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.
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