early warning signs of local government distress: new jersey’s alternative to default and...
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EARLY WARNING SIGNS OF LOCAL GOVERNMENT DISTRESS: NEW JERSEY’S ALTERNATIVE TO DEFAULT AND BANKRUPTCY
Municipal Analysts Group of New York – January 8, 2014
Presented by
Thomas Neff, Director
New Jersey Division of Local Government Services
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Reason New Jersey Takes Active Role in Local Budgeting
There is diversity in local government budgeting competence: some excellent, vast majority acceptable, some… ehhhhhhhhh.
Bankruptcy/default impacts bad officials and innocent constituents, but other communities when investor confidence in region declines.
New Jersey recognizes need to protect innocents and others from bad actors.
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Role of the State of New Jersey: Four Main ComponentsUNLIKE OTHER STATES (CALIFORNIA, ETC)
1. Laws, LFB, DLGS and tradition maintain a system that make serious fiscal distress rare.
2. When serious distress rears its head, State system prevents bankruptcy or default.
3. NJ intervenes aggressively to restore stability.
4. State implements reforms to reduce local spending pressures in all communities.
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Maintain system that makes serious fiscal distress rare.1. DLGS licenses local staff involved in budgets (CFO, Clerk, Tax Collector) to ensure standards.
2. DOBI requires conservative investments
3. LFB requires balanced budgets with justified revenues and adequate appropriations for liabilities (debt service, pension obligations, etc.)
4. DLGS Enforces through State approving budgets prior to adoption (every year for outliers otherwise once every 3 years.)
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Maintain system that makes serious fiscal distress rare (cont’d.)5. Special controls on bonds: ban on borrowing for operating expenses in most cases or where useful life is < five years; when debt issued, must stay within certain limit, conform to standard maturity schedules, have down payment; LFB approval needed to exceed limit, odd maturities,
6. Qualified Bond Act – provides assurance.
7. Local Finance Board reviews all authority financings.
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Maintain system that makes serious fiscal distress rare (cont’d.)8. Disclosure, disclosure, and more disclosure.
Considerable disclosure in budget itself, including recent emphasis on structural challenges; “User-friendly budget” will make New Jersey leader in meaningful disclosure (pilot phase); Best Practices is form of disclosure.Proposed new audit standards will require emphasis on continuing disclosure requirements.
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Maintain system that makes serious fiscal distress rare (cont’d.)9. Continuing education requirements and guidance for professionals involved in budget process.Available training opportunities for budget officials through State and associations that must meet state standards;Regular guidance and notices issued by State to local finance officers and officials on issues as they arise;State shares and advances best practices; requiring local officials to implement them or lose aid.
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Prevent bankruptcy or default. Revenue assumptions and expenditure items are
very conservative. Not budgeting for debt obligations is not an option
under state law. Local governments can’t declare bankruptcy
without Local Finance Board; approval has never been granted and won’t be granted any time soon.
State routinely discourages municipalities from wasting money on bankruptcy advisers and would terminate such advisers upon state intervention.
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Intervene to restore financial stability to distressed areas. 1. When municipalities show early signs of distress (emergency appropriations, debt restructurings, unusual borrowings):Public scrutiny comes with approvals: stricter review of disclosure documents; public discussion of pressures.Limited state oversight with certain approvals (conditions on approvals might include restrictions, state-approval for hires, etc.)
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Intervene to restore financial stability to distressed areas (cont’d.) 2. When distress triggers requests for help, State budget allows funding for state grants (Transitional Aid) and loans with open-ended oversight powers.State personnel assigned as Fiscal Monitors.Bans on nonessential spending. Approval needed: hires, vendors, debt, raises, new programs, tax exemptions, etc.Municipality-specific conditions. 04/19/23 Division of Local Government Services 10
Intervene to restore financial stability to distressed areas (cont’d.) 3. Where distress is recognized but help is not voluntarily sought through aid requests:Director can set muni levy to meet expenses.Local Finance Board can assume virtually total control of municipalities. Local Finance Board can establish recovery plan (virtually no limitations on plan or right of appeal) for authorities.
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QUICK EXAMPLES
Camden (elements everywhere): restructure police, outsource collections, modernize fees, steel political spine, help with development.
Trenton: State hiring key personnel. Paterson: State required terminations, increase
in levy and sewer fees. Camden County Pollution Control Authority:
Threat of Recovery Plan. Newark: Threat of Supervision
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Active efforts by state to reduce spending pressures. 1. Decrease in defined pensions (no COLA).
2. Increase in public employee contributions for pensions and health benefits. (Increases just now hitting high points.)
3. Reforms to collective bargaining process, putting premium on cost restraints (impacts pensions).
4. Prohibitions against entering into health benefit plans more expensive than State Plan. 04/19/23 Division of Local Government Services 13
Active efforts by state to reduce spending pressures (cont’d.)
5. Continuing to push for civil service reforms to allow easier ability to enter into shared services that reduce employee costs.
6. Continuing to push for restrictions on accrued sick and vacation liabilities.
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Information in this presentation is general in nature and care should be taken to understand laws and regulations as they relate to particular circumstances.
www.nj.gov/dca/dlgs
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