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Restoring the State's Urban Enterprise Zone Program

Colleen O'Dea | December 9, 2011

Democrats are behind a bill that would reverse the administration's decision to stop funding UEZs.

New Jersey's State Theater, located in the Urban Enterprise Zone in New Brunswick.

Senate Democrats are attempting to revive New Jersey's nearly three-decade-old Urban Enterprise Zone program, which was created with the idea of bringing commerce and jobs back to city downtown areas. The program offers an incentive for consumers to shop in urban downtowns due to lower sales tax, and most of the taxes collected were in turn given to the cities to reinvest locally.

Legislation that would give zones back some of these tax funds as long as they meet tougher planning requirements, along with stricter conditions for how they can spend the funds was voted out of the Senate Community and Urban Affairs Committee yesterday, 3-0, with both Republican members abstaining. It now heads to the Senate Budget and Appropriations Committee.

The 32 Urban Enterprise Zones (UEZs) received a final payment from the state last month, after the Christie administration decided to eliminate funding for the program, citing a consultant's report that said the program was a drain on state resources and of little benefit to the local economies.

"The Urban Enterprise Zones do have a place as economic development tools," said Sen. Jeff Van Drew, (D-–Cape May), chair of the Senate Community and Urban Affairs Committee and co-sponsor of S-2949, which would overhaul the zones.

He cited the Vineland/Millville zone, one of two in his district, as a great example of the program's success, enabling these communities in remote Cumberland County to reshape their main streets and attract businesses and professional services.

Michael Cerra, a lobbyist with the New Jersey State League of Municipalities, agreed.

"For nearly 30 years, UEZs have helped support local economies, particularly in our urban centers … resulting in tangible results in both the host cities and the state as a whole," Cerra said.

"Without UEZ funding, these cities are confronted with additional budget shortfalls, felt from its taxpayers to those who work in the zones. Reforms and improvements can and should be made, but the program itself should be preserved, as it should be an essential part of the state's economic recovery strategy."

Meant to address the stinging criticisms in last February's UEZ report, the bill would set new requirements for the zones to meet in order to receive funding from the state. Chief among these would be a five-year economic growth plan. Zones that meet the requirements would be eligible to get back 45 percent of the sales tax revenue they collect, with 5 percent going to administer the program and the rest deposited in the state's general fund.

Under the terms of the UEZ program, enacted in 1983, the zones were eligible to receive some or all of the taxes they collected each year to support their operations, some police and fire services, and capital improvements.

A month after taking office in 2010, Gov. Chris Christie suspended payments to the zones and used the money instead to help balance the budget. He took the money allocated for the program from Gov. Jon S. Corzine's 2010 budget, and also cut it from his budgets for fiscal year 2011 and 2012. Doing so deprived the zones of roughly $90 million annually. Last July, the Democrats' attempted to override the governor's veto of a $47 million infusion hey had inserted into the budget for the Enterprise Zone Assistance Fund. The override failed on a party line vote.

How those monies had been spent was a key criticism of a lengthy assessment of the UEZ program conducted by Delta Development Group, Inc. and HR&R Advisors, Inc. for the state Department of Community Affairs, which oversees the program. That report, released last February, stated there was a "lack of accountability from fund recipients" for the money spent, which "does not justify continued allocation of public resources in the present fashion."

Between 2002 and 2008, the state invested nearly $2.2 billion in direct expenditures and reduced taxes on the UEZs, according to jointly authorized memo by DCA Commissioner Lori Grifa and Caren Franzini, who is both head of the state Economic Development Authority and chair of the UEZ Authority. Explaining why they accepted some of the report's recommendations while rejecting others, they agreed that the zone program "delivered a limited economic impact on the zone economies and produced a negative return on state investment."

The report concluded that every $1 of state funding produced only 8 cents in new state and local revenue and 83 cents in "ripple effect" economic activity. Less than 5 percent of the money was spent on construction, expansion or renovation projects.

"Although the NJ UEZ Program has some tangible signs of success … [it] is bureaucratically cumbersome and costly to operate, and has yielded inconsistent and uncertain quantifiable results in terms of business expansion and job creation in the State's urban areas," the report concluded.

Sandy Forosisky, Vineland's economic development director, disputed the study, which was completed within three months.

