Friday, July 31, 2015

The Problems of PILOTs

Note: This was one of the earliest posts I wrote for this blog and I now realize that this post contains an error of omission.

If Jersey City did not PILOT any new development its state aid would remain at $418 million forever due to the mechanism of Adjustment Aid, which disallows any district from getting less than 102% of what it got before SFRA became law.  However, since Jersey City's Equalization Valuation would be higher its "embarrassment or riches" would be greater and there would be more pressure to reduce its state aid.

Adjustment Aid will hopefully be eliminated one day and I was writing in reference to that future era.  

Let's say that you could enroll in a program where you would receive somewhat lower compensation at work, but get that compensation tax free or at a reduced rate and thus come out with higher net earnings.  Let's say this "PILOS" program - Payment In Lieu Of Salary - was originally intended to help less-employable people but there were no restrictions on who could enroll, including people who had no trouble getting a job.

Let's say that in addition to getting all of that money tax-free you could also benefit from food stamps, welfare, and Medicaid?

Sounds pretty good, right? Well a program like this for salaries is fiction, but New Jersey has a tax abatement program just like it that was originally intended to foster development where property owners pay a reduced fee called a PILOT (Payment In Lieu Of Taxes).

In a PILOT agreement, the owner pays a fee which is split 95%: 5% by the municipality and county, with 0% going to the school system.  In a hot real estate market, where the municipality has a lot of leverage, the  municipality can structure the agreement so that it gets more money from the PILOT payment than it would through regular taxation.

This post is going to focus on Jersey City and PILOTs. I'm "singling out" Jersey City for several good reasons.  One, Jersey City has PILOTed more property than any other town in New Jersey. Two, Jersey City's K-12 state aid is $418 million, making it New Jersey's second biggest recipient of state aid after Newark. Three, even without Jersey City's PILOTed property factoring into the calculation for Equalization Aid, Jersey City would still be very overaided.  Four, Steve Fulop is widely expected to run for governor.

Jersey City's Prolific PILOT Granting

According to a report NJ's Comptroller in 2010, Jersey City was one of, if not the, biggest PILOT granter in New Jersey.

In 2008, 303 [municipalities] had less than 1% of their total taxable value [abated]. Approximately one-third of municipalities, 188 overall, from 1-5% of their property value in [abatement]. A total of 75 municipalities had granted such exemptions exceeding 5% of total taxable value. ... 
Examination of the detailed property listings for the 75 municipalities showed that most of them engage in few to no redevelopment or rehabilitation abatements of significant value. Of the 75 municipalities, 40 had little to no such activity, with exemptions instead aimed at public properties, medical facilities, or nature preserves. An additional 12 of the municipalities had relatively few development abatements. The recoreds indicated that only 20 municipalities had granted many or high-value abatements for rehabilitation and redevelopment. .. 
Significant Use of Development Abatements: Asbury Park, Atlantic City, Bayonne, Bridgeton, Camden, Collingswood, Harrison, Hoboken, Gloucester Twp., Jersey City, Long Branch, Millville, Newark, New Brunswick, Paterson, Rahway, South Bound Brook, Vineland, Union City, Trenton.

It is not a coincidence that most of the largest granters of PILOTs in New Jersey are high-aid Abbott districts. Abbott aid allows school districts to have very low school tax rates and thereby sacrifice little by granting a PILOT and cutting the schools out of revenue.  In most non-Abbotts the school tax is much higher than the municipal tax, but in Jersey City the municipal tax is 50% of the tax bill, with the Board of Education getting 25%, Hudson County getting 22%, and small agencies getting the rest.

75% of Jersey City's K-12 school budget is paid for by state taxpayers, so if Jersey City PILOTs new development the state pays for the large majority of the costs to educate the children.  100% of Jersey City's Pre-K budget is paid for by state taxpayers, so Jersey City can PILOT property with impunity when it comes to Pre-K considerations.

In other words, since the state pays for Jersey City's schools anyway, cutting the schools out of money is relatively cost-free for Jersey City.

Jersey City Gains By Cutting the Schools and Hudson County Out

Indeed, cutting the schools and county out of taxes is more and more often revenue-positive for Jersey City since Jersey City can arrange for the developer to pay MORE in PILOT payments (which go to the municipality) than it would have paid to the municipality under regular taxation. Since these properties are office buildings and apartments for affluent people, the marginal cost of new services for new properties is very low and these PILOT agreements are extremely revenue-positive for Jersey City.

Jersey City started to grant PILOT agreements in the 1980s when Jersey City was "blighted" and continues to grant PILOTs even in thriving areas because PILOT agreements are so incredibly lucrative to the city.  In fact, PILOT payments in Jersey City are equal to more than half of Jersey City's regular municipal taxes. Jersey City's regular municipal tax levy is only $217.5 million but it gets $119.2 million from 146 PILOTed properties.

Jersey City is completely indifferent to PILOTs' impact on other Hudson County towns and state education aid, Jersey City openly boasts about how much more money it gets from a PILOTed building than a non-PILOTed.

Jersey City receives 100% of P.I.L.O.T. payments vs. 45% of conventional taxes
  • Most abated properties contribute more to city revenues than they would through conventional taxes
  • Under a P.I.L.O.T. agreement, The Sugar House in downtown Jersey City paid $652,216 to the city in 2007
  • Under conventional taxation, the Sugar House would have paid a total of $1,016,044 in taxes that year, of which Jersey City would have received $466,364 Jersey City received 40% more revenue through the P.I.L.O.T. than it would have through conventional taxation
The Real Problem with PILOTs (for the state)

The problem with Jersey City and PILOTs that should concern all state taxpayers is that PILOTed properties appear to the state as tax exempt properties just like churches, cemeteries, schools, and colleges would.

