Abatements 501: A Critique of Mayor Fulop’s “Buy Up” Abatement Policy

In my Abatement Series, I’ve discussed the basic premise of abatements, how they are funded, and the impact to conventional taxpayers.  In this post I look at Mayor Fulop’s new tax abatement policy for Jersey City, which includes two notable components:

  1. Tiering System: A system of awarding abatements based on geographic location or project type1.  Each “tier” equates to a baseline abatement length (e.g. Tier 1 = 5 years, Tier 2 = 10 years, etc).
  2. PreK Facilities & the “Buy-Up”: a mechanism by which a developer can “buy-up” to a higher tier, and thereby extend an abatement term.

Abatement Premise

The premise of the buy-up is that a “giveback” to the community is funneled from the abatement extension (an extra “x” years of tax reduction, which is a cost to conventional taxpayers) to specific programs and facilities for public education, youth and jobs, and recreation.

Yet upon close analysis, the policy’s buy-up mechanism appears – in concept and practice – to extend tax abatements without the giveback to the community.  

Let’s get civic and break it down.  We’ll start with a brief overview of the policy’s tiering system.

The Policy’s Tiering System

Mayor Fulop’s tax abatement policy was adopted by executive order on December 24, 2013.  The policy codifies the length of time for an abatement based on geographic location or development type, from 5 years to 30 years.

 Policy Tiers

“Buying Up” To a Longer Abatement Term

For Tiers 1 through 3, a developer can extend the length of the abatement term and thereby purchase additional years of tax reduction.  To do this, the developer must buy-up to a higher tier.  To buy-up, the developer can either (a) pay between 1% and 3% of gross construction costs to a City “trust fund” or (b) build a preK facility. BuyUp

Buy-Up Mechanism #1: Pay 1.5% – 3% Construction Fees into Trust Fund

The policy language around the construction fees is very specific: the funds will “be placed in a trust fund held and controlled by the City.”  The concept of a “trust fund” is critical because a trust fund has a very specific accounting and budgetary purpose Money being held in trust implies that (a) there is a specific purpose for the money and (b) there is a specific person or entity who will ultimately benefit from the money being held in trust.  Trust Fund Combined Pic 1 and 2But if money is not held in a trust fund, then the funds are, by definition, not “held in trust.”  The accounting becomes less clear.  And thus the transparency of the buy-up money – and how it is ultimately used – decreases. Trust Fund Pic #3 The Jersey City City Council approved a buy-up abatement on March 26, 2014 for a rental building at 360 9th Street in Hamilton Park.  Because it was located in Hamilton Park, the development qualified for a Tier 2 abatement, or 10 years.  The developer elected to buy-up to Tier 3 for a cost of 1.5% of construction costs “to be placed in a trust fund held and controlled by the City.”

But during the public comment portion of the meeting, the Council revealed that no trust fund existed. It was “yet to be established” according to City Council President Rolando Lavarro (he voted against the abatement).  Further, Councilwoman Candice Osborne stated that the Council was “currently working” to draft legislation that would define how the funds were accounted for and ultimately used (she voted for the abatement).

Either the funds are put into a trust fund or they are not.  As a civic society, we rely on written laws and regulations that provide the public with assurances about how our government operates and how our money is spent.  Thus, this disconnect between the official policy – which includes language about a trust fund – and the Council’s admission that no such trust fund existed, is problematic.

Buy-Up Mechanism #2: Build a PreK Facility

The second means of buying-up is to build a preK facility, subject to Jersey City Board of Education (JCBOE) approval.  But, similar to the non-existent trust fund, issues exist.  It is important to note upfront that the City did not solicit input from the JCBOE when crafting this abatement policy (I confirmed this with multiple sources within the JCBOE).  This gives context to several flaws within the policy.

PreK Bullets

 Let’s drill into each of these issues, starting with the JCBOE budget.

No Budget to Build Schools

NO BUDGET TO BUILD SCHOOLS.  Building and financing new schools in Jersey City is the responsibility of the NJ Schools Development Authority (SDA).  PreK is 100% state funded, and it is intended entirely for “inside” the classroom.  Further, to enter into a lease longer than 5 years, the JCBOE must receive approval from the state (page 156 of the link2).  This is how school construction is supposed to work in Jersey City:

Public Financing of PreK Classrooms But the SDA is not fulfilling its mandate, and so the JCBOE has been forced to use part of its operating budget (the JCBOE does not have a capital budget) to lease classroom space.  In this vacuum of school construction created by the SDA, Mayor Fulop has offered a hybrid, public-private approach to building new classroom space, an inherently more complex process: Hybrid - Public and Private - Financing of PreK Classrooms The graphic above illustrates the “Pennrose” deal: a PreK facility at the Ward “B” Gloria Robinson Court Homes on Duncan Avenue (an affordable housing project).  The affordable housing project predates Mr. Fulop’s tenure in office, but he is strongly advocating for construction of a new, unbuilt preK facility, going so far as to speak about it in his state of the City address.  But the JCBOE is pushing back for multiple reasons, including cost prohibitive terms, a general lack of transparency surrounding the negotiating process, and concerns about the Mayor’s involvement in negotiations between a private developer and the JCBOE.

