Retroactive Financing of Tax Appeals – A New Tool for Municipalities
by Matthew D. Jessup on January 19, 2012
It’s no secret that municipalities have been hit hard by the ongoing recession. One source of significant financial stress is the amount of money that municipalities are required to pay to residents as a result of tax appeals. As real estate values continue to decline, successful tax appeals continue to rise, forcing municipalities to pay significant judgment amounts out of an ever-declining surplus. Municipalities currently have a few tools to finance these tax appeal judgments, including by refunding bond ordinance or by a series of emergency appropriations that are later taken out by refunding bond ordinance.
Municipalities have now been given yet another tool to assist with this ongoing struggle with tax appeal refunds. Yesterday, Governor Christie signed into law A-3971/S-3110, which states, among other things, the following:
Any municipality that has ended the previous budget year with a deficit in operations caused, whether in whole or in part, by obligations created from tax appeals, may issue notes with the approval of the Local Finance Board on such conditions as the Local Finance Board deems appropriate. The amount of notes authorized pursuant to this provision shall not exceed the cash payments or tax credits due to tax appeals and shall be authorized by a bond ordinance approved by the Local Finance Board.
I’m calling this one the “Do Over Bill”, as in “Those municipalities that didn’t finance tax appeals last year by refunding bond ordinance or pay tax appeal amounts through emergency appropriations, now get a do over.” This opportunity at a “do over” could not have come at a better time. In this economic environment, rating agencies are concerned more than ever before with the level of surplus held by municipalities. This new law gives municipalities a chance to restore surplus and stave off the probable ratings downgrade that would have otherwise followed.
Similar to the Local Finance Board’s recently announced criteria for financing tax appeal credits, to me it’s a shame that this new law allows a municipality to issue these new Tax Appeal Notes only if the municipality’s previous budget year ended with a deficit in operations. If Town A spends $3 million on tax appeals in a given year and ends up with $10,000 in surplus in operations, Town A does not qualify under the new law and cannot issue new Tax Appeal Notes to help restore surplus. But if Town B spends the same $3 million on tax appeals and ends up with a $5,000 deficit, Town B gets to recapture and rebuild all $3 million in surplus through the issuance of these new Tax Appeal Notes.
Perhaps over time, the Local Finance Board can find a way to ease the “deficit” requirement. In the meantime, if your municipality finds itself starting 2012 with a deficit created in part by tax appeals, there is now a mechanism to help right the ship.
Local Finance Board Paving the Way to Faster Refundings
by Matthew D. Jessup on December 15, 2011
Yesterday, the Local Finance Board (Board) took the first step in establishing a new rule that would allow municipalities and counties to issue refunding bonds and capture debt service savings on an expedited basis. This is a significant development, as timing is everything when it comes to refundings, particularly in this volatile economic market.
The Board has adopted a resolution approving a proposed rule that would allow municipal and county issuers to issue refunding bonds to refund outstanding long-term bonds without the prior approval of the Board, as long as certain conditions are met. Currently, municipalities and counties must appear before the Board for approval after introduction and before final adoption of a refunding bond ordinance. Because the Board accepts applications and meets only once per month, the current procedure can result in a 30 to 45 day delay – plenty of time for interest rates to rise and opportunities to decrease debt service to vanish.
The proposed conditions are as follows:
Upon closing on a refunding bond issue, an issuer will need to file a certification with the Board that details that the above conditions were met, with appropriate back-up and an itemized accounting of the costs of issuance of the refunding bonds.
An overwhelming majority of the refunding transactions completed by municipalities and counties meet the above conditions. Accordingly, most issuers will receive the significant benefit of being able to enter the bond market quickly without any additional burdens. Any issuer that was going through the process of authorizing a refunding bond issue at the end of 2010 knows how quickly interest rates can rise and certainly can appreciate the benefit this proposed rule provides.
The Board’s proposed rule is subject to a 60-day comment period and additional action prior to becoming final. During that time period, issuers will still need to make application to the Board for approval to issue refunding bonds.
Additional Tax Appeal Relief Has Arrived
by Matthew D. Jessup on September 30, 2011
The Division of Local Government Services indicated today that municipalities may, for the first time, finance with refunding bonds or notes the amount owed to a taxpayer as a result of a successful tax appeal and applied as a credit against future taxes to be paid by such taxpayer (taxpayer credits). Previously, municipalities were able to finance only the amount actually paid by the municipality by check back to the taxpayer.
