Did you know there is a 5% tax increase on tonight’s City Council agenda? -
"Our gap right now is close to $20M in my estimation excluding steps the city has already taken and any further funding for lost revenues. If we use ALL of our surplus, that would only be about $9M. A 5% tax increase would fund only about another $2.8M. We are not at all confident that we will get more federal funding, but will know more over the ensuing couple of months. Regardless, even if this was the $5M equal to our revenue loss, and although we will still try to find additional cost savings, especially in unnecessary overhead, I am confident that the tax increase for this year will be much greater than 5%"
So your total tax bill in August would be increased 5%? Did you read about it any communications from the mayor’s office?
If you go to the online agenda for tonight's meeting, scroll down to resolutions, and under section 8 “Tax Collector”, the third one listed is a resolution titled “Resolution Authorizing Estimated Tax Billing Per N.J.S.A. 54:4-66.3”. Obvious, right? If this captured your curiosity, you could click on it to read the resolution. You know what, I’ll just copy it here as it is short…
WHEREAS, the ongoing COVID-19 pandemic has disrupted municipal, county, and state governments, the 2020 budget process and property tax billing process may not be as timely and certain as they have been in past years; and,
WHEREAS, the City of Hoboken (“the City”) has not introduced its 2020 Municipal Budget and the New Jersey Division of Local Government Services may be delayed in reviewing the City’s 2020 Municipal Budget prior to adoption due to the current fiscal uncertainties, and the Hudson County Board of Taxation may be delayed in certifying the City’s 2020 tax rate once the City’s 2020 budget is adopted; and,
WHEREAS, without a certified 2020 tax rate, City of Hoboken Tax Collector will be unable to prepare and mail property tax bills in accordance with statutory deadlines for the third quarter installment of 2020 taxes; and,
WHEREAS, because of these above-mentioned uncertainties, the New Jersey Division of Local Government Services issued Local Finance Notice LFN-2020-07 which strongly recommends that municipalities issue estimated property tax bills for the third quarter installment of 2020 taxes, and,
WHEREAS, the Tax Collector, in consultation with the Chief Financial Officer and Finance Director, computed an estimated tax levy in accordance with NJSA 54:4-66.3, and each signed a certification showing the tax rate and tax levy for 2019 and the range of permitted estimated tax rates and levies for 2020; and,
WHEREAS, the 2020 estimated tax rate and estimated tax levy are within the permitted range, the Director of the Division of Local Government Services does not need to approve the estimated tax levy;
WHEREAS, the City seeks to authorize the Tax Collector, if she deems necessary, to prepare and issue estimated tax bills for the third quarter installment of 2020 taxes.
NOW, THEREFORE, BE IT RESOLVED, by the City Council, City of Hoboken, County of Hudson, State of New Jersey as follows:
1. The Tax Collector is hereby authorized and, if she deems necessary, directed to prepare and issue estimated tax bills for the third quarter installment of 2020 taxes.
2. The estimated tax levy for 2020 is hereby set at $196,600,000.
So… did you find the 5% increase anywhere? Does $196M mean anything to you? Do you see any actual information about the 2020 municipal budget or why the administration believes a 5% increase is warranted? As Co-Chair of the Revenue, Finance and Infrastructure subcommittee, I have asked the administration to provide some information about these items. I told the administration that it is not fair to ask the City Council to approve a 5% increase without it, but moreover it is not fair to the residents of Hoboken who either pay taxes directly or indirectly. As of this writing I am told they will be uploading a memo providing more color.
But here is some color from me.
WHAT IS A TAX ESTIMATE AND WHY IS IT A 5% INCREASE?
Our tax bills come four times per year. The first two tax bills are based off of last year’s budget. Typically our budget is approved by May, so the August and November tax bills reflect the new budget. Because of COVId, all deadlines have been extended and Hoboken will not approve its budget before the August tax bill so the laws allow municipalities to estimate taxes. The allowable range is 95% to 105% of last year’s TOTAL taxes (so 5% decrease in taxes to a 5% increase in taxes). By total tax, meaning the 5% is applied to the total levy which includes county, school, municipal, library and open space taxes.
So the city, because of the significant shortfall, is recommending that we use the highest available rate increase of 5%. The rationale is that if the anticipated rate increase is going to be 5% or greater, if the highest rate isn’t selected now, then the financial impact will be even greater in the November, February, and May billings.
That wasn’t so hard to say, right?
