Mayor Palmer claims that the State should be paying us $155M if they were taxed at our rate (~let’s say 3% effective). That would equate to a valuation of state property of roughly $4.5B.

However, DCA estimates the value of all public property in Trenton which includes State, City and Federal buildings (but doesn’t include schools and the arenas) at $1.4B. Based on this number and some analysis by TDA and my guestimate, I’d say the State valuation is more like $1.2B. With that valuation in mind, the State would owe more like $36M/year in PILOT.

Trenton’s actual ratable value is $2.1B (the number our property taxes are based on).

A disagreement about this basic fact would lead to two radically different positions. If the Mayor is right, then the State is a deadbeat like he said. If my calculations are right, then we’ve been receiving aid for a long time because the State currently funds us to the tune of $340M ($250M for schools and $90 for municipal).

Where we agree is that a sudden $42M decrease in aid (or whatever you call it) would be disastrous, just as the Mayor said. The big difference is the negotiating position we go in with.

I’ll stress that the above are my numbers (so far). The Committee to Fix Trenton’s Budget is working to get to the bottom of this and develop a group position and then an approach.

In light of this evening’s speech, I thought it useful for my neighbors to have this perspective. Look for a more for the FixTrentonsBudget.org group.

Everyone agrees (I hope) that we need a rethink about Trenton’s financial health. Everyone also agrees (I hope) that there is a price at which selling the suburban portions of the Trenton Water Works is a good idea.

And, let there be no doubt that it’s too late to patch this year’s budget. Without drastic action we’re facing catastrophic disaster from a tax hike that will drive away investment, force foreclosures and thereby further reduce city revenue.

My hope is that the administration and petitioners can reach an agreement that commits the city to budgeting, openness and planning reforms that address our structural problems. I also hope that they can reach an agreement to allow the sale to move forward and, as stipulated in the City Council’s resolution, use only $20M of the proceeds to fix budget gaps. The remaining $60M should pay down long term debt principal.

Emotions are running high on both sides, for all of our sakes, let’s hope and pray cool heads prevail.

In “Invest the Trenton Water Works proceeds in the future not the past” I argued that the proceeds from the sale of the Water Works should not be applied directly to the 2010 and 2011 budgets. I allowed that it was too late to fix the 2009 budget and therefore $20M of the proceeds should be used to patch this year’s gaping budget hole.

If a group of Trenton citizens have their way, the sale will be delayed until a public vote can be taken and it’s not certain at all that the public will go along with the administration’s plan. We’d be left with a huge problem. Therefore, we’d better come up with plan B for patching the 2009 budget.

No, make that plan C. Plan A would have been to for the city to have been serious about managing the risk in its budgets starting 10 years ago when times were good. Trenton’s voters never demanded accountability for the long term fiscal health of the city and look where it’s gotten us. We pay only 14% of our total municipal and school costs and that’s just not tenable. (see “Trenton’s budget is in worse shape than you think”).

We’ve been hooked on the drug of state aid for far too long!

Let’s review how big a $20M budget gap is. There are roughly 26,500 households in Trenton (US Census bureau). So, our budget gap equates to $750 per household. That’s a staggering amount of money. To be clear, no matter what happens with the Water Works sale, Trentonians will eventually face this additional tax burden given the city’s current cost structure.

Mayor Palmer has argued that by not selling the Water Works, taxes will have to go up over 1000% from ($90 to $1090 per $100,000 of assessed value) and that by selling it we avoid the problem. That’s not quite true. The Mayor’s proposal is to avoid the tax hike for the next 3 years, but after that (and presumably when the Mayor’s out of office) we’ll face an even larger $30M budget deficit (according to administration numbers). Furthermore, state law prohibits such large swings in taxes anyway.

However, we need to make some big changes, no matter what. The problem is that to fix 2009 we’ll have to take drastic action if the citizen initiative succeeds.

So, what to do?

Cede the schools to the state

Of the $291M Trenton school budget, we currently pay only $21M or roughly 7.2%. Stopping payment on our portion will force hardship on the school system and will likely force the state to take it over. But, it’s possible our children will be in better care. It’s sort of like a mother giving up her child. Since she knows she can’t take of it, it’s in the best interest of the child to let someone else have it.

Hopefully, the state will have additional resources from the Obama stimulus plan to provide direct school aid. We can only hope that our Education President and Education Governor can find the money to take care of our kids.

Some day, when we get our budget back under control and have built a local economy strong enough to support education, maybe we can have another chance. But we’re a long way from that. Our local economy needs (as measured by assessed value) to grow by 300% before we are out of fiscal danger. Until then, every year we are at the mercy of a fickle state budget, inflation and an uncertain economy. We’ve got a lot of work to do to get ourselves clean and off the drug of state subsidy. Unfortunately, just like an addicted parent, it’s going to be better to go through rehab alone so we don’t endanger our kids any further.