Specifically, the Division will allow municipalities to finance 3/4 of the amount of taxpayer credits. The logic is that, even though the entire taxpayer credit is being given to the successful taxpayer in the 4th Quarter, that taxpayer credit is a product of the overpayment made by the taxpayer in Quarters 1, 2 and 3.
This, of course, presumes that the tax appeal is settled after the 3rd Quarter tax payment is made by the taxpayer. It is unclear whether a tax appeal settled after the 2nd Quarter but prior to the 3rd Quarter would result in only 2/4 of the credit being eligible for financing.
But, there’s no such thing as a free lunch.
Approval by the Local Finance Board to finance taxpayer credits comes with four conditions:
1. The municipality must show that, absent financing the taxpayer credits, the municipality would end the fiscal year with a deficit in operations (this would be a projected deficit, since the Local Finance Board’s approval of these financings must occur no later than the November Local Finance Board meeting).
This condition is unfortunate. Those municipalities that have large amounts of taxpayer credits but do not meet this condition will be forced to spend their surplus funds instead of financing the taxpayer credits over several years. In this economic environment, with rating agencies already downgrading municipal credits at alarming levels, this unnecessary use of surplus will be a “credit negative” (to use a rating agency phrase) and lead to increased costs of borrowing for municipalities.
2. The municipality may finance tax appeal credits only one time. Choose your year wisely.
3. The municipality will be required to undertake a revaluation or reassessment, as appropriate.
4. The municipal governing body must adopt a resolution acknowledging that all new hires through the end of the next succeeding fiscal year be approved by the Division.
Municipalities will be required to complete a Division-issued form asking a series of questions regarding each new hire, including who is being hired, at what compensation, whether the hire will be civil service, why the hire is taking place (someone’s retiring, new position, etc.). The Division will scrutinize each new hire thoroughly.
This is not a perfect solution, as noted above. In addition, it is troubling that each municipality may finance taxpayer credits only once. Even if a municipality immediately undertakes a revaluation or reassessment, those procedures take time, and the intended effect of eliminating or drastically reducing the number of tax appeals won’t be felt the next year. The municipality will likely have the same taxpayer credit problem in the next year, with no real, viable solution.
That said, the inability of municipalities to finance taxpayer credits over a multi-year period was putting enormous financial pressure on many municipal budgets. The Division’s solution will go a long way towards eliminating one of many financial pressures faced by municipalities.
Three Ways to Improve Your Bond Credit Rating
by Matthew D. Jessup on August 8, 2011
In today’s municipal bond market, your credit rating is more important than ever. Underwriters and financial advisors say that the difference between an “A” rating and a “AA” rating can mean the difference of 30 basis points or more. Such a difference can result in interest rate savings of $315,000 on a $10,000,000 20-year general improvement bond issue. In refunding transactions, 30 basis points can mean the difference between achieving the State-required 3.00% present value savings (and capturing debt service savings) and falling short (and letting bondholders keep your money).
That said, not every municipality is blessed with a healthy general fund balance, a wealthy tax base and a full “cap bank” under the 2% Property Tax Cap Act. After recently meeting with one rating agency and participating in ratings calls with both ratings agencies week after week, it occurred to me that there are three easy ways every municipality can immediately improve its standing with the rating agencies.
First, establish written policies regarding (1) use and regeneration of General Fund balance, (2) long-term capital improvements and (3) issuance of short- and long-term debt. Your municipality likely already has “informal” or “understood” policies regarding these topics, but they’re not written down. Simply putting them to paper (and, even better, having them adopted by the governing body by resolution) shows the rating agencies that all members of the administration are in agreement and that the policies will survive departing finance officers and administrators and provide continuity.
Second, complete and update revenue and expenditure forecasting on a monthly or quarterly basis. Continuous updates to a 12- or 18-month projection will better prepare a municipality to anticipate and react to future revenue decreases or expenditure increases. Revisit prior forecasts and identify and use historic trends to help prepare future forecasts. Preparing and updating these forecasts, being prepared to discuss each item and meeting the projections consistently are all indications to the rating agencies of a strong management team.
Third, provide monthly or quarterly financial reports to the Mayor and governing body. Use the revenue and expenditure forecast discussed above to prepare a “projected versus actual.” Many municipalities already prepare similar reports but fail to share them with the Mayor and governing body. Keeping everyone informed is another characteristic of a strong management team.
Your municipality likely implements one or more of these three suggestions in an informal way. It is a short step-up to make them formal in a way that satisfies the rating agencies. The effort will be minimal and the result could be significant.