No cap on rentNO CAP ON RENT.  There is no guidance in the policy around preK facility rents that would be charged to the JCBOE by a private developer.  This issue – prohibitively high cost – is one reason that the JCBOE, the Mayor’s office, and Pennrose are at loggerheads over the unbuilt preK facility at the Gloria Robinson Court Homes (referenced above).  JCBOE sources state that appropriate rent for school space is “below market” since schools are perceived as a public good and a neighborhood amenity.  

As a means of objective financial comparison, I pulled the 2013 audited financial statements for Learning Community Charter School3, located 0.8 miles from the Gloria Robinson site.

  • At the  February 18, 2014 BOE Caucus meeting, Pennrose presented a series of slides to the JCBOE that detailed the cost of its preK facility.  The bottom line cost for the preK facility, to be financed by the JCBOE over 25 years, was $5,739,344.  Ward A and B DealsThe facility – as yet unbuilt – would contain 16,000 square feet and house six preK classes, or 90 students.
  • In April 2009, Learning Community Charter School – a public charter school for Kindergarten through Grade 8 – purchased land and a building at 2495 Kennedy Boulevard for $5,700,000.  The building contains 76,000 square feet and currently houses 542 students.

The Pennrose facility is approximately the same cost as the LCCS building, yet it will house only 11% of the students as compared to the LCCS building and contains only 22% of the square footage.  What is accounting for this disparity between cost, student capacity, and square footage?

DecreasedTransparencyDECREASED TRANSPARENCY.  The JCBOE is subject to strict rules when considering long-term leases, per NJ Administrative Code (NJAC) Chapter 26, Subchapter 10 (“Lease-Purchase and Lease Agreements”).   Some rules include: (a) a public hearing about the lease with opportunity for public comment, (b) a two-thirds BOE vote to approve the lease, and (c) assurances from BOE legal counsel that the lease is in conformance with State and Federal law.

But the abatement policy’s approach is to give the City primary (if not full) negotiating control over preK facility construction.  This potentially degrades the transparency that would otherwise be required if the JCBOE were to have a primary role in the process.

The JCBOE’s secondary negotiating role is evident in negotiations with the City for the Gloria Robinson Court Homes preK Facility (referenced above) and the PS 37 Cordero Annex, an existing school that currently houses 60 preK students in Hamilton Park.Ward A and B Deals

Per NJAC mandate, the JCBOE is holding a public hearing on April 24, 2014 about the two properties.  Yet the question must be asked: is the Mayor’s policy adding to, or detracting from, a more transparent process for PreK facilities?

Older KidNO FOCUS BEYOND PRE-K.  One BOE member I spoke with questions the policy’s focus on “preK facilities” only.  The JCBOE’s mandate includes preK through Grade 12. By investing only in PreK facilities, it could create a future imbalance in classroom capacity at the grammar, middle school, and high school levels.  It could also siphon away necessary resources like science labs and related equipment, computers and tablets, instruments and sports equipment, and other materials used by children beyond preK.

The City’s Viewpoint

I started researching for this article in early February.  Per the City’s request, I submitted a detailed list of questions through the City spokesperson but my questions went unanswered.  I informed the City I would publish an article with or without the City’s input, whereupon I was told I could meet with the Mayor.  But his scheduler repeatedly cancelled or postponed meetings due to unavailability of the Mayor.

A few days before publishing this article, I contacted the Mayor’s office for comment or clarification on my questions; I never received a response. I also contacted the City Business Administrator to inquire about how exactly the 360 9th Street buy-up funding was being accounted for.  I wanted to know the (a) fund and (b) specific account.  I have not yet received a response.

Civic Takeaways…

That Mayor Fulop’s new policy has served as the basis for approved abatements and buy-ups is problematic.  Tax reductions are being approved, and extended, under the guise of “benefits” that may not actually exist.  Some basic civic questions to ask include:

  1. Why did the Mayor not provide a clear explanation of the policy and buy-up program when it was finally adopted in December 2013?
  2. What is the status of the trust fund for the buy-up funds?  When will it be set up?  Who will will oversee it?
  3. Will the buy-up money eventually be used to serve education, youth jobs programs, or recreation?
  4. Does the hybrid public-private approach to building preK centers add to, or detract from, potential partnership between the City and JCBOE?
  5. How does a new preK facility benefit the City if expensive rent or financing is then demanded of the JCBOE over the duration of the lease?
  6. How exactly are the tax abatements being measured and evaluated?  Can the City provide a full explanation of the process and methodology it undertakes with each new abatement?