I know this proposal sounds draconian. However, let’s face the fact that we could go bankrupt and now have no where else to turn. Parents and elected officials have to realize that the options at this point are horrid. We can gut the basic functioning of the city which will prevent any hope of revitalization or we can cut the police and fire departments and risk falling into anarchy. Allowing a state takeover of the schools is the safer alternative.

Running a water company for Ewing, Hopewell and other towns isn’t core to the business of running Trenton. It’s safe to say that we have more pressing concerns than whether or not our neighbors to the north have good water pressure. Continuing to run TWW would stretch our already thin and getting thinner, management resources.

Those that argue against the sale need to consider the big picture.

After all, it’s not as if owning the water works is somehow a birthright to all Trentonians. In peril of not having studied the history of TWW, I’ll guess that sometime long ago, Trenton was the stable big brother to Ewing, Lawrence and the others. With an attitude of taking care of our young neighbors and empire building, it probably seemed a good idea to run their water systems.

However, running Ewing’s water system isn’t core to Trenton’s management and never was.

Some opponents have complained that by selling TWW, Trenton will miss out on a revenue stream that it needs. While we will forego a portion of the revenue (we maintain a wholesale capability) we also forego future expenses and capital improvement costs.

Hopefully the administration or its professional advisors have done an analysis that compared the NPV (Net Present Value) of selling TWW vs. keeping it.  The NPV of selling it is $80M (i.e. the sales price)

The NPV for keeping it includes an analysis of future cash flows as follows:

• Revenues for the suburban water, expenses associated with the revenue and estimated capital upgrades and repair costs.
• All of these would be added together over time and discounted to present value.
• That present value is hopefully less than $80M.
• Extra credit if the admin did some scenario analysis (particularly a Monte Carlo analysis) to test an expected value for the NPV given a variety of scenarios (i.e. what if a major repair is needed).

My hope is that Council was briefed by the professional help on this analysis and all seven were comfortable with it.

Did we get a good deal?  We got as good a deal as those in power could negotiate.   It was in their interest to maximize the sales price. The $80M sales price factors in future revenue and costs. By selling the asset we’re getting the financial benefit up front so we can re-invest it in a way more closely aligned with the city’s strategic objectives (like lowering our debt burden).

At a broad brush, the city of Trenton should not be in the water business outside its borders. We’re stretched thin at managing things in general and there is a real risk that things could go wrong (pipe breaks, contamination, corruption). Reasonable people support the sale, including me.

My concern is over what we do with the funds.

We have a few options of what to do with the $80M in sales proceeds from TWW.

• We could pay down $35.7M of water utility debt and spend the rest plugging budget gaps for the next two years. This is the administration’s current proposal.
• We could use all $80M to pay down debt principal.
• We could pay down $60M in debt principal and use $20M to plug the hole in the 2009 budget.

In principal, we should use the proceeds of the sale to pay down long term debt. The value in TWW has been built up over many years by many Trentonians. We should want their efforts to be repaid to generations to come, not to just those of us living in Trenton today.

Furthermore, reducing the city’s overall debt level increases our flexibility to fund future capital projects.

The argument against using the proceeds to fill budget gaps is similar in logic to how businesses and homes manage their budgets. We don’t sell our car or home to pay for groceries. Rather, we invest the proceeds in other long term assets (new home, college education). By paying down an additional $44M in principal we reduce debt expenses in future budgets by $2M – $3M per year.

By using the proceeds to plug holes in the 2009 and 2010 budgets, we are using a precious long term asset to cover up our spending problems for just two years. The 2011 budget and beyond will have even bigger shortfalls ranging up to $30M.

To avoid any perceived impropriety, the Palmer administration should not use the TWW sale to fix current budget issues at the expense of future budgets and future administrations.

Instead the administration should propose the following:

• Pay down $60M in long term debt
• Use $20M to plug the 2009 problems (its too late to fix this year any other way)
• Get busy fixing our structural issues in advance of 2010

The long term fixes to our budget’s structural problems will come in six areas

• Reduction of long term debt ($60M from TWW sale)
• Non-resident wage tax
• Property re-assessment & rate increase
• Implementation of a land tax (or fines on vacant property)
• Accelerated sale of city owned property (at nominal prices)
• Realignment of the budget towards revitalization

Fixing our structural budget issues is hard work. Using proceeds from the TWW sale to fix the budget is an easy shortcut. The question is whether the Palmer administration, along with city council, will undertake the hard job of restructuring our budget or simply leave it to the next mayor.

Mayor Palmer will leave a positive legacy in Trenton if he can work through these thorny issues by the time he leaves office. I, for one, am ready to help.