Both Moody’s Investors Service and Standard & Poor’s publish their rating methodologies. I encourage everyone to read through them for more details on what the rating agencies are looking for when assigning a rating to your municipality.
Moody’s – General Obligation Bonds Methodology
Standard & Poor’s – General Obligation Bonds Methodology
Does the SEC Want to Hear from NJ Bond Issuers?
by Matthew D. Jessup on March 24, 2011
Earlier this week, the Securities and Exchange Commission (SEC) announced that additional field hearings examining the state of the municipal securities market were being suspended due to budgetary constraints. In lieu of these hearings, the SEC is asking market participants to submit comments on a wide range of municipal securities market topics, including “disclosure and transparency, financial reporting and accounting, and investor protection and education”. A complete list of topics may be found on the SEC’s website (http://www.sec.gov/spotlight/municipalsecurities.shtml).
The New Jersey Government Finance Officers Association (GFOA) recently asked Ed McManimon for his opinions on whether the GFOA should formulate a response to the SEC. Here is Ed’s response:
Our view is that the SEC is really looking for comments and suggestions from the market itself, not the Issuers. It is the SEC’s hope that the Financial Community will urge more specific procedures for municipal debt, similar to corporate debt, so that it might serve as a catalyst for more regulation of tax-exempt debt, or replacing tax-exempt debt with taxable debt or more routine disclosure, etc. I believe that any comments from the GFOA or extended government community will be a waste of effort and will at this point fall on deaf ears. However, we should be prepared to react to extreme positions that may result from their exercise.
I am also concerned that it would be difficult for us to make a strong case at this stage since, candidly, in my opinion, the lax and inconsistent compliance by many local governments with fairly benign initial and continuing disclosure and related issuing requirements has probably spurred this effort on and makes it hard to confront this exercise by the SEC in any meaningful way.
We need to get our house in order by making sure all local governments and all Finance Officers and all auditors and all bond attorneys, etc., understand the significance of continuing disclosure filing requirements, arbitrage calculations on a regular basis and the benefit of maintaining current updated financial information if you want to access the market effectively and keep regulators from proposing more stringent, costly and onerous requirements on all of us.
To further Ed’s point, note the statement made by the SEC on its website: “[P]rotecting investors in the municipal securities market is a core function of the Commission and the staff is continuing its’ [sic] efforts to gather information about the market and develop recommendations for improving the state of the municipal securities market.”
Readers that know Ed know that he is always interested in the contrarian view. Leave us a comment below and share your view. And if you decide to submit a comment to the SEC, let us know.
Who Is Filing Your Secondary Market Disclosure?
by Matthew D. Jessup on March 16, 2011
This is the time of year when each calendar-year municipality is finalizing its audited financial statements for the year ending December 31, 2010 and adopting its budget for 2011. The focus is generally on the finishing touches for the audit, as well as working with the Division of Local Government Services to fine-tune the revenue and expenditure numbers in the budget.
Let me add one very important step to this process that is often forgotten or overlooked, and yet is now more important than ever. Someone needs to file the completed audit and the adopted budget with the Municipal Securities Rulemaking Board (MSRB) through the MSRB’s Electronic Municipal Market Access Dataport (www.emma.msrb.org) to ensure compliance with your municipality’s secondary market disclosure requirements.
That last sentence may have made your head spin, but the filing of secondary market information needs to be a priority for any municipality that has issued municipal bonds. In order for a purchaser of municipal bonds to comply with certain Securities Exchange Commission (SEC) and MSRB requirements, the purchaser must receive a written promise from the issuer of the municipal bonds that the issuer will (1) provide annually its updated financial information, including the audit, the budget and certain demographic and other economic data originally included in the Official Statement that was used to sell the municipal bonds; and (2) provide notice of the occurrence of certain “material events” if they occur. This promise is written into every Official Statement distributed in connection with the issuance of municipal bonds. Without it, there would be no buyers of those bonds.
The SEC and the MSRB are more focused than ever on enforcing the written promise made by municipalities. In fact, the SEC Chairwoman reported to the House of Representatives yesterday that the SEC would like the ability to pursue municipal issuers directly, versus having to enforce disclosure obligations indirectly through the purchasers of municipal bonds, the way it does currently.
It has been my experience that all too often, municipalities forget to file their secondary market information with the MSRB. The municipality thinks the auditor, bond counsel or financial advisor automatically completes the filing, and the same professionals think the municipality completes the filing. The deadline for filing secondary market information varies by issuer and is contained within the form and sale resolution authorizing the bonds.
