Stuart Shapiro welcomes Marc Pfeiffer, the Executive Director of the Bloustein Local Government Research Center, to EJB Talks this week. Bloustein Local serves as an invaluable resource for New Jersey’s elected and appointed officials. They discuss the current critical work the center is doing, such as the impact of the digital economy on tax policy for local governments. Stuart and Marc also explore the increasing risk of cybersecurity threats and what local governments can to do be “technology fit” to lower their risk and ease their recovery when a problem occurs. Marc also talks about one of New Jersey’s long-standing conundrums; the consolidation of the multitudes of municipalities.

Stuart Shapiro
Welcome to EJB talks. I’m Stuart Shapiro, the Interim Dean of the Bloustein School, and the purpose of this podcast is to highlight the work my colleagues and our alumni in the fields of policy, planning, and health are doing to make the world the country and New Jersey a better place.

Today, we welcome Marc Pfeiffer, the Executive Director of the Rutgers Center for Local Government to the podcast, continuing our season-long theme of highlighting the Bloustein School Research Centers. Welcome, Marc.

Marc Pfeiffer
Good morning, Stuart. Nice to be here.

Stuart Shapiro
Great. Thanks for joining us. Let’s start with, as we’re doing with all of the centers, sort of a description of what your center does, how it got started, and how you got involved with it.

Marc Pfeiffer
So the Bloustein Local Government Research Center started about 10 years just under 10 years ago. It was a coincidence of factors that brought it together. I had just completed a 36-year career in New Jersey public administration and public management. I spent the first 10 years of my career as a municipal administrator. Then I transitioned to state government, where I spent 26 years in the state agency that oversees New Jersey’s many local governments, counties and authorities. I’d retired, I was looking for something new to do. I had stopped in at some point with Dean Hughes, and we chatted and one thing led to another. And he asked me to come on board to help staff, well actually be the staff member of this new local government research center, which Dr. Ray Caprio would be the Director of and I basically had the position of assistant director. But since then, and that was in late 2012, we’ve been just doing a lot of really different things over the last couple of years focusing on New Jersey government policy issues.

Stuart Shapiro
Wonderful. And yeah, the amount of work, the variety of the work that you all do, is pretty amazing, and I wish we could cover all of it here. But we’ll focus on a couple of things that caught my attention.

I know you’ve done a lot of work on technology and the digital aspects of local government, let’s get a couple of those. Can you talk about your work on the impact of the digital economy on tax policy?

Marc Pfeiffer
Yeah, I’ll try. It’s a work in progress at the moment. The state budget, last year’s state budget, assigned the task of studying the impact of the digital economy and state tax policy to the state’s division of taxation. They had some bandwidth issues and trying to turn that study around and based on their experience with working with me in the past, they made came to us at Bloustein. And they asked me and Dr. Mike Lahr of our R/ECON unit, to take a stab at this to figure out what’s happening with the digital economy, and how it’s affecting state tax policy. Particularly with an eye on how it can affect collections and revenue enhancements, because, you know, are we missing stuff? Or are there things happening that we should be taking advantage of that we’re not?

So we started a project with that and had a very hard deadline. It was actually the end of March, which we got an extension for because it took a while to get it started and figure out how we were going to do it and what we were going to do with it. But it’s underway. And it’s a challenging study because the digital economy is moving quickly. State governments don’t tend to keep up with what happens in the regular economy, to begin with. And the digital one is really challenging because it’s just brand new and nobody really has their arms around it. So we’ve been talking to a lot of experts. We’ve been talking to some national organizations, and hopefully, in about six to eight weeks, we will have a report to the legislature outlining here’s what’s happening, here’s what we think you can do. And here are some options for you.

Stuart Shapiro
I mean, it’s sort of trite to say everything is different, but I’ll say it anyway, everything is different now.

Marc Pfeiffer
Yeah, pretty much is. And it’s really interesting, because, you know, it’s the digital economy has not only affected where businesses locate, it affects how people get their goods and services. A big change that happened was in 2018, there was a Supreme Court case that said, Ok, states can now tax businesses, even if they don’t have a presence based on where they’re delivering to.

Stuart Shapiro
Right.

Marc Pfeiffer
That was a huge change for states.

Stuart Shapiro
I know. When I fill out my tax returns, I have to sort of put down how much I’ve bought on Amazon over the previous year. That’s a thing. So is that the only way as sort of that self-reporting the only way that local governments can collect the money I spend on websites?

