The Jersey City Independent "

A new state report raises concerns about the uses and abuses of municipal tax abatements in New Jersey, echoing and validating concerns raised in Jersey City over the past several years by citizens, elected officials and policy watchdog groups.

The 25-page report, which was released on Wednesday, was undertaken by state comptroller Matthew Boxer in order to identify “weaknesses in the [municipal abatement] system,” according to a letter from Boxer that accompanied the report.

“Tax abatements result in significant foregone revenue and introduce tax inequities that deserve closer scrutiny,” the comptroller writes.

Tax abatements were introduced in New Jersey in 1961, when the state legislature approved what is known as the Fox-Lance law, establishing criteria for designating “blighted and slum areas” and permitting the use of 15-year abatements. Under abatement terms, in lieu of a conventional property tax payment, developers agree to pay over a fixed period of time a percentage of their project’s annual gross income, a percentage of assessed taxes or, less often, a percentage of project cost.

Over the subsequent decades, abatements were used only sparingly to attract development to underdeveloped areas, mostly in Jersey City and Newark. However, the practice picked up steam statewide in the 1980s; that decade also saw a marked increase in abatements here in Jersey City, particularly along the Hudson River waterfront, which was famously transformed from decaying industrial dockland into a glittering enclave of corporate office space and high-rise condominiums, now dubbed “Wall Street West” and the “Gold Coast.” Over the years the lengths of tax abatements also increased, reaching 30 and even 40 years in some cases.

The legislature cited Jersey City’s success when it renewed the enabling legislation in 1992; at that time the term “blighted areas” was replaced with “areas in need of redevelopment” — a change that was more than cosmetic, as it increased the number of places where abatements could be used. Eleven years later in 2003, the legislature amended the law to include a provision allowing municipalities to require developers to make contributions to an Affordable Housing Trust Fund, which subsidizes the development of low- and moderate-income housing.

Despite the acknowledged successes of abatements as a development tool, Boxer identifies problems in the process and makes several recommendations in his report that he hopes “will help to ensure more open and fair investment of taxpayer dollars and better decisions and outcomes in the future.” While the intention of the report is to urge Gov. Chris Christie and the state legislature “to amend current law to adopt these recommendations,” it also points out that “state and local officials can implement many of these practices.”

Identifying Problems and Recommending Solutions

The recommendations of the report are centered around four aspects of the abatement process which it identifies as problematic:

• a policy-setting process that does not adequately represent the interests of all those affected
• weak analytical criteria used in determining whether to grant abatements
• a lack of transparency and monitoring
• too little involvement in the process at the state level

More broadly, the report suggests that “tax abatements should be used carefully and sparingly given the multitude of pitfalls, their far-reaching impact, and the reality that exemption from taxation is a departure from the normal allocation of tax obligations.”

In order to ensure that the interests of everyone affected by tax abatements are represented when decisions on tax abatements are made, the comptroller’s report suggests that “counties, school districts, and the public should assume greater roles” in those decisions. Because of the way abatements are structured, municipalities keep the vast majority of the payments in lieu of taxes (PILOTs) that are central to abatement agreements, creating “a perverse incentive” for municipalities to grant abatements regardless of the potential costs to other entities.

By contrast, in a conventional property tax arrangement the county and school district together usually collect more than half of tax payments. In other words, although counties and school districts lose a great deal of revenue as a result of abatement agreements, they are not represented when those agreements are reached. The report also suggests that PILOT payments could be redistributed to align with conventional tax percentages, or that municipalities could be limited to granting exemptions only on the portion of property taxes owed to them.

To strengthen the analytical criteria used by municipalities in granting abatements, the report recommends that “robust cost-benefit analyses” be conducted as part of the abatement process. This would permit an accounting of “any losses in ratable property that would be suffered by the municipality, the county, and the local school district.” Because a tax abated property does not appear on the tax rolls, the total ratable base that defines a municipality’s obligation to contribute to the county tax coffers is artificially depressed, creating a situation where other municipalities in the county must bear a disproportionately large portion of the burden.