So, please allow this to serve as a reminder. Contact your auditor, bond counsel and financial advisor and make sure everyone has the same understanding of who is filing this information. Hire one of your professionals to undertake this responsibility if need be. Any fees associated with this work are well worth preserving your municipality’s access to the municipal bond market and will pale in comparison to the fines and penalties the SEC may one day have a right to collect from your municipality.
by Matthew D. Jessup on December 17, 2010
Last night, the House of Representatives followed the earlier action of the Senate and approved significant tax legislation that, among other things, failed to include an extension of the Build America Bond (BAB) Program. The BAB Program automatically expires on December 31, 2010, and tax legislation was the last chance for a stay of execution. The BAB Program allowed governmental issuers to issue taxable bonds to finance tax-exempt capital projects and receive a 35% (or in some cases 45%) interest subsidy from the Federal government.
Based on the very scientific “by show of hands” survey I conducted last month at the League of Municipalities, governmental issuers in New Jersey won’t be mourning the death of BABs for long. Very few municipalities issued BABs, and the few that did are still (a) wondering whether they saved money compared to issuing traditional tax-exempt bonds and (b) holding their breath that the Federal government makes good on its promise to pay the subsidy for the next 20 or 30 years.
What municipalities should mourn is the reversion of the “Bank Qualification” limit from $30 million back to $10 million. Originally created in 1986, the $10 million limitation had never been increased based on inflation or regionalization, until 2009 when it was increased to $30 million pursuant to the legislation creating BABs. Tax legislation was needed to prevent the decrease back to $10 million at the end of the year.
Banks buying “Bank Qualified” debt are allowed to deduct 80% of the cost of borrowing and holding such debt issued by governmental issuers that issue no more than (for now) $30 million of tax-exempt debt each year. When banks have access to less expensive capital, those savings are passed down to the municipal issuers. On any given day, bank qualification can mean as many as 50 basis points or more in savings.
Rather than issue Build America Bonds, a significant number of New Jersey issuers took advantage of the limitation increase to $30 million and issued bank qualified debt in 2009 and 2010. The increase in the limitation was long overdue and provided critical debt service relief to municipalities. It is unfortunate that Congress couldn’t separate its dislike for BABs from the benefits of a higher bank qualification limit, so that the latter could continue. Heading into the worst budget year they have ever seen, local governments needed this valuable benefit.
The New 2 Percent “Cap” and . . . the Rahway Valley Sewerage Authority
by Matthew D. Jessup on November 29, 2010
There I was on the Saturday morning after Thanksgiving, enjoying a cup of coffee and reading my local newspaper, when an open letter from Cranford, New Jersey’s Mayor-Elect Dan Ashenbach caught my attention. Addressed to Governor Chris Christie and Senator Tom Kean, Jr., the Mayor-Elect pleads that a majority of the service fee paid by Cranford (and eight other member municipalities) to the Rahway Valley Sewerage Authority (RVSA) be treated outside the new 2 percent cap on annual property tax increases in New Jersey.
The new 2 percent cap does allow certain municipal costs to be raised outside the cap, including “amounts to be raised by taxation for capital expenditures, including debt service as defined by law.” As the Mayor-Elect points out, approximately 85% of the service fee paid by Cranford to the RVSA is for Cranford’s share of debt service on RVSA Bonds, originally issued to finance $275 million in capital expenditures.
The concept of a municipality pledging its unlimited taxing power to pay debt service on a constituent government entity’s bonds and notes is not new. Regional and municipal sewerage authorities, utilities authorities and other government agencies have for decades issued bonds to fund capital projects, secured by the unlimited taxing power of the localities benefitting from the capital projects. This legal arrangement is wrapped up in an agreement between the authority and the municipality called a “service contract”, “deficiency agreement” or other similar agreement and allows the authority to sell bonds at interest rates significantly lower than bonds sold without the municipal promise-to-pay. In the event of an authority shortfall in revenues, the municipality makes service contract payments to the authority, a portion of which pays debt service on the authority bonds and a portion of which pays for the authority’s current expenses, such as authority staff salaries.
The NJ Division of Local Government Services (Division) has consistently taken the position, under both the old 4 percent cap law and the new 2 percent cap law, that the payments made by municipalities to authorities and necessary to satisfy authority debt service requirements constitute “debt service” and are outside the cap. The arrangement between the RVSA and its nine member municipalities should be treated no differently.
