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.

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