Tax Abatements 601: Brighter Sunshine Mandated for NJ Abatements

Tax abatement reporting in Jersey City is finally getting more transparent.  Two distinct authoritative bodies have mandated changes that require Jersey City (and other cities) to get onboard the transparency train. This news should come as a relief to taxpayers since abatements now constitute over 20% of Jersey City’s annual revenue yet have been sharply criticized by the NJ Comptroller as being too opaque and a detriment to both the county and the local schools.

The new transparency impacts two documents that are of import to taxpayers:

• The budget: a forward-looking estimate of how the government expects to spend taxpayer money in the current year.
• The financial statements: a backward-looking set of statements that detail how the government actually spent taxpayer money in the previous year.

Let’s get civic and break it down.

The Budget: Increased Transparency Mandated by NJ Division of Local Government Services

In New Jersey, municipalities are subject to state oversight.  One oversight entity is the “Division of Local Government Services” (“DLGS“).  The DLGS possesses singular authority when it comes to municipal finance; for instance, it reviews and approves city budgets and it can approve or deny capital projects.

Here’s how the DLGS got smart and taxpayer-friendly about abatements:

Starting in 2015, the DLGS now requires municipalities to produce a “user friendly budget” – in addition to the “regular” budget – which contains new reporting requirements about abatements.  For the first time, municipalities like Jersey City are required to provide the public with new details pertaining to each abatement, including:

1. Abatement Name
2. Type of Project (Commercial, Affordable Housing)
3. PILOT Billing (how much the city collects annually in PILOT payments)
4. Assessed Value of the land and building
5. Taxes if billed in full

Previously, the city simply listed its abatements in the “regular” city budget along with annual PILOT revenue.  For an example, see the 2015 budget; the PILOTs are listed starting on page 26.

The new user friendly budget represents much-needed transparency because previously, comparisons between (a) PILOTs and (b) foregone conventional taxes on abated properties didn’t exist.  The comparison of PILOT versus conventional taxes raises a host of questions and concerns that Civic JC succinctly organized in July 2015 on its Facebook page (you can find the analysis here).

Financial Statements & GASB Statement No. 77

State governments like NJ and local governments like Jersey City are required to release financial statements each year that explain how taxpayer money was actually spent in the preceding year.  Financial statements are audited by an independent accountant (often an accounting firm); the purpose of the audit is to ensure that what’s in the financial statements fairly represent the true fiscal picture. The city prepares the statements and the auditor provides the assurance; both parties use “GASB” standards to do so.

“GASB” is an acronym for Government Accounting Standards Board, which is an independent organization (i.e. non governmental) that “establishes and improves standards of accounting and financial reporting for U.S. state and local government.”  Roughly speaking, GASB creates and maintains the accounting rules that every city and state in the U.S. must adhere to.

And here’s what’s so interesting vis a vis abatements: GASB recently released new rules around tax abatement reporting.  It is called “GASB Statement No. 77 – Tax Abatement Disclosures.”  Statement No. 77 is great news for taxpayers because it promises to:

• “improve financial reporting by giving users of financial statements essential information that is not consistently or comprehensively reported to the public at present.”
• “better [equip taxpayers] to understand (1) how tax abatements affect a government’s future ability to raise resources and meet its financial obligations and (2) the impact those abatements have on a government’s financial position and economic condition.”

How will this happen?  GASB mandates that governments disclose information about the abatements, including:

• Brief descriptive information, such as the tax being abated,
• the authority under which tax abatements are provided,
• eligibility criteria,
• the mechanism by which taxes are abated, provisions for recapturing abated taxes, and
• the types of commitments made by tax abatement recipients
• The gross dollar amount of taxes abated during the period
• Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement.

The GASB impact in Jersey City likely won’t be realized until the 2015 financial statements are released in 2016.

Sunshine: the Taxpayer’s Friend

One core tenet of “getting civic” is demanding transparent evidence to substantiate that your tax dollars are being prudently spent, both in the short- and long-term. This evidence has been woefully missing for the past two decades with respect to abatements in Jersey City.

Fortunately for taxpayers, transparency around abatements has increased in 2015. That the state of NJ and GASB have independently sought greater transparency over abatements should be informing: abatements are currently too opaque.  And the antidote to opacity includes a healthy dose of sunshine.