Tax 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.

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.

 

“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.

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.  But 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. The Jersey City City Council approved a buy-up abatement on March 26, 2014 for a rental building at 360 9^th 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.

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

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:

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: 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 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.  The 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?

DECREASED 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.

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?

NO 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.