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.

1 comment... read it below or add one

Right of Center January 27, 2012 at 9:53 pm

it also means townships will finance operating expenses through the “back door” (as it were). Rather like paying your electric bill with a home equity loan. I’m amazed anyone thinks this is a good idea.

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