New Jersey Public Finance Blog | McManimon, Scotland & Baumann blog about public financing in New Jersey

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.

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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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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.

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Material Changes to Material Events

by Matthew D. Jessup on June 1, 2010

The Securities and Exchange Commission has adopted amendments to Rule 15c2-12 that impact all issuers of municipal bonds and notes. The amendments to the secondary market disclosure rule apply to all bonds and notes issued on or after December 1, 2010. However, given that issuers adopt a bond or form and sale resolution weeks or months in advance of issuing obligations, it is important to think about these changes now.

The following is a summary of the amendments:

Notices of those events listed in 15c2-12(b)(5)(i)(C), otherwise known as “Material Events”, must be submitted to the Municipal Securities Rulemaking Board (MSRB) “in a timely manner not in excess of ten business days after the occurrence of the event”. Previously, issuers were simply required to provide notice “in a timely manner”. An identical change is being made to the “small issuer” exception found at 15c2-12(d)(2)(ii)(B).

This is the only amendment that is likely to impact New Jersey municipal issuers of bonds and notes. Remember that “ratings changes” are one of the Material Events. If your municipality receives a ratings upgrade or downgrade, you now have only 10 days to report the change to the MSRB.
The materiality condition is being eliminated for the following Material Events: (1) principal and interest payment delinquencies, (2) unscheduled draws on debt service reserves reflecting financial difficulties, (3) unscheduled draws on credit enhancements reflecting financial difficulties, (4) substitution of credit or liquidity providers, or their failure to perform, (5) defeasances and (6) rating changes. These events need to be reported to the MSRB no matter how minor or insignificant.
The Material Event “adverse tax opinions or events affecting the tax-exempt status of the security” is being amended in its entirety to “Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security”.
The previous list of 11 Material Events is being expanded to include four additional events: (1) tender offers, (2) bankruptcy, insolvency, receivership, or similar proceeding of the obligated person, (3) the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material, and (4) appointment of a successor or additional trustee, or the change of name of a trustee, if material.
The exemption from the Rule (15c2-12(d)(1)(iii)) for demand securities is being eliminated. There is a limited grandfather provision, which those who deal with demand obligations should explore further.