Marc Pfeiffer
Well, there are a couple of things. It’s first that we have to realize that New Jersey sales taxes are not a piece of local government revenue. Local governments in New Jersey primarily rely on property taxes. The dreaded property taxes everybody talks about. We have a few municipalities that get a piece of sales tax, they’re called Urban enterprise zones, that’s a whole separate program. But sales tax really supports state government activities. That’s the big purpose for it.

And what’s happened is that self-reporting that people do isn’t as important as it used to be, because now state governments can tax people like Amazon, and large companies who are shipping all over the country, that they can now report where the product was shipped to, and collect the sales tax on

Stuart Shapiro
Right.

Marc Pfeiffer
So you should be seeing on Amazon now on your app, when you filling out your Amazon or Target or Walmart or whoever, that they’re charging you sales tax now, even though those goods may not be coming from Jersey, although we know that with our growth in warehouses, a lot of it is coming from Jersey.

Stuart Shapiro
Yeah. There’s a bunch right around here.

Marc Pfeiffer
Right. That’s a whole nother issue. So you’re now paying that tax upfront. And that’s important for states.

Stuart Shapiro
And looking both over the short term and the long term. How has that affected revenue for states?

Marc Pfeiffer
Well, as the digital economy was picking up in the 20-teens, states, were seeing that the revenues they were getting for retail were dropping, because downtowns weren’t getting as much business as they were. Big box stores were starting to fade as Amazon and the other companies were starting to ramp up. And as we enter 2020, 10 states were unable to collect sales tax on those revenues. Because of an old court case called Quill. We won’t get into the weeds of that but it said you can’t collect unless there’s a business presence. And there was a lot of litigation over the last decade of state saying, hey, we got to change that. And eventually, South Dakota brought a… passed a law and got a really good case that went up to the U.S. Supreme Court called Wayfair. And that changed everything. Because now states can collect and require those companies to collect sales taxes for them, and remit them to the state based on what they delivered to that state.

Stuart Shapiro
Well, thank you, South Dakota.

Marc Pfeiffer
Yes, they did a really good thing, surprisingly. Who would have thought?

Stuart Shapiro
((Laughing)) It is a beautiful state, the Badlands are amazing.

Marc Pfeiffer
Yes, yes it is.

Stuart Shapiro
But, well, that’s fascinating. And you know, so, I do want to hit at least one or two other things you guys have covered. So I could have a lot of other questions on this, but we’ll move on here.

Another sort of aspect of the “everything changing” is everyone’s dependence on computer systems. We’re recording this right now, each of us is in different places, and we’re relying on the internet, we’re relying on the security of the internet. And local governments, as you said, don’t move quickly. And so I would have to imagine that the risks they face from things like ransomware attacks and other cybersecurity threats have to be pretty substantial. Is that correct?

Marc Pfeiffer
Yeah. 100%? Yes. Technology has been a big part of what the center has been doing really since we started. And we’ve done some innovative, what I think innovative work and original work on looking at how governments have technology risks and the importance they have of trying to get their arms around them. We did some work on that. Our first paper went out on that in 2015, and we’ve continued to work on that issue when it comes to cybersecurity. We work with a large group of New Jersey local governments called the Municipal Excess Liability Fund, which provides joint insurance to almost 600 municipalities, counties, local authorities, and first aid squads. And the idea is to help them get their cybersecurity act together.

A couple, about five years ago, we developed with some local technology people, we developed a plan of minimum technology standards which we want to believe was the first of its type. Here are the minimum things you have to do to give yourself a degree of cybersecurity and health as it were. And that was tied to their cyber insurance policy that said if you meet these standards, and you do have us and you had a successful data breach or ransomware attack, the insurance fund will cover your deductible because you were doing a lot to protect yourself. And that was the incentive for those towns to start getting their act together, to fall in line to get fit to protect themselves. The problem has only gotten worse.

Stuart Shapiro
Yeah, I was going to ask, how are these; how are the local governments doing?

Marc Pfeiffer
We think they are doing reasonably well if they’re paying attention. We still have a number of small organizations that aren’t paying a lot of attention, but their risks are also smaller. Where, if they take a hit, it’s not the end of the world, they can recover. But more medium-size places, you know, anybody over 20,000 population has a significant risk, and they absolutely have to pay attention to this; Hire the right technology people, employ the right resources, educate their employees on what they have to do. We’re starting to use the term, “are you technology fit”? We used to call it, are you proficient, but that’s just an awkward phrase. So this is good. We want… we all want to be fit…

Stuart Shapiro
It’s a slightly lower bar as well. (((laughing)))

Marc Pfeiffer
Yes. When you’re saying it, it’s not as many syllables caught up in your mouth. ((laughing))). But that talks about the idea of being fit means that you have processes for planning, decision making, budgeting, and your technology. That your cybersecurity practices are sound. That you’ve got good password practices. You’re using multi-factor authentication. You’ve gotten good firewalls and email filtering, and all the technical stuff that we don’t have to go into. And then the people that you hire to do the work, are competent, and they’re trained and you’ve trained your employees on you know, don’t click on that email, don’t click on that link in the email that looks interesting.