Recall, the state's formula for Equalization Aid (the biggest aid stream by far) is:

Adequacy Budget - Local Fair Share = Equalization Aid.

"Local Fair Share" is supposed to be based 50% on Total Income and 50% on Equalized Valuation.

This means that since PILOTed property is invisible to the formula for Equalization Aid, that the higher Equalization Aid is maintained despite the larger, real tax base.

As the Comptroller said:

"When new development occurs in connection with a long-term abatement, the PILOT revenue is not reflected in its ratable base, meaning formula state aid continues to provide enhanced funding based on artificially low community wealth. The school district still needs the state aid at the enhanced level since the district itself does not see the benefit of the PILOT amounts, and taxpayers throughout the state pay the resulting bill. The system allows the municipality, in essence, to hide its true wealth from the school district and the state, resulting in the school district's continued reliance on the state for funding."

Indeed, the value of PILOTed property in Jersey City is enormous and if it were taxable Jersey City would not need to be an Abbott district. Figures are very difficult to come by, but it was recently reported that if Jersey City's PILOTed properties paid regular taxes they would pay $198,589,915 total (to the schools, Hudson County, and municipality.)

Jersey City's (effective) tax rate is 2.291, (meaning 2.291%) so if the hypothetical taxes on Jersey City's PILOTs are $198.6 million, their (equalized) valuation has to be $198,589,915/.02291 =


The figure boggles the mind. It's like Jersey City has a hidden Millburn that the state's aid formulas do not see. Even at Jersey City's low 0.5878 tax rate, that $8.7 billion would produce $51 million for the school system.

If the state's aid formula could perceive that $8.6 billion in equalized valuation it could reduce Jersey City's aid and give that money to needier districts.

And what's also significant is that Jersey City is granting more and more PILOTs. Mayor Steven Fulop has reduced the value of PILOT agreements on the waterfront and downtown but is giving more PILOTs than ever to development in outer areas, including the transit-node of Journal Square. For example, the 1,840 apartment complex being built by KRE at Jersey Square (a $660 million construction job) will have a 30-year abatement and be invisible to the state's aid formulas through at least 2046.

Presumably these apartment projects will add only slightly to Jersey City's public school K-12 population, but they are expected to help increase Jersey City's state-funded Pre-K population by 25% in the next five years and cost the state (which pays nearly 100% of Pre-K costs) $20-30 million.

Jersey City: Aid Hoarder

Aside from the issue of PILOTs is that even Jersey City's official, equalized valuation has risen dramatically to $18-19 billion, the highest in New Jersey. Despite that increase in wealth, Jersey City's state aid has risen.  Without peer, Jersey City is he largest aid hoarder in New Jersey.

From 2000 to 2015, Jersey City's (non-PILOTed) Equalized Valuation more than tripled from $5.9 billion to $19.7 billion. (according to the Division of Taxation). By contrast Newark's Equalized Valuation only rose from $5.1 billion to $13.5 billion.

Yet yet despite that very high valuation Jersey City is not made to pay more for its schools. On the contrary, its aid has increased in absolute and proportional terms.

In 2000 Jersey City got $272.9 million in state aid out of a $5.1 billion (5.3%) total statewide distribution. Now Jersey City gets $488 million (counting Pre-K) out of an $8.6 billion statewide distribution. (5.7%).

Because of its gentrification and the existence of Adjustment Aid, the anatomy of state aid in Jersey City and Newark have diverged dramatically. Newark only gets $13 million in Adjustment Aid. Jersey City gets $114 million. Even though Jersey City's property wealth dwarfs Newark's, Jersey City's Local Tax Levy and Newark's are essentially the same.

Notice the difference in Adjustment Aid.

In the last few years Jersey City has thrived in a way that no other large city in New Jersey has.  This is good for New Jersey as a whole, but in the last few years New Jersey's state aid stream has been stagnant.  Hundreds of districts get less than 100% of what SFRA recommends and 117 districts get less than 50% of what SFRA recommends.  Many low-resource/high-need non-Abbotts never even got decent aid prior to the recession.

New Jersey has a daunting Pension Crisis combined with an intensifying education funding crisis.  This means that we cannot ignore the $8 billion in hidden ratables that Jersey City has.  New Jersey's PILOT law needs to be changed so that the municipality, school district, and county lose money in equal proportions and so that a fraction of the valuation of the PILOTed property counts for municipal and school aid.

Even aside from its PILOTed property, Jersey City is New Jersey's most overaided district in absolute terms.  Its $114 million in Adjustment Aid is a fifth of the total and would be even higher if Christie ran the SFRA formula again.  Jersey City has thousands of children receiving state-funded Pre-K whose parents are actually affluent and that number is expected to grow.

In the era of the Pension Crisis something has to change! 

April 8th, 2016 Update:

Former Jersey City mayor Gerald McCann wrote about the benefits of PILOTing to Jersey City itself in terms of Hudson County taxes:

Tax abatements do reduce our share of the county taxes since they are not part of that ratio. If the abatements are removed, we will have to pay more in county taxes as well as less in state aid for our schools.

January 18, 2017 Update:

If Jersey City's PILOTed property were an independent city, it would be in the top ten for New Jersey.

Here are the top EVs in NJ for tax year 2017.
1. Jersey City $26.6 bil
2. Edison $15.8 bil
3. Toms River $15.167 bil
4. Hoboken $15.128 bil
5. Newark $13.8 bil
6. Ocean City $12 bil
probably Jersey City's PILOTedMiddletown $10.6 bil

Woodbridge $10.5 bil


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