A strong public school system is essential bedrock to a healthy community. Yet in Jersey City, our bedrock is threatened by a fiscal policy that is over-reliant on PILOTs. Here’s the crux of the problem: PILOTs help grow the city, which in turn increases demand for public schools. But PILOTed residents don’t pay school tax, leaving taxpayers to bear the burden of increased school cost. Two factors compound this problem:
(1) the city is now dependent on PILOTs to fund itself, so there is economic and political pressure to maintain the current course instead of fixing this structural problem before it grows even worse and
(2) state education aid has been flat the past several years, shifting the cost burden to local Jersey City taxpayers.
How we fund our public schools in the short and long-term is critically important. We need an open dialog about this issue. Our collective investment in the public schools speaks to the quality of our future as a community.
Let’s get civic and break it down.
PILOTs vs Regular Taxes: What’s the Difference?
A PILOT (“payment in lieu of tax”, aka abatement) is intended to alleviate blight. The idea is that the developer takes on risk by building in a blighted area. As a trade-off, the developer pays a PILOT instead of a conventional tax. The goal is: once the building is constructed, private capital and interests will help to lift the area out of blight.
There are two main differences between a regular tax and a PILOT:
(1) PILOTs avoid risk. A PILOT is a contract consisting of pre-defined payments over time (like a loan). Contrast that with a regular tax which can rise unpredictably over time.
(2) PILOTs benefit the city at expense of the schools. A PILOT pays 95% to the city and 5% to the county; the schools receive 0%. Contrast that with a regular property tax that splits the payment; in Jersey City, a property tax pays about 50% to the city, 25% to the schools, and 25% to the county.
I’ve written a series about tax abatements here if you want to read more.
PILOTs “Rob” from the School System
When used with discretion to alleviate blight, PILOTs can serve a public good. But when used without discretion to increase market rate housing in already-gentrified areas of the city, PILOTs can do real harm, particularly to the public schools.
This harm, and the difference between regular taxes and PILOTs, was first brought to my attention by then-Councilman Steven Fulop. During his 2013 mayoral campaign, Mr. Fulop criticized the PILOT policy of his predecessors and stated that PILOTs “should be allocated in equal proportions to the County, City, and Board of Education.” Mr. Fulop was criticizing a key characteristic of PILOTs: they don’t pay school tax.
But as mayor, Mr. Fulop’s actions have run counter to his promise. Since November 2013, 18 abatements have been granted(7), none of which are allocated in “equal proportions” to the city, schools, and county.
Robbing from the Schools Helps the City Pay Its Bills
Looking at city budget data informs the pressures facing Mr. Fulop and the City Council. The city has grown more reliant on PILOTs because it needs the 95% share of revenue to help fund the city budget. We can see this by looking at how the city paid its bills in 2007 versus how it’s paying them in 2015(1).
Three noticeable trends jump out:
(1) State municipal aid to the city decreased from 2007 to 2015. (Note: this is a separate bucket of state aid from what the public schools receive.)
(2) Local taxes increased over that same timeframe.
(3) PILOTs also increased.
So the city was historically reliant on state aid, but when that spigot was tightened, the city fell back on tax hikes. But tax hikes are legitimately painful and unpopular for residents. So the next best source of money for the city is PILOTs.
We can also see the city’s over-reliance on PILOTs when we look at property values.
- Local taxes are funded by the tax base, i.e. homes and businesses that pay property tax. The 2014 assessed value of this property was $5.9 billion(2) per tax data published by NJ Department of Community Affairs.
- PILOTs are paid by abated homes and businesses. The 2014 assessed value of PILOTed property was $2.5 billion(3) per the city’s 2015 User Friendly Budget. [Note: I’ve removed affordable housing to make the comparison with the tax base more apples-to-apples.]
In effect, 30% of the city’s money-generating property is PILOTed. None of which pays school tax.
Another way to look at this is:
- People living in the PILOTed buildings don’t pay school tax. Instead, those families are sending 95% of their payment to the city, to help grow Jersey City.
- The foregone school tax from the PILOTed buildings is, in turn, being picked up families living in regularly taxed homes.
An Alarm Bell: State School Aid Flatlines, Jersey City School Tax Goes Up
Since 2011, state aid to Jersey City has been flat at about $420 million per year (4). Yet over this time, the local school tax levy has increased about 7.5%, from $104 million in 2011 to $112 million in 2015(5).
We can reasonably predict that school taxes will continue to go up based on the following:
- The district released a 2013 demographic report(6) predicting increased school enrollments. Increasing enrollment will, barring significant cost cutting measures, lead to increasing costs.
