Thursday, November 19, 2015

Jersey City's Property Reassessment Won't Change State Aid

The State Treasury may force Jersey City, Elizabeth, and Dunellen to do property reassessments.

"Jersey City could be forced to perform its first citywide property revaluation since 1988, with state treasury officials announcing today they are investigating whether the city's properties are uniformly and fairly assessed. 
Because Jersey City hasn't performed a reval in 27 years, the city's total true value exceeds its assessed value by $15.6 billion, a ratio of 24.6 percent, according to treasury officials, who announced the move in a press release today. 
A ratio of 85 percent or lower generally denotes noncompliance with state regulations, Dennis Shilling, acting director of the state Division of Taxation said in a statement."
"Tax redistribution? Tax hike? What's the difference?"
Indeed. Jersey City has not done a property reassessment since 1988 and this means that tens of thousands of Jersey City property owners are paying property taxes that are either unfairly low or unfairly high. The residents paying unfairly low taxes are people who live in areas that have seen the biggest gains in real estate prices since 1988 -- ie, usually downtown residents. The residents paying disproportionately high property taxes are those who live in less gentrified areas. Thus, the poor in Jersey City pay disproportionate property taxes.

Towns in New Jersey are supposed to reassess whenever general assessment falls under 85% of Equalized Valuation (ie, market value) of real estate, but this is supposed to be enforced by county tax boards and Hudson County's tax board has not fulfilled this duty.

"The Division of Taxation is reluctantly taking this action because the Hudson, Middlesex and Union county tax boards have failed to do what they are supposed to do," Treasury spokesman Joe Perone said. "The state has been more than patient in trying to convince the county tax boards to meet obligations, but they have been lax in enforcement because revaluations are unpopular."....
This would be the first time in four decades that the division is invoking its authority to force a municipality to reassess its property "because it's clear that the county tax boards and the three municipalities have no interest in complying with the law," he said.

Jersey City had started to do a reassessment in 2013 but Mayor Steve Fulop cancelled the reassessment in one of his first acts as mayor, falsely calling it a "back-door tax hike."

Steve Fulop is flat-out wrong about reassessment being a "tax hike." A reassessment is a tax redistribution, it shifts the tax burden away from property whose value has been flat or decreased towards property whose value has increased. Equal taxation based on value of property is a bedrock principle of good governance and Jersey City has scoffed at this. Unless a town increases its tax levy, the effect of a reassessment is neutral, not revenue-positive.

Because of Jersey City's lack of a property assessment, Steve Fulop's house is assessed at only $104,000, even though he he paid $845,000 for it in the summer of 2015.  Fulop's own personal taxes are thus only $7,700. (see this for more corroboration.)

Jersey City isn't alone in not reassessing and the Department of Treasury said that Dunellen and Elizabeth may also be forced to reassess, plus a few other towns at a later date. All of the non-compliant towns are in Hudson, Middlesex, and Union counties.

Based on the ratio of official assessment compared to Equalized Valuation, Jersey City is the twelth most underassessed town in New Jersey. (Source, Table of Equalized Valuations 2016)
TownCountyAve. Ratio Assessed to True ValueAgg. Assessed ValuationEqualized Valuation
South River BoroughMiddlesex30.82$412,491,700$1,338,389,682
Clark TownshipUnion29.72$736,384,800$2,478,042,490
Kearny TownHudson29.66$1,053,180,040$3,553,397,416
Garwood BoroughUnion29.63$186,595,900$629,887,717
Jersey City CityHudson27.63$5,980,096,344$21,661,162,459
Woodbridge TownshipMiddlesex27.51$3,134,845,150$11,399,418,958
Mountainside BoroughUnion27.28$477,364,200$1,750,299,915
East Brunswick TownshipMiddlesex26.64$1,893,167,400$7,108,627,682
Roselle Park BoroughUnion25.99$283,238,410$1,089,986,053
Scotch Plains TownshipUnion24.71$987,259,600$3,996,246,076
Westfield TownUnion24.62$1,844,511,900$7,493,429,972
Dunellen BoroughMiddlesex24.61$144,355,200$586,571,338
Fanwood BoroughUnion19.97$228,392,700$1,143,774,259
Union TownshipUnion17.21$1,032,808,600$6,001,212,086
Elizabeth CityUnion13.40$895,804,300$6,686,841,431
Winfield TownshipUnion8.36$1,382,200$16,539,043

Jersey City's property taxes are the state's most unfair based on the Coefficient of Deviation.  This means that property taxes in Jersey City diverge wildly from a common ratio whereas in other underassessed towns property sales tend to diverge by closer ratios.  (see ".")Jersey City's Property Taxes are the State's Most Unfair

Reassessments in other towns are important too, but reassessments of the other towns is less interesting because none of the other non-compliant towns are aid hoarders like Jersey City (and none has a gubernatorial candidate for mayor), therefore there is some hope that this could mean a reduction in Jersey City's state aid.

