More Scrutiny of Deals that Municipalities Make with Developers?

State lawmakers want increased regulation of local tax agreements that can adversely affect funding for school districts

Construction site
As lawmakers consider increasing the amount of aid the state gives to K-12 school districts this year, they’re also advancing legislation that would bring more scrutiny to special tax agreements between local officials and developers that can also influence the bottom line for school districts.

Known as payments in lieu of taxes, or PILOTs, the long-term agreements can be a valuable tool for municipal-government leaders to stimulate redevelopment in their communities. But, by design, they can also reduce the amount of overall tax revenue that would otherwise go to the local schools.

A group of lawmakers led by Senate President Steve Sweeney (D-Gloucester) is looking to establish new requirements to make sure local leaders and the residents they represent fully understand how PILOT agreements will impact local tax collections, including for their schools. The new requirements would force mayors and other municipal officials to conduct an independent cost-benefit analysis of a proposed long-term tax exemption, and for the results of that analysis and other fiscal-impact data to be posted online by both a municipality and the state.

Sweeney said the goal of the bill, which was passed unanimously by the Senate Budget and Appropriations Committee yesterday, is to ensure that PILOTs don’t get abused. But the New Jersey State League of Municipalities opposes the legislation, concerned that the new requirements could heap new costs on local governments when they are considering a long-term PILOT agreement.

School funding at issue

The focus on PILOTs comes as school funding has become one of the hottest issues in the State House this year amid ongoing discussions between Gov. Phil Murphy and lawmakers as they search for a broader agreement on a new state budget for the 2019 fiscal year, which begins on July 1. Murphy, a Democrat, is proposing to increase state funding to K-12 school districts by nearly $284 million as part of an overall $37.4 billion budget plan but Sweeney and other lawmakers are pushing for him to also agree to change the way the state currently divvies up what’s known as “formula aid” to local schools.

Under Sweeney’s proposed school-aid legislation, more money would go to districts that are considered “underfunded” based on their enrollment figures. But Sweeney’s bill would also require reductions to scores of districts that have been getting so-called “adjustment aid” meant to save them from cuts. That additional aid totals more than $670 million a year, and currently goes to 190 districts.

Another key factor in the school-funding debate is how much money is being collected each year from local property owners through the school-tax portion of their local property-tax bills, and whether the state is being relied on too much to provide aid in some communities where local officials aren’t raising as much as they can through property taxes. In some cases, the local leaders have also intentionally restricted the revenue stream for local schools by entering into long-term PILOTs with developers.

The tax deals can last decades

Such agreements can last up to 30 years, and typically involve the payment of a specific amount of revenue in lieu of an annual property-tax bill that’s based on the latest property-value assessment. The deals generally result in 95 percent of an agreed upon payment going directly to the municipal government, and 5 percent going to the county government, which means there’s no tax revenue at all for the local schools — though they may benefit indirectly from an overall increase in local property values that can be generated by successful redevelopment initiatives.

Under the bill approved by the Senate committee yesterday, developers seeking to secure a long-term tax exemption from a local government would have to submit a cost-benefit analysis to the government leaders, along with their application for the tax incentive. An independent analysis of the proposed redevelopment project would also have to be submitted by the mayor of the town or some other chief executive officer. The legislation would require the analysis, among other things, to consider the impact on local revenue collections, as well as on the local school district and county government.

According to the bill, the results of the cost-benefit analysis would have to be posted on a town’s official website, and also provided to the state Department of Community Affairs, which already shares detailed, town-by-town informationn about local property taxes and relief programs on its website.

Sweeney said the goal of the legislation is to make sure the state PILOT program is working properly, and to demonstrate that the agreements are generating good deals for taxpayers.

Using PILOTs ‘to capture all the revenue’

“I support PILOTs and I believe in PILOTs, and they’re important,” he said. “But some places might not need them anymore, and they use them as a way just to gather and capture all of the revenue into the municipal budget.”

Sweeney didn’t cite any specific place as a concern, but the use of PILOTs in places like Jersey City was highlighted by several witnesses during public hearings on Murphy’s budget proposal earlier this year.

“We want it to work right, that’s all,” Sweeney added.

Despite the bill’s easy passage out of committee yesterday, the League of Municipalities is raising a number of concerns about the legislation. In a letter to lawmakers yesterday, the organization called on the staff of the nonpartisan Office of Legislative Services to prepare a fiscal note, so lawmakers have more information about any potential costs that would come with adoption of the bill. The letter also said that, under current law, New Jersey municipalities “already consider the relative costs and benefits of a project in their consideration of financial agreements.”

“Preparation of a formal analysis on a prescribed set of topics will increase the municipal cost of reviewing applications and limit local decision-making authority,” the letter said.