I will protect your pensions. Nothing about your pension is going to change when I am governor. - Chris Christie, "An Open Letter to the Teachers of NJ" October, 2009

Monday, July 5, 2010

A Tale of Two Caps

I'm trying to wrap my head around this 2% cap deal, so I thought I'd play with some numbers and see what issues come up.

From what I read in the press (which, if you've read this blog, you know often can't be trusted) the 2% cap exempts health care, pension benefits, capital expenses, and emergencies.

But part of Christie's "toolkit" (clever term - he's "fixing" things, you see?) is a proposed 2.5% cap on employee salaries.

On it's face, there's a problem: you're letting salaries grow faster than taxes. Yes, because you are exempting the four items, there is a "gap" that allows for salaries and expenses to grow faster for a while. But at some point, the 2.0% growth in taxes won't be able to keep up with the 2.5% growth in salaries, and towns won't have enough money to meet their payrolls. So how much will the exemptions provide an offset? Because, if you can still raise taxes above the cap to meet health care costs, pension costs, etc., that will close some of the gap between the two caps, right?

Hmm... let's work this out with an example:

I'll pick a suburban district: New Providence, in Union County (no, I don't live or teach there, but I do know several staff members and students, and I'm impressed with both how well they do both academically and fiscally). It's a K-12 district with a non-regionalized high school, so all the property tax revenue comes from the same town and is spent on the kids in that town.

They also lost all their state aid last year. Keep this in mind as we work through the problem.

The district has kept up their Powerpoint for last year's budget presentation. The budget was defeated and the town cut another $200K, but the numbers should still serve our purposes. How does the $32 million dollar budget breakdown?

Salaries: 64.1% ($20,590,428)
Benefits (Health/Other): 14.6% ($4,685,570)
Operating/Other Expenses/Capital Outlay: 21.3% ($6,842,432)

Let's assume all of the benefits are exempt from the cap. Let's further be incredibly generous and give 1$ million toward capital expenses. That's around $26.5 million that will be subject to the cap.

Now, the local levy for the district is about $30.5 million. The Powerpoint obviously screws up the ratables for the town (somehow, I very much doubt it's $1 billion...), and we don't really know if or how those will be affected by the cap. But let's again be very generous and say $2.5 million of the local levy in this small town will not be subject to the cap.

So $29 million in revenue is now subject to a 2% cap.  And $26.5 million in expenses cannot be exempted.

Christie has been talking about 2.5% cap on employee salaries and benefits. Would that still be in place if benefits are exempt? One of the many details we are apparently not going to learn about until later, but let's again be very generous and say benefits are not subject to the 2.5% cap, but salaries are.

We're also going to put the increase in operating costs at 2.5% to roughly match CPI over the last decade. This is admittedly very crude. but, again, good enough for our discussion.

Given these very, very rough numbers, how long until New Providence runs out of local tax money to meet their payroll?

Not until Year 20; wow, seems far away. If I run this with a 3% expenses cap, NP can go until Year 11; 4%, until Year 6.

Some immediate thoughts:

- The 2.5% cap on expenses is probably unreasonable; CPI over the last decade is probably little higher, but energy costs are a greater percentage of a schools operating expenses than a consumer. Still, New Prov has close to a 4:1 ration of salaries to expenses, so it's really payroll that's going to drive their total budget.

- If you're a union negotiator sitting down to renew your contract, and you know your BOE can get away with paying a 4% raise for six years before the "cap gap" closes, why wouldn't you push for that if you could?

- Let's say you're one of these evil hypothetical BOE members you always hear about on NJ 101.5, and you're completely in the pocket of the union (hold on, this scenario is so laughable I've got tea coming out of my nose...), and you want to get the maximum amount out of the taxpayers. What incentive do you have to keep capital expenses or health care costs low?

In our example, right out of the gate, New Prov has a $2.5 million difference between the taxes subjected to a  2.0% cap and the expenses subjected to a 2.5% cap. They could take that money and apply it to the non-cap expenses... OR, they could spend it all on extra cappable expenses, tell the taxpayers they are still under the cap, and then raise taxes to cover all of their non-cap spending.

Would a budget like that pass? Hell, no, but our "evil" BOE will probably game things to get the maximum amount out of taxpayers to keep that gap as wide as possible. And isn't that what this is supposed to prevent?

- Which brings up this point: is the non-cap spending still subject to voter approval? I would assume so, but then...

- How will that vote be explained to the voters? "Well, we're asking for a 3.5% increase, but that's really under the 2% cap." How will that make any sense at the polls? Isn't the argument by the anti-school crowd (every town has them) going to be "It's over 2%! You can't separate out health costs!"? Even though you can?

- What incentive under this system does a BOE have to keep health costs and capital expenses low? If it's outside the cap, why not spend as much as you can? Unless, again, those expenses are part of the total budget that gets approved by the voters. But, again, isn't this going to be confusing?

- And finally - state aid. Every dollar in aid that comes to a district is almost certain, under this plan, to go to capped expenses - why spend it on non-cap stuff when you can still go to the taxpayers for the money without worrying about the cap? Which widens the gap between the caps. And if the 2.5% cap on salaries goes through, won't the district then put as much money as they can into operating expenses? Is that going to encourage efficiency?


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