Bloomberg News

Struggling U.S. Capitals Seek More From Tax-Exempt Landowners

July 13, 2011

July 13 (Bloomberg) -- The gilded dome of New Jersey’s State House looks down upon an idled $87 million park project and graffiti spray-painted on a parking garage: “GHOST TOWN @ FIVE,” a dig at thousands of suburb-dwelling government workers who pay no taxes to the city of Trenton.

From New Jersey to Nebraska, capital cities are crying poverty as states close $103 billion in budget deficits, partly by slashing local aid. Governments own much of those cities’ real estate and pay only a fraction of the revenue that would be due if the land were in private hands.

In Trenton, half of the property is state-owned, limiting the city’s ability to generate revenue. After a 23 percent aid cut in fiscal 2011, the former industrial hub with the slogan “Trenton Makes, The World Takes” was expecting to receive $24 million, or 13 percent of its revenue, from the state in 2012. It may not get any after Governor Chris Christie, a first- term Republican, slashed funding for a program that helps distressed cities to $10 million from $149 million.

“Cities like Trenton can’t survive enormous budget cuts when the biggest property owner in the city is exempt from paying taxes,” Assemblywoman Bonnie Watson Coleman, a Trenton Democrat, said in a June 10 statement.

Trenton, where nearly a quarter of the 83,200 residents live in poverty, is preparing for the worst. It plans to fire more than 100 police officers and some civilian staff, and increase property taxes 21 percent, said David Rousseau, a financial consultant to Mayor Tony Mack who was state treasurer for Christie’s predecessor, Democrat Jon Corzine.

Under Review

The credit ratings of Trenton and five other New Jersey cities were put under review yesterday for possible downgrade by Moody’s Investors Service, which cited Christie’s latest aid cut. The company lowered Trenton to A3, the fourth-lowest investment grade, in May 2010, after Christie’s initial reduction. Towns and cities in New Jersey, the second-wealthiest U.S. state, led the country in downgrades last year.

Trenton’s rating “incorporates the city’s high debt burden and moderately sized tax base, nearly half of which remains nontaxable as the state’s capital,” Moody’s said in a January report that assigned a negative outlook to the debt, which means the rating could be lowered again.

It’s doubtful whether towns will ever receive the level of help from states they once did, said Alan Schankel, director of fixed-income research at the financial services firm Janney Montgomery Scott LLC in Philadelphia.

“It’s not just the state capitals, but obviously they’re the ones in the headlights,” Schankel said in a July 7 phone interview. “I don’t think it’s coming back.”

Jobs Cut

Lawmakers in Lincoln, Nebraska, this year eliminated $1.8 million for the capital city, “nothing real drastic,” city Finance Director Don Herz said, although painful enough.

“We’ve cut about 160 positions in the past three years,” Herz said in a June 23 telephone interview. “We don’t trim our trees as much as we did. We reduced some library hours. Pools aren’t open quite as much.”

Not every capital is in such poor shape. North Dakota, the third-least-populous state, with 672,600 residents, had a $1 billion two-year budget surplus in 2010 because of an economic boom tied to oil drilling. Bismarck, the capital, and its surrounding region have the lowest U.S. employment rate: 2.9 percent in May, compared with 9.1 percent nationally. Last year the city’s property-tax base grew 3.86 percent, and the budget accommodated street resurfacing, water-plant upgrades and health programs, according to a financial report.

Police and Roads

Since 2001, New Jersey lawmakers representing Trenton have unsuccessfully sponsored legislation calling on the state to make payments in lieu of taxes to help cover the cost of services such as police and road maintenance.

Some cities, rather than begging state government, are chasing private money. In May, California Governor Jerry Brown proposed selling 42 blocks of state-owned land, an urban renewal project with about 75 commercial and mixed-income residential buildings in downtown Sacramento, the capital. The state would collect proceeds from any sale and the city would increase its tax base. Sacramento hasn’t estimated any potential financial impact, Leyne Milstein, director of finance, said in an e-mail.

Other cities are seeking new or higher payments in lieu of taxes from hospitals, universities and cultural institutions. In April, Boston sent requests to about 40 such nonprofit groups.

Paying Up

Beth Israel Deaconess Medical Center has voluntarily paid the city $167,000 a year on property that, if privately owned, would raise $23 million in taxes, according to a December 2010 report by a mayoral task force. Under a new formula based in part on property value, it agreed to pay $753,000 in 2012 and $3.1 million within five years.

“No one is enthusiastic about paying anything that remotely resembles a tax,” Eric Buehrens, interim president and chief executive officer of the hospital, said in a July 8 telephone interview. Each dollar contributed to the city, “is a dollar not going to something else,” he said.

Providence, Rhode Island, is looking at the Boston model to raise more money from institutions such as Brown and Johnson & Wales universities and Rhode Island Hospital, whose expansions into the decaying Jewelry District created private jobs, encouraged retail and restaurants, and also took swaths of potentially revenue-producing land off the tax rolls.

Bankruptcy Danger

Harrisburg, Pennsylvania, in danger of bankruptcy after nearly defaulting on bond payments related to a failed incinerator project, was told by financial consultants this month to sell assets, cut jobs and seek more money from nonprofits, which together with state government own about half the property in the city.

Trenton has no four-year college campuses, major research hospitals or large company headquarters that often bring nonresidents into cities to spend money. The state and city identify New Jersey government as the largest employer in Trenton, although it’s not clear how many work there. A 1992 study by the city and Thomas Edison State College said 23,400 state employees worked in the capital, and 15 percent were city residents subject to its taxes. New Jersey Department of Labor and Workforce Development data from 2009 -- prior to state layoffs -- put the figure at 39,100 workers, including those in hospital and correctional institutions in suburban Trenton.

‘Center of Business’

The 1992 study, commissioned to identify how the state’s presence helped and harmed Trenton, urged the state to help create “festive shopping centers,” increase aid and underwrite the fire and police departments. Few of those recommendations came to pass. Christie’s administration last year halted work on an urban park behind the State House that was pitched by planners as a tourism draw, citing a lack of funds.

Mack, who took office last year, on July 6 announced a renewed effort to make Trenton “a center of business, culture, education, heritage-building and a prosperous, livable community,” according to a statement. In a June 10 editorial in the Trentonian newspaper, he called on the state to pay its “fair share for the burdens placed on city resources.”

In the near term, Trenton and other cities need help beyond the $10 million of state aid they must now share, Rousseau, Mack’s consultant, said in a July 1 phone interview.

“Armageddon is that it goes down to basically nothing,” he said.

--Editors: Stacie Servetah, Stephen Merelman

To contact the reporter on this story: Elise Young in Trenton, New Jersey, at eyoung30@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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