Trenton’s budget is in worse shape than you think
August 9th, 2008 | 
Author: This article was originally published in the August 2008 edition of the Trenton Downtowner – D. Dodson
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
|
|
|
Hamilton |
Trenton |
|
Budget |
|
|
|
|
|
Municipal |
$ 89,000,000 |
$ 196,000,000 |
|
|
School |
$ 182,000,000 |
$ 291,000,000 |
|
|
Total |
$ 271,000,000 |
$ 487,000,000 |
|
|
|
|
|
|
Property Tax |
|
|
|
|
|
Municipal |
$ 54,000,000 |
$ 47,868,000 |
|
|
School |
$ 93,000,000 |
$ 21,000,000 |
|
|
Total |
$ 147,000,000 |
$ 68,868,000 |
|
|
|
|
|
|
% Property Tax Funded |
54% |
14% |
|
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
|
|
Hamilton |
Trenton |
|
Total Budget |
$271,000,000 |
$ 487,000,000 |
|
Total Property Tax |
$147,000,000 |
$ 68,868,000 |
|
% Funded by Prop. Tax |
54% |
14% |
|
% Tax increase all external funding is cut |
84% |
607% |
|
Tax increase required to meet shortfall of external funding cut |
$3,600 |
$39,500 |
|
% increase if no external increase and 4% inflation |
7% |
28% |
|
Tax increase required to meet shortfall 4% inflation |
$300 |
$1,800 |
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.
Posted in Taxes and Budgets | 
Tags: bankrupt, budget, disaster, foreclosure, Hamilton, NJ, taxes, Trenton
Nice analysis, but some of what you’re seeing is the desired intent of the New Jersey constitution, which by restricting income tax proceeds to school aid and other property-tax offsets is actually set up as an income-redistribution scheme to low-property-value districts. Still, you are correct that to take advantage of what the state is offering, Trenton has to make good use of that transfer payment and wean itself from dependence in the long-run.
And also — let’s reinvent Trenton without dissing Camden! Things are really, really bad there, for sure, but “ceases to be livable” is a probably too simplistic a way to put it, since after all some 80,000 souls did live there in 2000. True that many had no economic choice about it, given how young, poor and uneducated they were on average, but even then, there are many pockets of civility and virtue and possibly even more choice than one gives credit for.
One thing Trenton has going for it vs. Camden is a notably better housing stock. Camden is full of firetrap wooden row houses and undesirable 2-story bricks (both remnants of cheap shipyard housing), whereas Trenton has ample architectural diversity and much higher quality overall.
However, one thing that Camden has that Trenton does not (to my knowledge) is a pretty cool website CAMConnect, an urban indicators project hosted by Cooper Hospital. Talk about looking bad news squarely in the face… take a look at the neighborhood-by-neighborhood data. I wonder who will host a similar project for Trenton, since the city administration cannot manage this task itself? In fact, it could and should be done better in Trenton, maybe with assistance from one of the county’s several universities.
Thanks for this analysis. What is most unfortunate is how little we see in terms of progress from efficient use of Trenton’s budget. I am surprised we continue to receive state aid. I would have expected the state to take control of Trenton’s municipal government already. Isn’t anyone watching?
You may also want to consider the relationship of land-use and ratables. I’ve heard from differing sources that the general downtown core of Trenton is composed of 50-70% state-owned facilities (that’s the location with the highest inherent value). Add to that, the relatively high proportion of non-ratable land use such as churches, non-profits, parks, utility easements and right of ways, as well as 5-10 year PILOTs in place, and the ratable situation in Trenton looks pretty bad.
It would be very interesting to try to compile a map of Trenton that indicates exactly how much of the 7+ square miles contributes towards ratables. You are correct in that ratables are not the solution to our financial woes, but I would guess that only 20-30% of the Trenton land mass is currently generating property taxes.
-sd
Stephen,
Please don’t be one of those people who use the “state government” excuse for Trenton’s lack of ratables.
There is no crowding out effect from government buildings. Trenton simply has a large proportion of undeveloped or underdeveloped land. Also, there’s no reason to think downtown is particularly valuable unless you have data to back it up (certainly would be a worthwhile study).
Apparently TDA is doing a study of occupancy rates and hopefully rents. Perhaps this study will make your point. However, my guess is that other neighborhoods have higher residential values (my properties alone point to that) and also higher commercial values.
Every one of us in Trenton and especially the Mayor’s office need to get off the bandwagon blaming lack of ratables on the state. It’s just not the problem.
That said, state policy is a large part of the problem. The state is the principal culprit in funding affordable housing in Trenton, it built the highway’s that tore the city into pieces, it owns the surface lots that are death to development and it implemented the tax and spending policies that led to NJ’s sprawl.
There’s plenty the state of NJ has done to mess up Trenton but locating the Capitol there isn’t one of them. And even if we’d be better off without the Capitol, there’s just not anything we can do about it so we’d better just move on.
What is the most surprising about Trenton, is that in certain neighborhoods, such as our own lovely Mill Hill, the value of developed land is considerably higher than that of to most affluent burbs, say, Library Place in Princeton. That number only works when you consider the cost per developed acre of the land. The cost per developed sf is less competitive. Consider the interchange of Route 129, Route 1, and the train tracks: there is over 15 acres of undevelopable land sitting there- underutilized by a poorly conceived and executed traffic interchange. I don’t mean to sit back and wag my finger at the State, but I think we all need to come to the realization that land is our most precious commodity in the City- and it needs to be considered as such in future developments and public works projects.
I also wrote about the State office buildings because the State negotiates what is effectively a large PILOT agreement with the city- and while I don’t know the number off hand, its a pretty big component of our “State-Aid”. That money should never dry-up- unless all State offices evacuate the city. It is another variable- the amount is usually touted as being much lower than a normal ratable would bear by the City- but there is not much leverage to negotiate a better deal. I’m remembering this information from years ago- so correct me if I’m way off!
Keep up these posts- they are eye opening.
-sd
Stephen,
Perhaps I can decipher the budget enough to break out the state and county PILOT revenue numbers and put it in a follow-on analysis. Likely I’ll do this as part of the review of the 2009 Budget.
It’s fair to treat this revenue differently than all the other state and county aid.
I, too, am tired of hearing how all problems facing Trenton are the result of the STATE not paying the, “market rate,” tax rate (sorry for awkward wording). Trenton is only one of 50 state capitals. Right now, I’m trying to find out how they survive. A few are big cities, i.e., Boston and Atlanta; my interest is in the cities with a population similar to Trenton’s, Annapolis for example. One thing I do know, Annapolis gets NO help from the Feds. Federal interest stops at the main gate of the naval academy. Dan, I’m so glad you can read a balance sheet. PHS