise no more than approx. $9.3 million x 1.04 = $9,672,000 via taxation, an increase of $372,000. (There are certain other rules and exceptions to this, but for our purposes we will simplify things a little).
2) The second type of limit is called an appropriations cap, where “appropriations” are simply the total amount of money a municipality spends. This is capped at a 3.5 percent year-over-year increase in the amount of money the borough can spend. So, since for 2009 the borough’s appropriations were set at approximately $14.2 million, for 2010 the borough could spend no more than $14.2 million x 1.035 = $14,697,000, an increase of $497,000 in appropriations. (Again, there are other rules and exceptions too complicated to get into here).
• As a result, to completely take advantage of the appropriations (spending) cap, the borough would have to find $497,000 – $372,000 = $125,000 in additional revenue, if it really wanted to spend all the money that it is legally allowed to.
• However, the problem is, the borough will have to pay its pension obligation of more than $300,000 to the state next year. (Remember, the state allowed Metuchen to defer its 2009 pension payment, but it can’t do that again for 2010. Also, in the past, these pension payments have not always been a consistent requirement, so they can be a little difficult to precisely budget for). This money also falls within the levy cap.
• As a result, if Metuchen needs to raise taxes by around $300,000 to pay for the 2010 pension contribution, Metuchen could only raise taxes another $72,000 or so ($300,000+$72,000=$372,000) for any other needs whose costs have risen. After that point, if the borough still needs more money to run government and provide services, it will have to either find new sources of revenue, (difficult to do), such as ratables from businesses, or be forced to make budget cuts, which could even include layoffs.
The appropriations cap has never been a problem for Metuchen, but the levy cap is likely to be a concern in the future. Many towns took the deferral hoping that there would be some revision of the 4 percent levy cap for 2010, which may still occur.
“If the state would send us the funds they collect for us – so-called state aid – and not reduce them year after year, the 4 percent levy cap would not be a problem,” Boerth said after the meeting. “But probably most importantly, these issues are not just peculiar to Metuchen. Almost every other town faces similar problems – loss of so-called state aid, declining revenue, increased costs, increased state mandates, and the 4 percent cap.”
Of course, this is just a ballpark and rough estimate of how things look, but it gives you an idea as to the challenges faced by the borough of Metuchen for next year.
“We are a creature of the state,” said Dyas at last week’s council meeting. “The dirty little secret is that though there are 500 or so municipalities out here in New Jersey, we are all really governed by the state. We have all these rules and regulations, and we have to get our budget approved by the DCA. The state now comes by and says we are going to have a 4 percent cap on all our revenue. We didn’t make that rule, though we have to live by these rules. We have to understand where we go with them and how we as a municipality deal with them.”
Want to learn more? Please go here to read a great article on New Jersey’s dire pension problems.