Sadly.  Not so fast.

No Effects on State Aid

Sen. Mike Doherty is correct about how internally unfair (ie, within Jersey City) the lack of a reassessment is

"Despite a booming real estate market that has enriched homeowners, many Jersey City residents continue to pay taxes as if they couldn't give their homes away."
But he is incorrect when he says this affects the rest of New Jersey.

"Even worse, the rest of New Jersey has been forced to pick up the tab while city officials have resisted efforts to be held accountable for their own spending."

And again:

"For years, I’ve worked to highlight the fact that some towns have massively gamed the system to shift their property tax burden to others and collect state aid they don’t deserve,” said Doherty. “Today’s announcement is recognition that they should no longer be given a free ride at everyone else’s expense.”

Jersey City's state aid would be unaffected by a reassessment for two reasons:
1.  State aid is linked to Equalized Valuation (ie, market value), not general assessment.
2.  Jersey City's state aid is protected by Adjustment Aid anyway.  

Equalized Valuation is independent of general assessment.  It is calculated by the county tax assessor by creating a ratio of sales prices to the official assessments on the sales.

Let's say that the whole town has a general assessment of $1 billion.  

Let's say that they sell in a given year sale prices exceed official assessments by 8.5 on average. (so properties that are assessed at $100,000 really sell for $850,000 and properties assessed at $2 million sell for $17 million ) (this is a badly underassesssed town, like Jersey City is)

Therefore the $1 billion general assessment is multiplied by 8.5 to get the Equalized Valuation, in this case $8.5 billion.  If the next year sales prices exceed assessed values by a factor of nine the general assessment would be multiplied by nine and the Equalized Valuation would be $9 billion.

Therefore it doesn't matter for Equalized Valuation if a town reassesses or not.  The sales ratio would change, but the product of general assessment x sales ratio would not be affected.

For instance, Paterson did a reevaluation in 2015. The new reevaluation dropped Paterson's general assessment to about $5.7 billion (from over $8 billion based on a 2007 reevaluation.)

The Passaic County tax assessor still did its own calculation and determined that Paterson's Equalized Valuation was $6.3 billion.

The lack of a reassessment has not prevented Jersey City's Equalized Valuation from climbing to $21 billion despite its general assessment only rising from about $5 billion to $6 billion from 1998 to 2015.

Adjustment Aid Protects Jersey City's Aid No Matter What

There are many people in New Jersey who observe Jersey City's increase in wealth and believe that Jersey City should lose state aid.

I believe this too.  Jersey City gets $111 million more in K-12 aid than SFRA says it demographically and economically needs and I think this should go to poorer districts.

But unless the law on Adjustment Aid is changed (or ignored) Jersey City's state aid will stay at $417 million forever.  

Unless SFRA is changed, as Jersey City's wealth increases all that will happen is that Jersey City's Equalization Aid will diminish to zero but be replaced dollar for dollar with Adjustment Aid.

Thus, no matter how much wealthier Jersey City becomes, it'll always be the same down-on-its-luck former port and industrial city in the eyes of SFRA.

Many people (Comptroller Matthew Boxer, conservatives Sen. Mike Doherty and Paul Mulshine, liberals like the New Jersey Policy Perspective, pragmatists like me) have criticized Jersey City's PILOTing because of how it deceptively lowers Jersey City's Equalized Valuation and sustains an artificially high aid level.  All of us assume that Jersey City's aid should be reduced, but we have been negligent in not saying that a reform of PILOTing would not be enough to free up Jersey City's aid for other districts.  What needs to happen in addition to PILOT reform is a reform of Adjustment Aid.  SFRA is the problem here, not only Jersey City's exploitation of the PILOT law.

Back to the property reassessment Jersey City is going to have to do.

Hooray! This is good for Jersey City!  

BLAH!  This has no effect on the rest of New Jersey.

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