BACK TO THE BUDGET AND CONSIDERATION FOR A 5% TAX INCREASE
The mess that is our budget has not changed, and has only been exacerbated by the effect of COVId. Not because we have mounting COVId costs – because we expect any COVId related costs like testing and any public safety overtime to be fully covered by either the CARES act, FEMA and/or the expanded HUD CDBG funding. The big new impact to Hoboken from COVId is no different than what businesses and individuals are experiencing – loss of revenues. Hoboken’s budget relies heavily on what I call “use” revenues – revenues derived from some activity like parking, construction, zoning and planning or hotel occupancy, all of which have been dramatically reduced due to COVId. These four categories alone generate a combined $20M annually which equates to 36% of our last year’s Tax Levy.
Where we left off, per my emails on January 27th and on Feb 19th, the city was facing an approximate $14M operating shortfall due to a decade of rising costs, increased spending and debt and no tax increases or sustainable expansion of revenues. And now, given the pandemic, estimated revenues could be down an additional $5M taking our shortfall closer to $20M.
Note that the individual COVId related estimates are mine but
the overall magnitude is similar to what the administration has indicated.
This administration’s recent policy of funding operations with our surplus has depleted $9.5M of our surplus (aka rainy day fund) and effectively is the straw that broke the camel’s back and what drives the difference between the administration’s original estimate of a $7M shortfall and the higher $14M (Pre-COVId) one I have provided.
THE BIG QUESTION - HOW DO WE FILL THE GAP?
Municipal budgeting is quite simple in that your budget has to show that revenues equals expenses. So when you have a shortfall, you have to either increase revenues or reduce expenses or both.
Possible expense reduction sources:
- Recent layoff / forced retirement of 28 classified employees (2020 impact ~$1M)
- Further available labor cuts/consolidations/wage cuts: unclassified staff (no Civil Service plan or notice periods required – these include mayor’s staff, director’s and many other administrative overhead functions), reduced part time hours, end stipends and overtime
- Favorable union contract settlement including move to lower cost, state health plan
- Expected lower current year health care costs due to COVId – but what does this mean for next year.
Possible available revenue increase sources are limited:
- Tax increase (2% cap has been lifted)
- Use of more surplus – which kicks the tax burden down the road a year
- Yet to be identified federal funding for COVId driven revenue losses
THE SURPLUS – WHAT IS THIS AND WHAT DOES IT REALLY MEAN?
The way to think about the surplus is as your savings account which is used for two reasons – one, to pay for things during the year knowing that you will get a bonus at the end of the year to replenish and two, as a rainy day fund to use during emergencies that you would need to find future . The city has had an approximate $20-22M savings account since at least 2012 (I don’t have the numbers prior to this). Until now where the account has been depleted in the last two years to $14M.
The City budgets to use a portion - not all - of its savings throughout the year to pay for things but anticipates that it regenerates this at the end of the year to replenish its savings. If the goal is to keep a constant balance in your savings account year over year, then you try to only use savings during the year equal to what you think your bonus would be. Use $20 and then get a $20 bonus.
The target amount of the total savings account is 2 months of our annual budget (roughly $10M/month) which also supports our high credit rating (which allows us to borrow at lower costs). So there is a method to the madness. On average, the city uses ~$10M give or take of our surplus each year as a source of revenue in our budget and then replenishes this amount each year from a variety of sources. These sources include unspent budgeted expenses, tax collection rate higher than budgeted (we collect 99% but typically budget 95% collection rate), and taxes received from newly constructed properties that were not yet in our tax base.
The other part of the Surplus – the part that is not used – is our “rainy day fund”. This is mainly there for emergencies like Hurricane Sandy or even what we are experiencing now with COVId.
Stating the obvious, if the city uses this savings account to fund operations and does not replenish we deplete our savings (says captain obvious) and then it is neither available as a revenue source in our budget in the future nor for emergencies. If we use the same amount this year in the budget that we used last year - $11.5M – to avoid any funding gap in our budget relating to surplus, this potentially puts us at a dangerously low level in our surplus account going into the 2021 budget which means we are back to where we are today facing another high tax increase.
WHERE DOES THAT LEAVE US?
Our gap right now is close to $20M in my estimation excluding steps the city has already taken and any further funding for lost revenues. If we use ALL of our surplus, that would only be about $9M. A 5% tax increase would fund only about another $2.8M. We are not at all confident that we will get more federal funding, but will know more over the ensuing couple of months. Regardless, even if this was the $5M equal to our revenue loss, and although we will still try to find additional cost savings, especially in unnecessary overhead, I am confident that the tax increase for this year will be much greater than 5%. So the question is do we take this 5% increase now to lessen the pain later in the year, or kick this one more quarter with the potential for a greater impact later. All input appreciated.
PLEASE PLAN TO WATCH OR JOIN TONIGHT'S MEETING AT 7PM
