By Michael G. McGuinness
Business as usual is just not possible anymore. New Jersey’s underperforming economy, bloated public sector spending and rising cost of living, along with Congress’s decision to reduce the state and local tax deduction, are forcing our collective hands to do better. There is no better place to start than at home in our local municipalities and school districts, where consolidations and sharing of services can produce both real financial savings and better outcomes. Simultaneously, state and county governments need to do likewise. Taxpaying businesses and residents deserve accountability, and this may require audits of how and where every dollar of taxpayer money is being spent.
Fortunately, Senate President Steve Sweeney convened an Economic and Fiscal Policy Workgroup in early 2018 that, on Aug. 9, released its Path to Progress Report that offers recommendations for right-sizing public-sector spending, operations and entitlements that are aimed at reducing property taxes and making the state more affordable. Ideally, this action would free up diminishing financial resources for long-overdue critical investments in infrastructure, higher education and economic development. Experience has shown that efficient and reliable public transportation systems (e.g., light rail, bus rapid transit, Midtown Direct rail access) are among the most meaningful tools for economic development. At the moment, our most pressing need is the Gateway project to expand and repair the Hudson River rail tunnels and Portal North Bridge, which carry over 200,000 passengers daily.
Many of the report’s recommendations are sensible and should be pursued. Shifting to a hybrid defined contribution pension plan for recent and new government hires, reducing health care benefit coverage for employees and retirees from platinum to gold level, consolidating smaller school districts, promoting and encouraging shared services among local governments and enabling S Corporations, LLCs and partnerships to pay state taxes equivalent to the gross income obligations of their owners and partners (thus making their state tax payments deductible on federal taxes), should free up substantial dollars for public- and private-sector investment in our state. Another proposal with merit is to add HOT, or High Occupancy Toll, lanes on congested highways to allow paying drivers to move more rapidly. Unlike HOV lanes, HOT lanes can be used by tractor trailers and single drivers, and peak pricing may apply. Unfortunately, the report recommends the leveraging of such state assets (roadways) and any new revenue streams to the pension system. Sound public policy would suggest that these new monies be used strictly for transportation-related improvements, rather than investing in a program with minimal sustainable state benefit.
Another major concern is the recommendation to reallocate PILOT payments based on current property tax ratios. PILOTs, or payment in lieu of taxes agreements, are powerful tools for redevelopment and often are necessary to make these projects financially feasible. Typically, these areas are blighted and incur substantial added costs for environmental remediation, demolition and infrastructure improvements. PILOTs result in a clean ratable for the town, a stable and predictable property tax schedule, a new workplace for the business tenant and employees and an income-producing property for the owner. PILOTs can also provide for needed affordable and workforce housing. Under the Long-term Tax Exemption Law, or LTTE, towns must share 5 percent of the annual tax proceeds with the county. Towns1 have discretion to share the balance of the proceeds with the school district or other municipal service providers. Many towns supplement school districts with non-education resources such as playgrounds, gyms or by paying off the debt on school bonds for improvements.
Unquestionably, municipalities should be held accountable for how they spend taxpayer dollars. Over the last few years, the Legislature has been particularly concerned with local accounting methods that undervalue projects utilizing LTTE, which could contribute to an education shortfall. However, there is no rationale for automatically splitting PILOT revenue based on current property tax ratios. Nearly half of today’s school districts would no longer even exist if the report’s recommendation to merge all smaller (non K-12, under 1,000 students) districts is implemented. This change alone could result in annual savings of up to $2 billion that could be better used to reduce property taxes or invest in infrastructure.
Also, declining school enrollment in many districts should lower expenses. Further, what about the cost of successful tax appeals? Towns, not school districts, are on the hook for tax appeal refunds that can run into the tens of millions of dollars annually. A mayor from a redeveloping town recently told me that he had to take out three 10- year loans to pay back $33 million in taxes from appeal cases. I would also argue that there is absolutely no nexus between nonresidential (commercial and industrial) development and the generation of school kids that would increase the need for more school funding. Let’s not put the cart before the horse.
For those of us who have been working in the advocacy, government and public policy world for many years, it’s very easy to shrug off this report’s findings and minimize its lasting impact beyond the next election cycle. Something is different this time. The speed at which this legislative report came together after the start of the Murphy administration, combined with the magnitude of shockwaves emanating from Washington, has seemingly awakened us from a long, drunk slumber. The party is over and we all better have skin in the game. With the Grow New Jersey Tax Credit incentive program set to expire in July 2019, and an administration that is scrutinizing its expenses and revenue streams, it is critical that our policy makers in Trenton revise these programs as soon as possible and right-size the benefits to reflect today’s market conditions and workforce needs. Failure to do so will jeopardize the transformational opportunities occurring today in communities such as Logan Township, Perth Amboy, New Brunswick and Paramus. Those towns stand to gain thousands of jobs and valuable ratables. Ending Grow New Jersey could take the Garden State out of the running with companies that are well along in the process of considering a location here.
It’s time for New Jersey to shift its deployment of precious financial resources to investments that will have long-term benefits for our state, such as infrastructure improvements and higher education. We may never win the war on price, but we can certainly compete with the best of them on quality if we focus on collaboration. Go Team New Jersey!
Michael McGuinness is CEO of NAIOP New Jersey and has led the commercial real estate development association since 1997. NAIOP represents developers, owners, asset managers and investors of commercial, industrial and mixed-use properties, with 830 members in New Jersey and over 19,000 members throughout North America.
