The Proposed 2.5% Cap on Property Taxes
The hot topic in Trenton these days is the proposed 2.5% cap on property taxes. There’s probably nothing more popular right now than the Governor’s cap proposal.
I know the burden property taxes have become. Every year I speak with seniors who cannot keep up. My own parents moved from their home in Cinnaminson afraid that taxes would rise so significantly they could not afford the house. Every family has cut back and worked to get through this recession. None of us enjoy it. But I am hesitant to support this proposal. My hesitancy to endorse the Governor’s proposal rests in the trouble I see down the road in providing basic services if such a drastic cap is effective before towns are given the power to control costs..
Remember the big change is not the reduction of the cap from the current 4% to 2.5%, but the difficulty lies in making the cap a “hard cap”. For years we have operated under a 4% cap but it is a “soft cap”. Over the years, the State has said health insurance costs, pension contributions and other big cost increases were outside the cap. This is why you have seen your property tax bill rise more than 4% in too many years. For example, some changes were made in the "cap" rules this year and those accounting changes cost Collingswood $200,000. The new “hard cap” proposal means all expenses count against your cap. So if health care increases 20% and pensions increase 20%, you can only increase revenues by 2.5%. That's where the problem lies: reducing personnel to fit within the cap is the only solution we have today.
Towns should first be given the ability to control personnel costs before we dramatically reduce revenues. You may recall the Governor has also proposed legislation to give towns a “toolkit” to give us the authority to control personnel costs. Most of these deal with giving towns the ability to negotiate public employee contracts that reflect current economic conditions. Part of the reason we’ve gotten where we are is that. even while we have lived under the current 4% cap on property taxes, the contract bargaining process, and the arbitration process that decides those disputes, has not been governed by the cap. Se we have ended up with arbitrators awarding contracts that significantly exceed the 4% cap in total compensation packages. Makes no sense but is a testament to the strength of the public employee lobby in Trenton.
Another example is pension reform. Collingswood’s pension contribution in 2005 was @ $150,000; in 2010, our pension contribution was @ $1.2 million. We have no control over this cost. We cannot opt out of the system; we cannot change the system. It is a defined-benefit plan – when almost every company in America has switched to a defined-contribution plan (401k). It needs to be closed now, with everyone frozen at their current benefit level. Even at that, there are likely big increases coming because Trenton took money out of the system over the years to plug budget gaps and lower our contributions during the stock market boom.
But Trenton will not give us the power to get out of the system. We have to stay in, pay the bill they send us, and be subject to the new cap. It would be fairer if the State pension bill was subject to the cap as well but it won’t be. The pension reform that has been adopted by Trenton is a start but does not help in any way. In Collingswood, these reforms affect 4 people in our 100 plus workforce. It makes for great Trenton speeches but is woefully inadequate in practice. In short, Trenton has cut our revenues, but has yet to deliver on giving us the ability to control our biggest costs.
Without any ability to control personnel costs – the largest part of our budget – we will have no choice but to eliminate staff. That’s where we’ve been the last few years. And while every business can use some streamlining (this year alone we have reduced our personnel costs 5.5% almost entirely by getting rid of people), a 2.5% hard cap, I fear, will mean drastic personnel cuts. And since, within most towns, the highest personnel costs wear police and fire uniforms, I am not excited about the prospects. I think the cap should be delayed for a few years, maybe graduated, while cost saving legislation is adopted and implemented. For example, our union contracts end this year, so we are barred from changing anything in 2010. For some towns, they are in union contracts for several more years: how can they implement any cost savings when they are bound to contracts? The only option is that unions may agree to reopen their contracts but that has not been very successful to date.
Second, I’ve been trying to read up on the Massachusetts model that the 2.5% cap is based on. Some articles suggest the times were a bit different. When the cap was instituted there, State aid was substantially increased. That certainly won’t be happening today. Towns in Massachusetts also have the ability to levy other taxes, like sales taxes, wage taxes or others. It seems there were other revenue sources to plug the gaps, at least for a transition period. So while their property taxes declined, what happened to the local wage and sales taxes?
I understand the reasoning that “it has to stop somewhere” and “every business and family has to live within its means”, but the local government business provides police and fire protection, collects trash and keeps the water and sewer services operating and I am concerned the political process in Trenton is not considering the impact on basic operations. My suggestions: Implement these drastic changes to cap rules over 3 years; make sure it doesn’t blow up all municipal operations.
But it looks like some changes in the cap will be coming: the Democratic Senate President has proposed his own 2.9% hard cap. So we’ll figure a way to deal with it. I hope it works without changing towns in a bad way. Be assured we will do all we can to maintain services without breaking the bank - as we have been trying to do every day.