"We don't feel that that study was as in-depth as it should have been," she said. Forosisky noted that while the authors weren't able to determine how many jobs were created, that information was submitted every time a town asked for money, but it wasn't always recorded by the UEZ Authority.

Overall, the report suggested eliminating the UEZ Authority in DCA and the zone program as it currently exists and replacing it with a different, community-based economic development program.

Grifa and Franzini did not recommend that extreme measure, so most of the program's benefits remain. Those include the lower, 3.5 percent sales tax charged by participating businesses within each zone (rather than the typical 7 percent) as an incentive to bring in customers, as well as several incentives for the businesses themselves -- sales tax exemptions for certain purchases and utility costs, subsidized unemployment insurance costs for low-wage workers, and some special tax credits.

Grifa and Franzini agreed that the zones should not get any of the taxes collected, but last month the state gave each UEZ unspent program and administrative funds that had accrued from sales tax revenue through June 30, 2010 and was reserved for their use, said Lisa Ryan, a DCA spokeswoman. This payment included some funds already committed to projects and totaled nearly $92 million.

"Local zones do not have to come to the state UEZ Authority for approval on how to use the money," said Ryan. "However, the state UEZ Authority urges the local zones and their municipalities to use the money prudently, as it is the product of a taxpayer program funded to promote economic growth."

Ranging from $9,000 for West Wildwood to $15.4 million for Jersey City, the zones have yet to feel the full effect of the loss of aid.

But, said Van Drew, "The ultimate effect could be quite profound."

Roberta Farber, Jersey City's UEZ director, said several cities had to cut back on a number of programs due to Christie's action to keep the sales tax dollars for state use.

"The UEZ program has had a tremendous impact on the unemployed in the municipalities; this would enable us to continue to do what we have done in the past, do job training programs," Farber said. "Over the past year, we have all had to cut … a lot of our programs have had to have layoffs, a lot of private-sector jobs have had to have layoffs because they are not getting that infusion of the public dollars that we have been able to provide."

Among the pending projects in Newark are streetscape and building façade improvements, and the relocation of a commercial bakery from New York City, which is expected to bring 100 new jobs. "We probably have one-to-two years' worth of serious development activity that can occur with previously approved projects, then we'd be winding down," said Adam Zipkin, the city's deputy mayor of economic and housing development. "This has been, in our opinion, a really successful program that has enabled millions of dollars to be invested in Newark that otherwise would not have occurred."

Van Drew's bill embodies some of the consultant's suggestions, while keeping the zone program intact and giving the UEZs back almost half of the sales taxes they collect as long as the cities that house them complete growth plans. DCA would evaluate municipal compliance with those plans to determine whether towns should continue to participate.

"This program has done a tremendous amount of good for financially distressed cities," said Sen. Brian Stack, (D-Hudson) and co-sponsor of the bill. "This bill allows the UEZ program to continue to aid towns and cities that are working to improve their downtowns, create jobs and stimulate the economy, but ensures they are held accountable for the funding they are provided."

The consultants' report found that only about $45 million is spent each year for zone projects, so Van Drew's bill would essentially continue to fund the UEZs at the level at which they were accustomed. (The money that was not spent accrued, which is how there was $91 million left in the accounts to distribute to the towns last month.)

All told, the zones employ about 99 staff statewide, and another 36 oversee the program in three state departments.

More than 6,800 businesses participate in the programs, charging a lower sales tax and getting the other benefits – including $140 million in sales tax exemptions each year. Still, the report found only 2 of every 10 eligible businesses participates.

DCA spokeswoman Ryan said that, based on the consultants' report, the administration has changed the way businesses participate, to reduce the bureaucracy and make the process more user-friendly. That could entice more businesses into the program.

Van Drew's bill is not the only legislative effort at addressing the UEZ program and trying to get some of the money collected back into the hands of municipal officials. Last month, the Assembly Appropriations Committee passed a very different bill that would make a number of changes to the law, including giving UEZ municipalities back a third of the taxes collected in their zones. The law would remain in effect until 2022.

While some legislators want to try to restore the program to its former state, that would be unrealistic and likely to be vetoed. Van Drew considers his bill a compromise. He does not expect his bill to pass in the lame duck session but wanted to get started moving through the process.

"I want a bill that is going to pass," Van Drew said. "Hopefully, it's something Gov. Christie can sign."

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