Trentonians pay for only 14% of the cost of running the city. If our external funders get tired of it, we’re in big trouble.

It isn’t clear how a city goes bankrupt. Technically bankruptcy occurs when an entity can’t pay its debt obligations. But a city can raise taxes and cut city services to the bone well before bankruptcy. In this case, the city simply ceases to be livable (e.g. Camden)

For many cities, federal and state subsidies and charitable giving prop up a budget. To the extent a city is no longer self funding, perhaps it is already bankrupt in a sense.

Perhaps bankrupt isn’t the operative term. Perhaps non-sustaining is a better descriptor.

No city is 100% self-sustaining

• They all receive some county, state and federal support.
• Nearby Hamilton pays 54% of its total school and municipal budget through property tax.
• Conversely, Trenton pays only 14%.

Table 1 – Comparison of Financial Health

Sources: Trenton Municipal Budget, Hamilton Municipal Budget, Hamilton School Budget, Trenton School Budget

If all of Hamilton’s external funding dried up tomorrow, property taxes would have to increase 84% to cover the shortfall. Assuming a $200,000 home value and Hamilton’s 2.17% effective tax rate (the rate after assessment ratios are taken into account), Hamiltonians would pay an increase in the tax on this average home from $4,400 to $8,000 per year.

On the other hand, if Trenton were to lose its external funding, taxes would have to increase a disastrous 600%. Given Trenton’s 3.3% effective tax rate the same $200,000 home would see an increase from $6,500 to almost $46,000. Ouch!

Trenton’s budget is at risk of crashing every year.

It’s not likely that Trenton’s external funding would suddenly dry up, rather in a tight state budget year like this one, it risks modest declines or flat funding.

· The under-funding of municipal programs has been, and continues to be, a major factor contributing to the property tax crisis. (Source: NJ League of Municipalities)

• Abbott school funding formulas continue to shift away from urban districts.
• NJ’s municipal funding has remained flat for 5 of the last 6 years failing to keep up with inflation (Source: NJ League of Municipalities)

If Trenton’s external funding stayed flat, 4% inflation in city spending would cause a 28% increase in property taxes. On a $200,000 Trenton home, this would increase taxes by $1,800 per year. This is equivalent to a 1% rise in the homeowner’s mortgage rate.

Table 2 – Comparison of “what-if” scenarios

Trenton’s bankruptcy will happen long before it’s announced in the papers.

Trenton’s bankruptcy will be felt one homeowner and one foreclosure at a time. It’s possible that we are already feeling the effects. According to FirstAmerican CoreLogic, Trenton’s foreclosure rate is 2.5 times higher than the national average.

If it’s true that urban homeowners are more at risk than their suburban neighbors, then it follows that increasingly high property tax rates will lead disproportionately to foreclosures in cities like Trenton. For Trentonians on the verge of foreclosure, a 28% tax increase could push them over the edge.

Trenton’s tax rate is like an adjustable rate mortgage that always adjusts the wrong way.

Most mortgages don’t go up, but taxes do. Trenton’s property tax rate has already increased 12% over the last two years. On a $200,000 home that’s an additional $780 a year. This is the same as having your mortgage raised from 7% to 7.5% without having a choice.

Forcing a house payment up every year certainly can’t help a family’s budget yet Trenton has raised property tax rates every year for the past 6 years.

Trenton’s fiscal integrity is at risk and so are its homeowners.

Because the city’s budget is in peril, so is the personal solvency of its property owners. Given the degree of risk, the city administration and council should start taking its budget crisis seriously. Instead, during the most recent budget deliberation, the administration kept council almost entirely in the dark. As a result, Trenton’s leadership is barely discussing the budget much less developing the bold initiatives that will lead to the city’s revitalization.

However, this is a problem that can be fixed. ReinventTrenton.com contains specific approaches to reviving Trenton’s economy and budget. Serious reformers will use it to think through a way out of Trenton’s budget dilemma.