- Since 2013, the city has approved 18 new long-term (10+ year) abatements that are not affordable housing related(7). Eight of these abatements are in Ward E (arguably the most gentrified ward in Jersey City). We should reasonably assume some of the abated residential properties will be home to public school students. Yet these families will not pay school tax. Logically speaking, taxpayers will make up the shortfall.
Finally, we can see how problematic the city’s PILOT policy is by looking at the impact of a single PILOT. In Ward C, Mr. Fulop’s signature, 3-tower “Journal Squared” project will add 1,840 units. Yet the school district’s 2013 demographic report(8) had this to say about PS #11, the zoned school for Journal Squared:
“P.S. 11: a combination of pressures include the increasing need for dedicated learning support spaces (Basic Skills and Resource), the continuing dependence on temporary trailers inadequately sized for the observed class size, and the overall over enrollment of the school results in increased numbers of students per class (sometimes up to 150%) and a generally compromised teaching environment.”
We know that the city (not the board of education) is on record for systemically under-estimating public school students coming out of abated buildings. For instance, the city estimates that the 1,840 unit project will house only 7 students(9). This number was taken from the city’s fiscal impact reports for the Journal Squared project.
This is a complex problem and we need thoughtful dialog to arrive at meaningful solutions. A first step is coming to greater understanding and getting engaged. To that end, here are three reasonable questions every taxpayer can ask the school board, the city council, and the mayor:
(1) Why are abated residents not paying school tax like regular taxpayers, a concern that Mr. Fulop highlighted to the public when he ran for mayor in 2013?
(2) What are the projected increases in the local school tax levy in the next 1-5 years, given obligations around teachers salaries, facilities maintenance and upgrades, and other essential costs?
(3) What is the fiscal impact to local taxpayers if state aid to Jersey City decreases?
- A one-page summary of revenue data is located on Sheet 11 of each year’s budget. PILOT data is a subtotal within “Special Revenues” and can be found on Sheet 10G of each year’s budget.
- Two files at the provided link contain the “Net Taxable Value” for taxable property: (a) the “Property Tax Tables” for 2014 (the column labeled “Net Valuation Taxable” contains the noted data) and (b) the “Abstract of Ratables” for 2014 (the column labeled “Net Taxable Value”).
- To view abatement data in the “User Friendly Budget” for 2015, click the link which will download an MS Excel file. Then navigate to Tab “UFB-6 Tax Abatements”. I have also provided this data in a single-table format here.
- State aid amounts by district are available at the link provided by drilling into the year and then the district.
- See slide “P-29” in the presentation at the link provided.
- See page “i” of the Executive Summary.
- The city provides abatement data for 2014 and 2015 on its Open Data Portal. However, data is only current through January 2015. Fifteen of the 18 market rate abatements are in this data. Additionally, in November 2013 the city approved three abatements for the 3-building “Journal Squared” project (each building is a separate abatement).
- See page 14 of the report.
- I OPRA’d Fiscal Impact Statements for the Journal Squared project. Those documents are available here.
The following correction was made to this post: the zoned school for Journal Squared is PS #11, not PS #23.
This is a really clear view into a complicated issue. Has the Mayor ever said publicly why his stand changed so dramatically from his campaign? Fulop’s abatement policy refers to the creation of a fund or trust for money to invest in PreK facilities or affordable housing. Does anyone know if the fund or trust was created?
The mayor didn’t publicly explain the departure from his campaign promise. The trust fund was never created. Per the business administrator for Jersey City, as of 12/31/2014, buy-up funds totaling $3,821,635 were on the city’s books in a reserve account titled “abatement buy-up.”
Peter Basso, Aide to the Council President posted this to Facebook in a conversation about BoE candidates on November 1. This as news to me, maybe I missed it, but it speaks to the issue –
“Peter Basso April, FYI the PK3/abatement exchange used to be part of the Mayor’s abatement “buy-up” policy in 2013-14, but it’s not anymore. Following review by Local Finance Board, the City was not given permission to do buy-ups at all. The current abatement policy is focused on on-site affordable housing, not building schools.”
Yes the new policy (related to affordable housing, a wholly separate issue) supersedes the previous PILOT policy that dealt with school-related-buy-ups. Though there was, as of 12/31/2014, nearly $4 million in buy-up funds on the city’s books in a reserve account. That is the “buy up” money that was not permissible to be put in trust per the Local Finance Board.
Brigid, love this. What do you think is the solution?
