City Budget: Structural deficit creates budgetary challenges. Large gap filled by selling property and front-loading PILOTs

Structural deficit creates budgetary challenges

Large gap filled by selling property and front-loading PILOTs

10/17/2004 Hoboken Reporter 

To fill the city's structural budget deficit last year, the city refinanced its debt at a higher interest rate for a longer term, which was not a particularly popular move. This year, to fill another large budget gap in its proposed $72 million spending plan, the administration of Mayor David Roberts is recommending that city sell off some of its property and front-load a number of Payments in Lieu of Taxes (PILOTs).

This had some people at Wednesday night's budget hearing questioning the soundness of the city's fiscal planning.

Stable taxes, but...

While the budget will maintain a stable tax rate for the 11th year in a row, spending is still significantly up from last year's approved budget of $59.9 million. The biggest spending increases include spiraling health care costs, and swelling police and fire salaries.

The plan, which will run from July of 2004 through June of 2005, calls for approximately $72 million in spending. That number might change because the administration is working on several amendments, which will likely be presented to the public at the council's next regularly scheduled meeting this Wednesday. The public hearing to the budget remains open and the public will have another opportunity to comment on Wednesday, after which time the council could vote on the spending plan.

According to Roberts, because $6.3 million in deferred charges was caused by overspending in past years, the operations portion of the 2005 budget is around $66 million. The municipal portion of the tax rate should remain stable at approximately $7.84 per $1,000 of property owned, he added. Overall, taxpayers pay the municipal tax rate ($7.84) as well as another amount for school and county taxes.

The public speaks

Even though the budget hearing conflicted with the presidential debate, the Yankees game and locally with a controversial hearing at the Zoning Board (see cover), there were still a number of people that spoke on the budget.

The same topics were hit on by nearly every speaker. They voiced their concerns over the impact of selling property for short-term property relief, they worry that taking up-front PILOT payments will adversely affect the city's future revenue stream, and are not convinced the city is doing all it can to control costs, especially when it comes to health insurance and salaries.

The city's position

Roberts said while spending is up, several areas were out of the city's control, such health and liability insurance costs, utility expenses, and garbage hauling fees. He said that despite these challenges, the city's finances are still in solid shape. "Hoboken's debt to value ratio has never been better and our city has never been stronger," said Roberts Thursday.

He added the value of all real estate in Hoboken has increased during the past decade, from $1.7 billion in 1994 to its current value of $2.4 billion.

City Business Administrator Richard England added Wednesday night that there are some opportunities to save in the near future. First, he said the $6.3 million in deferred charges, assuming the city budgets enough this year, should fall away in next year's budget.

Second, he said, the contracts of all six of the city's collective bargaining units, two each for fire, police and municipal employees, are up Dec. 1. "We plan on taking and aggressive stance in those negotiations," said England. Also, he said he expects to collect $12 million in taxes from new properties that come online in the next five years.

The 'one-shots'

This proposed FY 2005 budget has over $15 million in one-shot revenues to plug the structural deficit. A structural deficit is when the city's annual revenue is less than its annual appropriations, making the city use non-recurring revenue sources to close the gap. The city is running a considerable structural deficit, considering the total amount to be expected raised in municipal taxes is only $19.1 million.

One example of "one-shot" revenue in the proposed budget is the sale of the municipal garage. According to England, the city plans to sell the garage to the Hudson County Improvement Authority, a quasigovernmental agency, for approximately $9 million.

This money would be plugged into the budget to offset the gap. The HCIA then would lease the property back for an annual rent equal to the interest on the HCIA's bond. Then if the HCIA in the future decides to sell the garage to a third party, the city will receive any monies above the original sale price.

But those in attendance said that it's not proper to sell assets for such short-term purposes. "Would you sell the garage behind your house to pay for your heating bill?" Hoboken resident Randy Brummette asked the council. "Well that's exactly what's happening here." He added that, "this is nothing more than a back door tax increase." He then asked England if selling assets and front-loading PILOTs should be used to pay operational expenses, such as salaries.

"It's not a good idea," said England. These were not encouraging words, considering that England, as the business administrator, is the person who is supposed to be selling this budget to the City Council.

