Earlier this month, the City of Bayonne finalized a deal with William Blair & Company, a Chicago-based securities firm, to liquidate future revenue from the sale of the southwestern portion of the Military Ocean Terminal Base (MOTBY) to the Port Authority of New York and New Jersey. The move was designed to make up for a $13 million shortfall in this year’s city budget caused by a MOTBY development deal falling through in April.
The city effectively sold $45 million worth of deferred payments for $27.3 million to be used for both this year’s budget and future budgets, according to the city’s Chief Financial Officer, Terrence Malloy. The city is betting that future tax revenue will stabilize with enough revenue generated by new development. “If you’re liquidating a future asset to fund current operations, the idea is to build a bridge to that future, rather than have an unsustainable tax increase in the intermediate years,” said Tax Assessor Joe Nichols. “That would discourage development, and we’re competing with towns around us.”
The Port Authority bought MOTBY land in 2010 for $235 million to be paid over 24 years, and now the city is selling the final nine, from years 2025 to 2033, which would have amounted to $45 million. The debt bought by William Blair & Company is tax-free, and holds an interest rate of 3.37 percent.
Searching for a sustainable revenue model
In the past, the city filled budget holes the same way. In 2003, Bayonne sold property to fill a budget gap, and in 2004, it sold its municipal garage to the Hudson County Improvement Authority for $10 million to fill that year’s gap. In 2007, under Mayor Joseph Doria, the city issued municipal bonds backed by future development revenue to fill its budget gap.
“The city has unfortunately been surviving off one-shot revenues for more than a decade, and we’re slowly trying to reverse that with the new tax ratables,” said Business Administrator Joe DeMarco. “Some of those [developments] are under construction, and they become viable next year, so it becomes a recurring revenue rather than a one-shot revenue.”
DeMarco said the city chose to cash in only on enough of the payments to leave a budget cushion for the next two to three years. “The goal is to use less than the $15 million next year and have some left over,” DeMarco said. “The plan is to replace that revenue with the developments that are coming.”
Budget deficits like this are common in Bayonne, which once relied on industry for much of its revenue. “Changes in the ratable base have been one of the persistent problems for the city since the decline of the industrial base,” said Nichols. “So what happened in 1991, the revaluation shifted a large amount of the tax burden from the former industrial tax base onto the residential tax base.”
Industry has been steadily leaving the city for decades, and like other post-industrial cities, Bayonne is shifting to a revenue model that relies on property-tax revenue from new development. Wealthy people pay taxes on those new luxury condos. Small businesses will feed off of the disposable income of those new residents. “Instead of dollar stores, I think we’ll see more restaurants,” Nichols said. He, and other city officials, support new development and hope to see Bayonne become a destination, rather than another commuter town.
“Banks typically come in and pitch these deals claiming they will help solve the problem right now by taking on future risk … but it has long term consequences at the end of the day, and these types of deals can be very expensive.” – Saqib Bhatti
From taxpayer wallets to Wall Street
Bayonne’s two immediate options to generate revenue fast are to either raise property taxes or sell something. Raising taxes in Bayonne, especially with a reval on the way, is politically and economically unviable, so liquidating assets is the only choice left, at least in the short term.
“Cities argue that there is no other way,” said Saqib Bhatti, a fellow at the Roosevelt Institute, a liberal think tank, and director of the ReFund America Project, which advocates for a more equitable relationship between American cities and the finance industry. “Well, that’s rarely true that you have no other choice.” Though Bayonne had to liquidate assets fast, the systemic problem, Bhatti said, is, “the lake between lack of progressive revenue and bad financial deals ends up compounding a bunch of problems.”
He said these kinds of “one-shot” deals are increasingly common, and banks and brokerage firms are profiting from cities’ inability to generate the revenue needed to run a city. “Instead of fixing the structural issues of getting a fully funded budget,” Bhatti said, “public officials are finding ways to make ends meet, and banks typically come in and pitch these deals claiming they will help solve the problem right now by taking on future risk … but it has long-term consequences and at the end of the day, these types of deals can be very expensive.” This deal is costing taxpayers $17 million in missed Port Authority payments, without accounting for the alternative tax increases and economic fallout from such a move.
Bhatti, and his organization argue that cities should collectively bargain with financial institutions to get better deals, and he supports a local progressive income tax, which in New Jersey, cities do not have the power to implement, with the exception of Newark.
Bhatti notes that another way the financial industry extracts resources from municipal governments is by shifting away from an interest-based model to one that relies on fees and services.
In Bayonne’s deal with William & Blair, the city employed N&W Financial Services in Hoboken to issue the Request for Quotation and advise the city, according to Malloy. These services not only gauge the market for price quotes, but manage the city’s investments and put together bond deals. Even though Bayonne paid N&W only about $20,000 from the William & Blair deal, N&W’s underwriting and advising help dictate which pockets municipal funds land in.
An amended municipal budget will be introduced at the city council meeting on Wednesday August 24, and is expected to pass at next month’s meeting.
Rory Pasquariello may be reached at email@example.com.