The report calls out Jersey City specifically with regard to this problem. Using a rough back-of-the-napkin calculation, the report estimates that with “approximately $2 billion” worth of abated property kept off Jersey City’s conventional tax rolls, Hudson County is missing out on about $30 million in tax revenue it would otherwise receive, a shortfall that must be made up for by “the other municipalities in the county.”

School district taxes are calculated based on a formula that accounts for average income and property values, so they are not affected in quite the same way as counties; however, this calculation does not account for the fact that owners of abated properties, which are in large part responsible for the rise of overall property values in the city, are not contributing to the school district, thereby shifting that burden to the owners of non-abated properties.

As a further method of enhancing what it calls a “perfunctory and limited” process for reviewing and granting abatements, the report recommends that areas designated as “in need of redevelopment” — the areas where abatements are permitted — should be regularly reviewed and redesignated as time goes on and circumstances change. The report notes that in areas where abatements and other measures have successfully been used to spur development, “tax incentives should no longer be necessary.”

Here the report again points a finger at Jersey City, noting that the Hudson River waterfront has “frequently” been identified as an area where abatements are no longer needed, yet continue to be granted. It goes on to state that many municipalities, including Jersey City, have granted a large number of abatements for market-rate housing although this may not be the best use of the tool. Instead, the report suggests that “identified areas of deficiency,” such as industrial, large commercial retail, small retail, low-income residential, or other sectors “should drive the focus of abatements.”

“Continuing to grant abatements for market-rate housing increases population density while straining local budgets that now need to serve more residents who do not fully contribute to normal tax revenues, despite their ability to afford expensive accommodations,” the report notes. Yet municipalities are driven to grant these abatements because they wish to “attract middle-income and high-income residents.” This leads to situations like one in Jersey City cited in the report, where Fisher Development Associates, the owners of Downtown’s Crystal Point, was granted “a second, more generous abatement for a luxury waterfront condominium complex after many units initially failed to sell.”

A Boost for Critics

It’s too early to tell what impact the comptroller’s report will have on municipal abatement policies in Jersey City or elsewhere in the state — Gov. Christie’s press office did not return a call requesting comment on the report — but one immediate result is clear: Those who have previously criticized the city for creating an excessive tax burden for owners of non-abated properties and for utilizing a fast and loose abatement granting process with too little public input, among other complaints, now have even more documentation to wield when making their case.

The comptroller’s report echoes and amplifies the concerns of the nonpartisan policy think tank New Jersey Policy Perspective (NJPP), which in July 2009 published a detailed report identifying problems with Jersey City’s abatement process and recommending changes. The report focused on issues related to the analytical criteria used in determining whether a given abatement is needed, transparency of the process and opportunities for public input, consequences for the county tax rolls and state involvement and oversight.

The release of NJPP’s report, coming at virtually the same moment when dozens of city officials and political insiders were arrested on federal corruption charges, played a role in the most successful recent large-scale effort to change city development policy, namely the redevelopment pay-to-play ordinance. The ordinance, which seeks to limit the influence of campaign cash on the decisions made by elected officials with regard to abatements and other city policies, was approved by the council last September .

NJPP president Deborah Howlett says her organization is pleased with Boxer’s report.

“It sort of broadens what we found in Jersey City,” Howlett says of the state document. “This is the second time that somebody has taken a dispassionate look at some of these abatement programs and found them lacking.”

Jersey City officials “should take it seriously,” she says.

While Howlett can see benefits in tax abatements and thinks it’s “great” that they help to fund city services and programs in an increasingly tight budget environment, she notes that abatements are not granted “in a vacuum.” Municipal officials “need to consider what effect that has on the county, on the schools, and on the taxpayers,” she notes.

The city responded to the release of NJPP’s report and its attendant public outcry with a report of its own — a PowerPoint presentation detailing the unequivocal success of abatements in Jersey City, including immediate budgetary benefits as well as indirect advantages created for the local economy. Among the benefits cited are the colonization of the Hudson waterfront by “Wall Street’s most prestigious financial firms … thanks to 14 million square feet of new, tax-abated office space,” construction jobs for local residents, as well as increased density, “unprecedented property value appreciation” throughout the city and the use of abatement revenues “to promote smart-growth and sustainable development.”