Hope you are enjoying the summer!
I know the burden property taxes have become. Every year I speak with seniors who cannot keep up. My own parents moved from their home in Cinnaminson afraid that taxes would rise so significantly they could not afford the house. Every family has cut back and worked to get through this recession. None of us enjoy it. But I am hesitant to support this proposal. My hesitancy to endorse the Governor’s proposal rests in the trouble I see down the road in providing basic services if such a drastic cap is effective before towns are given the power to control costs..
Remember the big change is not the reduction of the cap from the current 4% to 2.5%, but the difficulty lies in making the cap a “hard cap”. For years we have operated under a 4% cap but it is a “soft cap”. Over the years, the State has said health insurance costs, pension contributions and other big cost increases were outside the cap. This is why you have seen your property tax bill rise more than 4% in too many years. For example, some changes were made in the "cap" rules this year and those accounting changes cost Collingswood $200,000. The new “hard cap” proposal means all expenses count against your cap. So if health care increases 20% and pensions increase 20%, you can only increase revenues by 2.5%. That's where the problem lies: reducing personnel to fit within the cap is the only solution we have today.
Towns should first be given the ability to control personnel costs before we dramatically reduce revenues. You may recall the Governor has also proposed legislation to give towns a “toolkit” to give us the authority to control personnel costs. Most of these deal with giving towns the ability to negotiate public employee contracts that reflect current economic conditions. Part of the reason we’ve gotten where we are is that. even while we have lived under the current 4% cap on property taxes, the contract bargaining process, and the arbitration process that decides those disputes, has not been governed by the cap. Se we have ended up with arbitrators awarding contracts that significantly exceed the 4% cap in total compensation packages. Makes no sense but is a testament to the strength of the public employee lobby in Trenton.
Another example is pension reform. Collingswood’s pension contribution in 2005 was @ $150,000; in 2010, our pension contribution was @ $1.2 million. We have no control over this cost. We cannot opt out of the system; we cannot change the system. It is a defined-benefit plan – when almost every company in America has switched to a defined-contribution plan (401k). It needs to be closed now, with everyone frozen at their current benefit level. Even at that, there are likely big increases coming because Trenton took money out of the system over the years to plug budget gaps and lower our contributions during the stock market boom.
But Trenton will not give us the power to get out of the system. We have to stay in, pay the bill they send us, and be subject to the new cap. It would be fairer if the State pension bill was subject to the cap as well but it won’t be. The pension reform that has been adopted by Trenton is a start but does not help in any way. In Collingswood, these reforms affect 4 people in our 100 plus workforce. It makes for great Trenton speeches but is woefully inadequate in practice. In short, Trenton has cut our revenues, but has yet to deliver on giving us the ability to control our biggest costs.
Without any ability to control personnel costs – the largest part of our budget – we will have no choice but to eliminate staff. That’s where we’ve been the last few years. And while every business can use some streamlining (this year alone we have reduced our personnel costs 5.5% almost entirely by getting rid of people), a 2.5% hard cap, I fear, will mean drastic personnel cuts. And since, within most towns, the highest personnel costs wear police and fire uniforms, I am not excited about the prospects. I think the cap should be delayed for a few years, maybe graduated, while cost saving legislation is adopted and implemented. For example, our union contracts end this year, so we are barred from changing anything in 2010. For some towns, they are in union contracts for several more years: how can they implement any cost savings when they are bound to contracts? The only option is that unions may agree to reopen their contracts but that has not been very successful to date.
Second, I’ve been trying to read up on the Massachusetts model that the 2.5% cap is based on. Some articles suggest the times were a bit different. When the cap was instituted there, State aid was substantially increased. That certainly won’t be happening today. Towns in Massachusetts also have the ability to levy other taxes, like sales taxes, wage taxes or others. It seems there were other revenue sources to plug the gaps, at least for a transition period. So while their property taxes declined, what happened to the local wage and sales taxes?
I understand the reasoning that “it has to stop somewhere” and “every business and family has to live within its means”, but the local government business provides police and fire protection, collects trash and keeps the water and sewer services operating and I am concerned the political process in Trenton is not considering the impact on basic operations. My suggestions: Implement these drastic changes to cap rules over 3 years; make sure it doesn’t blow up all municipal operations.
But it looks like some changes in the cap will be coming: the Democratic Senate President has proposed his own 2.9% hard cap. So we’ll figure a way to deal with it. I hope it works without changing towns in a bad way. Be assured we will do all we can to maintain services without breaking the bank - as we have been trying to do every day.
Hope you are enjoying the summer!