The solution here is simple. The RVSA should divide the service fee into two components – a debt service component and an operating component – and send the member municipalities a bill reflecting the two payment amounts. The member municipalities can then raise the debt service component in their municipal budgets outside the 2 percent cap, and the operating component inside the cap, the same way a municipality would treat a service contract payment. The Division (and the Governor and Senator) would be honoring both the spirit and letter of the law by allowing the RVSA member municipalities to bifurcate the payment into “inside” and “outside” the cap payments.
The New 2 Percent Cap and . . . Police Cars
by Matthew D. Jessup on November 19, 2010
Earlier this week, I joined hundreds of mayors, administrators, finance officers and others in attending a session at the New Jersey League of Municipalities entitled, “Budget and Audit Updates – Understanding the Process”. The session was hosted by Clinton Mayor Christine Schaumburg and featured panelists Director Tom Neff, Marc Pfeiffer and Tina Zapicchi, all of the Division of Local Government Services (Division) and Leon Costello, a municipal auditor from Ford-Scott & Associates.
The session focused on the new 2 percent cap on property tax increases and its impact on municipal 2011 budgets. The 2 percent cap law contains exceptions for amounts that can be raised “outside” the 2 percent cap, including an exception for “amounts to be raised by taxation for capital expenditures, including debt service as defined by law.” During the session, an audience member asked whether lease payments made by municipalities for the lease of police vehicles from dealers would be treated as “inside” or “outside” the 2 percent cap.
Tina Zapicchi responded that lease payments for police cars will be treated as inside the cap. Tina reiterated that only items that are allowed to be bonded under the Local Bond Law are eligible to meet the “capital expenditure” exception to the cap.
I believe this conclusion is incorrect, and have urged the Division to reconsider its position. First, the inability to bond for the acquisition of police cars is the result of an oversight in the law that needs to be fixed. The Local Bond Law allows municipalities and counties to bond for any capital project with a useful life of 5 years or more. It used to be that police cars could be leased only for a period of 3 years. But the Legislature in 2000 declared that police cars have a useful life of 5 years, by changing the Local Public Contracts Law to allow 5 year leases. In making that change, the Legislature inadvertently forgot to conform the Local Bond Law for consistency. Police cars are “capital expenditures” despite the current version of the Local Bond Law.
Second, municipal capital lease payments to improvement authorities are “debt service” and are outside the cap. Many municipalities lease police cars and other capital items through improvement authority bond financings. These “capital lease” financings have the improvement authority issuing bonds, using the bond proceeds to acquire the police cars and leasing the police cars to the municipality. The municipality, in turn, makes capital lease payments to the improvement authority equal to the debt service on the improvement authority bonds.
The method by which municipalities and counties finance their police cars should not impact the issue of whether the lease payments are inside or outside the cap. Police cars are capital items and the lease payments are debt service – a perfect fit for the outside-the-cap exception.
The New 2 Percent Cap and . . .
by Matthew D. Jessup on October 21, 2010
The New Jersey Legislature recently enacted P.L. 2010, c.44, better known as the 2 Percent Property Tax Levy Cap Law, or the 2 Percent Cap. The law is Governor Chris Christie’s attempt to bring property tax relief to the long-overtaxed residents of New Jersey.
The 2 Percent Cap prevents New Jersey municipalities from raising property taxes by more than 2 percent every year. The law does provide five exceptions to the 2 Percent Cap: (1) amounts required to be raised by taxation for capital expenditures, including debt service, (2) increases in pension contributions in excess of 2 percent, (3) increases in health care costs in excess of 2 percent (but no higher than the increase of the State Health Benefits Program), (4) extraordinary costs resulting from a declared emergency and (5) amounts approved by simple majority of voters voting at a special election.
The 2 Percent Cap will have a severe impact on municipal budgets in 2011. Whether Governor Christie’s 33-bill “toolkit” is approved by the Legislature and provides the assistance that municipalities desperately need in order to comply with the 2 Percent Cap remains to be seen. One thing is for sure: in the coming weeks and months, there will be countless questions asked regarding what expenses will be limited by, or “inside”, the 2 Percent Cap and what expenses will qualify as exclusions, or be “outside” the 2 Percent Cap.
As these questions are raised, debated and answered, we will keep you updated here.
Matthew D. Jessup, Blog Editor
Matt Jessup chairs the Public Finance practice group at McManimon & Scotland, L.L.C. Matt has been with the firm for 10 years, during which time he has participated in the issuance of hundreds of millions of dollars of bonds and notes for countless counties, municipalities and public authorities. Read More
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