These are valid questions that everyone in Jersey City – particularly conventional taxpayers who bear the most cost and risk with each new abatement granted – should be asking.

I received help in writing this article from members of the community who provided feedback about the topics and info graphics contained in this article.  My sincere thanks for their time and willingness to spend time on this very important issue.

Notes:

(1) The policy explains that the first three tiers are “based on median income,” however no explanatory detail or data relating to this assertion is provided.

(2) State statute governing approval of lease agreements for JCBOE includes 6A:26-10.9 through 6A:26-10.11.

(3) Data for LCCS taken from LCCS Financial Report for Fiscal Year ending June 30, 2012. Report is available for download here.      a)  Profile of LCCS is on Page 5 of LCCS Financial Report.
b) Enrollment numbers for 2013 are on page 111 of LCCS Financial Report.
c) Enrollment for Gloria Robinson Court Home based on PreK Floor Plans (pages 13-14 of Pennrose slides) which show 6 classrooms.  State regulations cap preK class sizes at 15 students.  6 classes of
15 students totals 90 students.
d) LCCS $5.7 million cost does not include closing costs.  
       

10 Comments

  1. Brigid, yet another amazing article by you that is well researched and written in plain English. I will have more to say once I get to read it again and digest all of the information you have provided. WOW. I just wanted to take a moment to THANK YOU for your tireless investigative reporting and public service on these important issues in our city. I hope you know how appreciated you are for your civic efforts and strong writing skills. So impressed! Please keep up the good work!!
    Best, Liza

    • Liza – thank you so much. I received help from others in the community – through detailed discussions, feedback about the info-graphics in this article, and sources who were willing to speak to the issues. Also, the more people who take time to tune in (like you and others), the better off our our community will be. So thank you for tuning in and taking the time to provide kind feedback. I do appreciate it!

  2. This is a very interesting and well written article. It needs to be picked up / shared by more of the JC websites.

    • Thanks so much for the feedback. I rely on word of mouth and social media – to the extent you can help spread the word, I would appreciate it. I really appreciate you taking the time to read the article and comment.

  3. this is a well written and easy to understand series on tax abatements. nothing new here, but it is laid out clear as day.

    the convoluted non-statutory “buy up” policy appears in place not for any logic or public good, but to continue the status quo granting the abatement agreements.

    regardless in the changing of the guard, there has been no meaningful roll back of past practices nor embracing of new ways to do things.

    the short term benefits to office holders and the plugging of budget holes appears to continue taking precedence over long term fiscal health.

  4. Well written and informative. There are a few differences that are important to point out between the Pennrose project and LCCS facility purchase. The first is that the Pennrose project is a LIHTC project and therefore requires 1) a long-term lease, 2) living wages paid to all persons that work on the development and require that a significant portion of the workers/employees be local (boosting the local economy) which is not the case with a charter school, 3) built using union labor (which drives up the cost of development compared to LCCS/alternatives), and importantly, 4) LCCS’s building was built in 1890 and is depreciated compared to a brand new building (therefore the correct assessment of price for the LCCS purchase should include the cost of improvements that were required to build out the facility to serve as a school and variance in cost required to maintain the properties).

  5. If you look in the audited financials that you provided a link to, the cost of the LCCS’s building including improvements is reported as $8.2m . Still much cheaper per sq ft than the Pennrose facility but a large portion of that is due to the requirements imposed by the State and Federal governments on LIHTC properties.

    • Thanks for this nuance. This is very helpful nuance to have. I think your points add good context to the conversation, both in the reasons that the Pennrose project might cost more but also in the complications around pairing an affordable housing project with a school facility.

      A few questions that arise are: (1) why is the City pushing so hard to pair a logistically, regulatory, and financially complex project like LIHTC onto the JCBOE, an entity that does not even have a capital budget and (2) why did the Mayor’s office or the JCHA or the developer not provide some of this nuance upfront?

  6. Hopefully better choices will be made now that the Pennrose deal is off the table. I have been searching the news and haven’t found any mention of Pennrose withdrawing their offer yet. Has anyone else seen anything?

    • Brittany – a representative from the developer sent an email to the JCBOE at approximately 3:30pm yesterday, informing the JCBOE that the Pennrose preK property would not be available due to timing and finance-related concerns.

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