State’s Sluggish Recovery Means More Bad News for Municipalities

Colleen O'Dea | July 13, 2012 | Budget
Rutgers seminar helps officials understand New Jersey's economic problems, but offers little in the way of fixes -- quick or otherwise

New Jersey has fared worse than the country at large during the three-year economic recovery, a trend not expected to change anytime soon, making the future challenging for municipal governments.

That’s the message municipal officials heard yesterday at a forum sponsored by the New Jersey State League of Municipalities Educational Foundation. The half-day seminar, held at the Edward J. Bloustein School of Public Policy at Rutgers University in New Brunswick, was designed to help officials understand the economic landscape and consider options for dealing with slow growth.

But speakers offered more bad news than solutions.

“More people in New Jersey believe in the tooth fairy than that the economic recovery exists,” said James Hughes, dean of the Bloustein School. A report he co-authored for the seminar, “Year 4 of Economic Recovery: New Municipal Realities to Come,” shows New Jersey has regained only 85,000 of the 248,000 private-sector jobs lost during the recession and beyond.

Patrick J. O’Keefe, director of economic research with JH Cohn Accountants and Consultants, said that as of May, the state had 1.4 percent fewer jobs than at the start of the millennium, compared with the nation overall, which has 1.7 percent more jobs than in 2000. If the state continues to add about 5,000 jobs a month, it will take three more years to reach pre-recession job levels.

“Over the last 10 years, New Jersey has underperformed the nation as a whole; that is where we need to pay more attention,” O’Keefe said.

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A major reason that the state’s recovery has been slow is that a disproportionately large part of New Jersey’s $487 billion economy is in the service sector. Nationally, manufacturing is surging, but the state’s manufacturing segment is minimal.

The commercial real estate market also continues to suffer, with the vacancy rate for commercial property hovering around 18 percent since 2002, said Gil Medina, executive managing director of Cushman and Wakefield and a former state commerce commissioner. The only thing preventing that vacancy rate from worsening has been the near total lack of new commercial construction.
He called the changing economic conditions “a paradigm shift.”

The state’s shifting demographics may also it even harder for communities to navigate the new economy.


Baby boomers, those born between 1946 and 1964, are becoming senior citizens. They are looking to downsize their homes but will be demanding greater services, said Hughes. At the same time, 20- and 30-somethings prefer higher-density housing in more populated areas and they are less interested in driving — more than a quarter of so-called echo boomers do not have a driver’s license.

The result, said Hughes, is that the suburban McMansions that were a staple of the housing boom over the past two decades are becoming “historical artifacts.”
O’Keefe said home ownership rates in New Jersey peaked in 2005 and have been dropping ever since — fewer than six in 10 housing units in the state were owner-occupied in 2010. The number of building permits issued last year was less than half of what it was in 2005, and more than 50 percent of those were for multifamily dwellings.

“No municipality in New Jersey is going to be immune to the implications,” O’Keefe said.

Meanwhile, home prices are at 2004 levels and owners living in houses assessed at higher amounts are seeking to recompense for that lost value through tax appeals.

Thomas Neff, director of the state’s Division of Local Government Services, said a record 113,000 tax appeals were filed in 2012, 28,000 more than the previous year. Last year’s appeals resulted in a $4 billion loss in ratables. The losses in 2012 will likely total $5 billion.

“Taxpayers are very, very angry,” said Martin Allen, real estate tax counsel to a number of municipalities.

He said tax courts are so backed up that appeals filed today are not likely to go to trial until October 2014. The result is more towns agreeing to settle cases to avoid litigation costs.

Updated Assessments

Neff and Allen both urged municipal officials with older assessments to revalue properties and all others to keep property assessments updated because that leads to fewer appeals and lower legal costs. Allen also advised municipalities not to cut staff in the assessor’s office because that will only lead to less uniformity and fairness in assessments and more tax appeals.

Municipalities struggling to cope with changing demographic trends and lost ratables should not expect much help from the state.

Raphael J. Caprio, a Bloustein School professor, said “There are limitations on the state as to how it can assist municipalities,” predicting virtually no increase in state aid to communities through 2017.

Had state aid continued rising at the same pace it had between 2000 and 2007, it would have reached $2 billion. Last year, municipalities got $700,000 less than that amount, which explains fully half of the property tax increases over the past five years.

Assuming trends in state aid and municipal spending continue, towns will be facing a $3 billion shortfall in 2017 if they continue to provide services at the same level as they did in 2009.

“In all likelihood, state aid is going to remain flat going forward,” Neff agreed.
But he did say relief is coming in the form of higher employee payments toward health benefits and a stabilization or reduction in the unfunded pension liability. Neff predicted municipal officials soon will be pleased, rather than dismayed, when they get their next pension bills.

“Coming around the corner are real substantial changes” that will help municipal budgets, Neff said.

Still, the shifting of healthcare costs from government to workers is not going to benefit either the individuals or the economy, as it is effectively a pay cut.

“Most government employees’ income will decrease by 5-to-10 percent,” Caprio said. “Assuming a 2 percent cost of living adjustment, income for most will at best be unchanged from 2011 to 2015 … This is unprecedented.”

That’s the same reality typical New Jerseyans have been facing this century. When inflation is factored in, the amount of disposal income for the typical resident — about $47,000 — has not changed since 2000, said O’Keefe.
The problem of mortgage foreclosures is beginning to plague home owners and municipalities, which will serve to depress housing prices and negatively impact towns.

Bankruptcy Filings

Virtually halted by the state Supreme Court for 18 months, filings have picked up in the beginning of this year — 13,000 actions so far, compared with 12,000 for all of last year, Allen said. New Jersey is second only to Florida in the percentage of mortgages in foreclosure — 8.4 percent, almost double the national average — according to O’Keefe

“There is an impact on municipalities,” Allen said, citing the maintenance of abandoned properties and property tax payment defaults.

Still, the situation provides an opportunity for municipalities to purchase properties for use as affordable housing, town offices, or other purposes. A community needs money to do that, though, and most towns don’t have any to spare.

Matthew Jessup, a partner at McManimon and Scotland, which serves as bond counsel to numerous local governmental entities, said it is becoming more difficult to get investors to buy municipal debt because of recent instances of towns declaring bankruptcy — three in California in the past month.

He urged officials to get their municipal finances in order and provide full disclosure, including written policies and explanations of one-shot revenues and structural deficits, in order to secure the best possible credit rating.

“Control the story, disclose it, tell what you will do remedy it,” Jessup said. “It could make a big difference in your borrowing rate.”

Neff said the state will soon be requiring greater disclosure by municipalities and plans to unveil online within the next week or two its draft of a new user-friendly budget to give the public a better understanding of municipal spending. The user-friendly budget was mandated by the same 2007 law encouraging municipal consolidation and shared services.

Caprio said that those two methods, typically cited as panaceas to cut costs, will not “yield savings of sufficient size”

He didn’t offer many concrete solutions, although he suggested municipalities consider all their options, including putting every municipal service and the way it is delivered “on the table.”

Caprio did point officials to a number of cost-saving ideas suggested by the Council of New Jersey Grantmakers, including a county- or statewide system of annual property reassessments, the consolidation of information technology services among municipalities, and the expansion of regional police dispatching.