Tax Abatements 801: We need better abatement disclosures in NJ to show impact on public schools

This is post included in both my abatement series and a series about the User Friendly Budget in NJ. 

We need better disclosures in NJ to understand the impact of tax abatements on the local fiscal landscape, particularly as it relates to public schools. The user friendly budget – mandated by the state starting in 2015 – was a welcome and needed first step to increase transparency, but more is needed and local governments can shore up the gap if they choose to.

We can explore this using Jersey City’s abatement data.

User Friendly Budget Abatement Data

Currently, the detailed long-term abatement data that NJ requires in the user friendly budget are (1) project name, (2) type of project, (3) assessed value, (4) payments in lieu of taxes, and (5) property tax that would be paid IF the project were conventionally taxed. Here’s a callout of that data below, from Jersey City’s 2016 User Friendly Budget:

A local municipal government can offer taxpayers more data, however, sharing (a) a fully compiled inventory of all current abatements (i.e. all that are included in the annual budget) along with (b) critical data such as…

• year the abatement starts,
• duration of the abatement, and
• address of the property (in addition to “project name”).

With this data, taxpayers could glean insight into key questions like:

1-When are abatements going to expire, thus convert from PILOT-paying properties to conventional tax paying property?

2-How will this conversion from PILOT to conventional tax impact both city budgeted revenues and public schools budgeted revenues?

Let’s explore some of the nuance. And, a note: the user friendly budget looks back one year. So…the 2016 budget looks at 2015 data (which explains why, for the 2016 budget references below, we are looking at 2015 data).

Jersey City’s 2016 User Friendly Budget

Back in 2016 I obtained a then-current listing of abatements from the Jersey City tax office. I was able to combine (a) user friendly budget data (a public document) with (b) supplemental data I received from the tax office. I wrote about and created a map of the data in posts from 2016 and 2018.

What I’m sharing in this post is a new interactive Tableau visualization of that data. I went through a few basic steps to create the dataset:

1. Used the 2016 user friendly budget’s abatement inventory as a starting point. These are long-term abatements that paid PILOT fees in 2015.
2. Added equalized (or true, market) value to the dataset. Equalized value = assessed value divided by the annual equalization ratio.  [Note: “true” value fluctuates over time and so we should read this data as “true” market value as of 2015.  For a refresher on assessed versus market value, click here.]
3. Layered in the START YEAR, DURATION, and ADDRESS of the properties (this was data that I obtained from the tax office in 2016).

While dated…this gives us a sense of what’s possible if local government provided this data real-time. And, I want to acknowledge: it would be much better to have this data officially published by the city tax office; for now, my visualization is a suggested imagining of what’s possible.

With the data laid out, let’s now see how it can inform the taxpayers’ fiscal landscape.

When abatements finally expire…

The abatements disclosed in the User Friendly Budget are all long-term abatements, thus a 10- to 30-year timeline exists between (a) when the building opens for business and starts paying PILOT fees to the city and (b) when the abatement contract finally expires.

Let’s focus on the expiration, i.e. the end of the abatement contract. When an abatement ends, the property converts from PILOT-paying property to property tax paying property.

Thus, grouping our data based on “year of expiration,” we can get a sense of aggregate real estate value that will convert from “PILOT-paying property” to “property tax paying property” on an annual basis.  This insight matters for a couple of reasons.

1. PILOT paying property doesn’t fund the public schools. It instead funds the city budget with short-term contractual revenues, a paradigm the NJ Comptroller described as a “perverse incentive” back in 2010 given the way the city can unilaterally siphon real estate away from the tax base, shrinking the base of tax revenues that can be shared with the schools. Understanding this timeline, in the aggregate for every abatement on the city’s books – is in taxpayers’ interests.
2. Related to point #1 above — when the abatements do expire, they will have a two-pronged effect on city and school budgets. First, the schools will finally recognize property tax revenues from the property. But second, the city will lose access to the PILOT fees and instead have to share the new property tax with the schools and county.

We can use use the 2016 budget to get a sense of the moving parts. Below is a two-axis chart that shows:

• left axis (orange bars) – 2015 ASSESSED value of abated property, summed by year of abatement expiration
• left axis (green bars – 2015 TRUE value of abated property, summed by year of abatement expiration.
• right axis (the dots) – the number of abatements expiring each year (to show the number of contracts driving the value in the orange bars).

[A note on assessed versus true value. I’m including ASSESSED value because this is what ties to the user friendly budget. However, true value is the better approximation for what the properties are actually worth, which lends insight into the impact these abatements will have when they expire in 2022. It’s worth noting here that this discrepancy between assessed versus true value is inherently confusing in part because in NJ, property taxes are computed based on assessed value, but assessed values grow outdated over time if the city fails to revalue.  In 2015, Jersey City had let 27 years lapse since its last revaluation in 1988.]

Two notes on the filter options in this chart: (1) I’m including only commercial abatements in this dataset (but you can modify the filter to see affordable housing and “other” category abatements if you wish..just use the filter at the top) and (2) if you’re interested in seeing what abatements are included in each orange bar, just use the tabular dataset above…it includes all the detail.

A focus on 2022 (as an example)

Let’s focus on 2022, the tallest orange / green bar. In that year, 10 commercial and/or industrial abatements will expire, which are listed below. The 2016 budget provides detail about the 2015 true values…specifically:

1. The 2015 assessed values of these 10 properties was $427 million. [Note: the 2015 true value was actually much higher, at $1.5 billion.]
2. In 2015, these 10 properties paid a sum-total of $16 million in PILOT fees (95% to the city, 5% to the county, and 0% to the schools). These PILOT fees are based on terms within each abatement contract.
3. In 2015, if these properties had been conventionally taxed, they would have paid a total of $32 million in property tax, apportioned out to the city, the county, and the schools.  This $32 million is computed by multiplying the $427 million of assessed value times the 2015 tax rate of 7.481%. We can also estimate city, school, and county tax using the respective component rates:

• $427M x 3.774% = $16M would have gone to the city (approximately as much as the full PILOT fee)
• $427M x 1.765% = $8M would have gone to the county
• $427M x 1.942% = $8M would have gone to the public schools

If we fast-forward to an imaginary (but eventually real) 2022, we’ll have a similar paradigm of $X in PILOT fees, $Y in conventional property tax, and 2022 tax rates.  Taxpayers – and public school stakeholders – have an interest in understanding this future look.  There is some forecasting that can be done here, in terms of analyzing the impact of expiring contracts and then the ripple effects on local budgets.

This is particularly urgent in Jersey City, where schools continue to lose state aid at a rapid clip, putting greater pressure on the local school levy (aka local school tax) to make up for the state aid cuts. As pressure mounts on the school levy to go up, a chain reaction will force pressure on the city levy to go down. This pressure may create yet more incentive for the city to enter into new abatement contracts (to create more PILOT fees that will ease pressure on the city levy).  The incentives are, logically speaking, somewhat circular and taxpayers should have full insight into the nuance.

Wrapping up…

It’s within the power of a municipal administration to improve bare minimum disclosures required by the state. A city can publish, along with the user friendly budget, an accompany schedule of each reported abatement’s start year, end year, and property address. It’s a low-cost effort that can improve transparency for taxpayers.