Others expressed concerns that the city is using the equity of the garage to fund a budget short fall. "What they're doing is borrowing against the credit of the municipal garage and cashing out its value in one year," said Hoboken resident Michael Lenz, who is also the city's former CFO.

Thursday, Councilwoman Carol Marsh said it's like taking the municipal garage to a pawn shop. "We're essentially pawning the garage and hoping they don't have to pay the bill until after the election," said Marsh.

916 Garden St. pulled from budget

One non-recurring revenue source that was pulled from the budget last week was the sale of the automated parking garage at 916 Garden St. The proposed budget anticipates $1.1 million for the sale of the garage 320-car garage.

England said that the garage might sell for $8.5 million, which would pay off the city's $6.3 million remaining on its bonds. But now it has been pulled. While the city isn't saying why it was pulled, the most likely answer is that it's going to be difficult to get $8.5 million for the facility, considering that in late 2002 a possible buyer, who has close ties to the current contractor who manages the garage, came forward with a winning bid of $5.75 million, but later pulled out.

So how will the city make up that $1.1 million now that it's no longer anticipated revenue?

It tacked on an extra million to the sale price of the municipal garage. Last week it was anticipated to be sold for $7.9 million and this week it's going for $9 million.

Did the value of the garage jump a million in one week?

No, the municipal property is actually worth much more than $9 million, but $9 million is now the sum of money that the city needs to fill the budget gap. The fact that the city is selling the garage to the HCIA for less than its total value gives credence to those that say the city is using a back door method to borrow against the value of an asset to fill the budget gap. According to state statute, it would be illegal to go out and directly bond to pay operational expenses.

Front-loading PILOTs

According to England, New Jersey Transit, currently and in the past, paid the city a PILOT of $149,000 for the bus terminal near the PATH station.

"For budget relief, we have agreed with [NJ Transit] to front-load $2.5 million with them being relieved of future PILOT payments until such time as the present value of $2.5 versus $149,000 is achieved," said England. Roberts said that using his good relationship with governmental or semi-governmental agencies helps a city in need.

In addition to the NJ Transit upfront payment, the city is also scheduled to receive a one-time upfront $3 million PILOT payment from the Port Authority of New York and New Jersey.

Critics of the administration worry that by taking money upfront for something that is short-lived as tax relief, the city is just borrowing from future taxpayers in order to spend more now.

Ines Garcia Keim, a former City Council candidate, said that taking money now, at the expense of later budgets, does not bode well for the future. "My first impression of this budget is that is very shortsighted," she said. "There is very little about the future but very much about the present."

On the spending side

In most municipal budgets, three of the biggest items are health insurance, and police and fire salaries, all of which have seen marked increases in the past several years.

Just like elsewhere, the city has endured 20 percent-plus annual increases in its group health premiums. Correctly anticipating how health insurance costs have risen has been a challenge, for each of the past two years the city has grossly under budgeted this important line item. After everything was said and done last year, the city ended up spending $10.1 million on health insurance.

According to England, this year the city is budgeting for an 18 percent increase in health insurance, but even with that some are concerned it's not enough, especially considering the city just got notice that its prescription plan will be going up 32 percent this year.

"I still don't think that we have enough budgeted," said Councilman Michael Russo, who asked England to run the numbers again.

England said it is possible that more money might have to be budgeted via a budget amendment, which could be presented to the council Wednesday.

Several of the speakers asked if there was any way to save money when it comes to insurance. While it's a great plan for employees, a full service medical plan with no premium contributions and hardly any co-payments, there are those who say that out of control costs no longer make the plan practical or affordable.

"It's a plan that is disproportionably good plan for the city employees," said Daniel DeCavaignac, a former City Council candidate. "This is something that we need to address."

He added that the city should also be more aggressive about shopping around for health care and getting the best price.

"We are looking into initiating a different policy for co-pay and are currently looking at a couple of different formulas for [health] insurance funding," responded city attorney Joseph Sherman.

Police and fire

Also, police and fire salaries are way up in this budget, with police salaries increasing by $1 million to $14 million per year and fire contracts increasing by $1.7 million to nearly $12 million annually. Their contracts are up for renegotiation at the end of the year.

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