Stuart Shapiro
Right.

Marc Pfeiffer
And a lot of organizations have been catching up on that and doing a good job with it… the reason why we don’t see more breaches. Absent all of that we would be seeing breach after breach after breach, but people are finally catching up, and getting the idea that you have to spend time and attention and money on these things.

Stuart Shapiro
Well, that’s good to hear. We’ve had Soumitra Bhuyan on the podcast as well. He does the same work with hospitals, and obviously, the stakes are arguably even higher there.

Marc Pfeiffer
Yeah.

Stuart Shapiro
Many, many of the same challenges.

Marc Pfeiffer
Yeah, that’s a whole remarkable world that hospitals have to deal with when it comes to cybersecurity. It’s in its own dimension really.

Stuart Shapiro
Yeah. Well, and like local governments, they have their own special challenges that they have to wrestle with.

So I’ve picked a couple of topics for you to talk about. But, let’s end and wrap up by giving you the chance to pick a couple of things your centers working on that you think listeners would be interested in?

Marc Pfeiffer
Well, a couple of things. One, one of the things we want to do, and probably won’t get to an until next year, is, …. In 2014, we did a study of the cost of New Jersey municipal government on a per capita basis. We had asked a question, and this is like an eternal question in New Jersey. Why do we have so many municipalities? And if we got rid of them and consolidated them together, could we save money? Well … when I worked in state government, one of my jobs was I was in charge of trying to get municipalities to consolidate. Didn’t do a very good job of it. But you know, it’s hard. But one of the things we found and Dr. Caprio and I worked on this… We were surprised by the result is that smaller governments tend to have a lower cost per capita of providing government services. They’re cheaper. And we found there’s a myriad of reasons for it. Lots of smaller reasons for it. And, you know, with over 500 places, there’s going to be a lot of different reasons for that.

But the most predominant reason we found, it was barely statistically significant, is that the more property wealth you had, the more money you spent. So if you were property, rich it was easier to spend money was easier to tax people, if you didn’t have a lot of property, you didn’t spend a lot of money. Now, there are other reasons behind that. But what we’d like to do is go back in and say, hey, it’s a decade or so later, you know, we about 10 years more data, let’s take a look at that data and see if what we found back then is still holding true. So we want to do that.

I’m also working on a project to rewrite the state’s training material for public procurement professionals, and purchasing agents. That world has gotten more and more complicated. My first job in government was doing purchasing. And it’s something like technology has stayed with me my entire career. And so we’ve been asked by the folks in charge of that another Rutgers unit, in fact, to redo that material. We’ve done some of the work already over the last 10 years, and we’ve worked on some new material. This could be completely reimagining it, how it’s done. Putting it onto our Canvas learning management system to make it all easy to use, and get rid of. You know, regular textbook-type type things. That’s going to be a big project, I’ll be working on the second half of this year.

Also, we work with the state with the State Certified Public Manager Program, part of the state’s Civil Service Commission. We help where I coordinate the curriculum to turn supervisors into full-fledged managers. And that’s a great, great in-service training program.

And we have this one-term idea of looking at how we assess property for that property tax thing we talked about, and there’s some work that can be done there. Technology has really changed the way assessment can be done. The way it’s done throughout the state, depending on the assessor, depending on every county tax board, you get very different results in each municipality, throughout the state. And we think there’s some work that can be done there. So that may be a project down a year or two out to see what happens with that.

Stuart Shapiro
Wow, well, technology, procurement, local government consolidation, training of local government managers. That’s a lot of different stuff. And what Marc is probably too modest to tell you is that it’s pretty close to a two-man shop that he’s got there. He probably has some students working for him occasionally but most of this is the work that he’s doing. And so, Marc, thanks for coming on and talking about all that.

Marc Pfeiffer
Thank you, Stuart enjoyed it and am happy to come back again when we finish that digital economy project if you want.

Stuart Shapiro
Excellent, excellent, we’ll make a date for it!

Thanks also to Amy Cobb and Karyn Olsen for doing all the hard production work on the podcast. We’ll see you next week with another talk from another expert at the Bloustein School. Until then, stay safe