Significantly, the city emphasizes that abatements create the conditions for generating ratables, or taxable fixed assets, over the long term — that is, abatements permit the development of properties to be taxed that otherwise would not exist. This argument hinges on the claim that abatements provide an incentive for development in an area or a circumstance where it otherwise wouldn’t happen — a concept known as “but for” because many projects would not go forward “but for” a tax abatement.

From the city’s point of view, all these benefits are augmented by the foremost advantage of tax abatements — a direct and immediate increase in revenue.

“Jersey City receives 100 perecent of PILOT payments vs. 45 percent of conventional taxes,” the presentation notes. Several examples cited in the presentation show that the city reaps greater revenues from abated properties than via conventional taxation. The city’s analysis also suggests that even when the cost of additional city services for new residents are accounted for, abatements for market-rate rental developments generate more revenue than cost.

However, the city’s presentation does not address several of the issues raised in the NJPP report and in this week’s report from the comptroller, including the financial challenges abatements create for the county and school district, the notion that abatements are simply no longer needed in the developed areas of the city and ambient suspicions about corrupt politicians taking illicit developer cash.

Ward E councilman Steven Fulop, who sponsored last year’s redeveloper pay-to-play law, as well as a failed 2008 bill that would have directed five percent of PILOT revenues to the school district, says the comptroller’s report is “a welcome thing.”

“It’s nice to have validation from the comptroller’s office,” Fulop says, adding that he hopes the report will assist his efforts to combat the “cronyism and political favoritism” he argues “is clearly there.”

Local good-government activist and 2009 mayoral candidate Dan Levin, who was one of the organizers of the effort to get the redeveloper pay-to-play legislation off the ground, has repeatedly voiced opposition to the continued use of Downtown abatements and called for tighter controls on the granting process. Weighing in on the report, Levin says he believes it “affirms and validates the concerns that Jersey City has abused and misused redevelopment law and tax abatement agreements for short term gain.”

The city’s primary incentive for granting abatements, Levin says, is “getting a shovel in the ground” in order to create “up-front pilot payments to plug budget holes before elections and [push] the deficit into the future.”

For his part, Mayor Healy says he is certain that there is still a place for abatements in the city’s economic development plans.

“As we continue to compete with places like New York City and Brooklyn to attract high profile companies to our city, we will continue to judiciously use tax abatements to foster growth and jobs in our city,” Healy says in a statement. “Jersey City is the economic engine of the state, largely due to the use of tax abatements to develop our waterfront and to create what is known as Wall Street West.”

Healy also points out that abatements are “not just utilized on our waterfront and Downtown, but throughout our city in all six wards.” In the past year, the City Council has indeed approved new tax abatements and amendments to existing abatements for affordable and market-rate housing as well as industrial and commercial developments in various parts of the city.

Following up on Mayor Healy’s statement, city spokeswoman Jennifer Morrill tells JCI that while the administration has not yet “had time to examine [the report] on a line by line basis,” she is confident that the city does “follow the best practices.” She points out that the public has an opportunity to comment on proposed tax abatements at City Council meetings and the proceedings of the meetings of the city’s Tax Enhancement Committee, which makes recommendations on granting abatements, are open to the public.

Morrill also says that the city undertakes “rigorous economic analysis” with respect to any given abatement and “closely monitor[s] the project to ensure compliance with all conditions.” She adds that the city Planning Division and the Jersey City Redevelopment Authority (JCRA) are “constantly modifying and updating our redevelopment plans.”

In a fashion typical to municipalities in New Jersey, where home rule is fiercely defended, Jersey City bristles at the notion of increased state oversight for abatements.

“We believe that the local municipality is best positioned to understand the totality of its development goals and its fiscal situation relative to property taxes,” Morrill says. “Adding other layers of government could increase cost and time involved in the decision making process.”

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