Kevin – Thank you. I think the BOE has the most leverage to address this with the city. It is an independent governing body separate from the city and it has a stake in how the schools are funded. I’d love to see a JCBOE assessment of how PILOTs impact the schools; to date I have not seen that. The City Council also needs support. When a PILOT gets approved, there often isn’t major scrutiny (aside from a few individuals who attend council meetings) from the public. So in fairness, the city is approving these PILOTs through transparent process and two open votes. There is real pressure to stay the course, given the JCBOE isn’t ringing alarm bells and the public isn’t engaged en masse and the city needs PILOT $ to avoid tax hikes in the short-term. The city needs to hear from people that there is concern about the way PILOTs don’t fund the schools, and that means attending meetings and voicing opinions on the matter.
A very interesting piece, thank you for writing this!
In a sense though, PILOTs are more of a tax problem than a school budget problem. Since a BOE sets a tax levy and not a tax rate a BOE gets whatever money it asks for no matter how much PILOTing occurs. The tax burden is just silently and automatically shifted onto other tax payers.
NJ’s PILOT law, state aid law, and tax cap interact with each other in complex ways and this means that even if none of Jersey City’s new development were PILOTed the JCPS would probably still be facing cuts.
The tax cap doesn’t give a BOE an automatic adjustment even if it has rising ratables. Thus, even if none of JC’s new development were PILOTed the Jersey City BOE couldn’t tap that property wealth unless it went to its electorate and got permission for an above-cap tax increase.
The Jersey City BOE has a large reluctance to raise taxes even within its existing taxing powers. Since NJ’s tax cap law gives a BOE certain adjustments to go above 2.0% for increasing health care costs (and rising enrollment), the Jersey City BOE could raise taxes over 2.0%. However, the Jersey City BOE hasn’t raised taxes over 2.0% and in one recent year stayed below even 2.0%.
The fact that JC’s school tax increases are lower than the increase in the market value of its real estate means that JC’s equalized tax rate has actually dropped in the last few years.
For 2015-16 the equalized tax rate is 0.5631.
In 2014-15 it was 0.5878.
For 2013-14 it was 0.6065.
For 2012-13 the equalized tax rate was 0.5658, so you can see the dropping equalized tax rate trend isn’t that old, but still, it’s gone on for two years in a row. Since JC gained over $1 billion in EV for 2016 the equalized tax rate will surely go down again next year too.
Why the JC BOE doesn’t want to raise taxes is an interesting question. Many BOEs try to be sensitive to the regressive nature of property taxes and avoid cuts that will hurt people with low incomes, but the JC BOE would have to be extra sensitive with this due to Jersey City’s lack of a reassessment. Since residents of ungentrified areas of Jerse yCity are overtaxed relative to the market values of their homes, tax increases in Jersey City are even more unfair and regressive than they are in towns that have recent and accurate property assessments.
Due to the tax cap and the JC BOE’s reluctance to raise taxes, if none of JC’s new development were PILOTed the effect would be even lower school property rates, not more money for the school system.
There are also complex interactions with state aid and here is where I would worry much more for Jersey City.
Technically, Jersey City should get a $417 million in K-12 aid forever due to Adjustment Aid sustaining the pre-SFRA aid level and Jersey City’s own gentrification disqualifying Jersey City from getting any additional aid.
However, there is an increasing realization that SFRA is unfundable, Adjustment Aid is unfair, and that there are many districts that more acutely need the aid that is now going to Jersey City. Even if there is no redistribution or Jersey City doesn’t lose any aid through that, she state’s pension system is so underfunded that across-the-board cuts to K-12 education aid are inevitable.
At best, Jersey City’s aid will be $417 million forever and Jersey City taxpayers will slowly have to pay for a higher percentage of the JC schools. A more likely scenario is aid cuts due to redistribution and/or across the board budget cuts and then JC will have to assume local tax responsibility quickly than it realizes.
Due to 30% of its valuation being PILOTed, the Jersey City BOE will have a harder time politically getting its residents to accept tax cuts than would a BOE that barely had any PILOTed property.
Very thorough response
Thanks for reading…
The PILOT situation is complicated, but the quick summary is that even if JC didn’t PILOT anything and all of those projects still got built, the schools wouldn’t get any new money unless the JCBOE raised the tax levy in proportion to the increase in ratables.
Without a large increase in the tax levy, all that would happen is that all other tax payers in JC would get a large tax cut. Although Jersey City’s may not notice it, Jersey Cityans _are already_ getting tax cuts compared to the value of their properties since Jersey City’s Equalized Valuation is increasing faster than the BOE’s tax levy.
Unfortunately, the JCBOE is legally blocked from raising taxes above 2-3% anyway, but even that is a moot point because the JCBOE is afraid to go anywhere near its legally allowable maximum under the tax cap law.
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