>THE RECORD, Sunday, October 5, 2008
BY WILLIAM LAMB
STAFF WRITER
North Jersey towns are finding it nearly impossible to borrow money because of the credit crisis — and officials fear a wave of property tax appeals and delinquencies could follow if the economic outlook doesn’t improve soon.
Cities and towns across the region are putting major projects and big-ticket purchases on hold, betting the crisis will ease in a matter of weeks or months. Still, many finance directors aren’t taking chances, telling department heads not to expect any spending increases next year.
Municipalities were already reeling from a 7.2 percent cut in state aid, announced in July, when the bottom fell out of the credit market in mid-September.
Since then, hiring freezes have been imposed or extended, and some city officials have warned that they may be forced to cut services or lay off employees to keep their budgets balanced. All of it is happening in the face of state-mandated increases to employee pension funds and contractual pay hikes that are beyond the control of municipal officials.
Bill Dressel, executive director of the New Jersey League of Municipalities, called it “the perfect storm for economic doldrums,” adding that the current climate is the worst he’s seen in his 34 years with the league.
In Wanaque, Borough Administrator Tom Carroll has told department heads to put off equipment purchases until next year.
“We’re making do with what we have,” Carroll said. “We’re going to fix the leaf blower machine because it’s fall and we need it. But we’re going to put off buying any new computers. We’ll do computer maintenance and use the machines we have.”
Housing fears
Few towns have seen a significant increase in property tax delinquencies, though the outlook won’t be fully clear until January. Standard & Poor’s reported last week that New York City-area home prices fell 7.4 percent from July 2007 to July 2008, raising fears that residents may seek to have their property taxes lowered next year.
There are other signs that the economic downturn is beginning to have a real impact on municipal budgets. In Leonia, for instance, residents owed about $227,000 in delinquent property taxes for 2007, more than double the $101,000 in delinquent property taxes for 2006, said Myrna Becker, the borough’s chief financial officer. Becker said the borough briefly delayed payments on some bills this summer.
“We simply didn’t have the funds to pay for them,” she said. “When you’re dealing with tax money that’s not coming in on a steady basis, it has an impact.”
The bleak economic outlook for towns and cities took a sharp turn for the worse on Sept. 17, when the market for government-backed bonds, traditionally considered among the safest of investments, dried up virtually overnight. Suddenly, cities found they could no longer tap their cheapest and most reliable source of borrowed money, bringing municipal cash flow to a standstill.
The problem started, bonding experts said, when institutional and individual investors panicked and began pulling their money from money market accounts that had invested heavily in tax-free municipal bonds and the short-term notes that cities issue as a way of ensuring stable cash flow.
Market collapse
Interest rates on municipal bonds and notes increased to more than 3 percent by last week, significantly higher than the 2 percent or so that municipal officials were accustomed to paying, said Ed McManimon, a Newark attorney whose firm specializes in municipal finance law. Municipal Market Advisors, a Massachusetts consulting firm, reported that the yields on some 30-year municipal bonds rose as high as 5.24 percent in September.
“Essentially, the note market collapsed,” McManimon said. “There were no bidders. In the 36 years I’ve been doing this, that’s never happened.”
In Rutherford, Chief Financial Officer Edward Cortright said he would decide in April whether to go ahead with a planned $9.1 million bond issue to finance capital projects.
“At that time, we may very well be affected by the market,” he said.
The borough would use the bonds to pay off four loans, called bond anticipation notes, that the borough took out over the last three years to finance road maintenance and other projects, Cortright said.
Leonia is already feeling the pain of a sluggish bond market. Borough Administrator Jack Terhune said fewer banks are competing to buy the borough’s debt.
“Now, when we go out for tax anticipation notes or bond anticipation notes, we get two [banks] who would respond,” he said. “A few years ago, we’d get eight or nine.”
The new climate is forcing cities and school districts to be creative.
For instance, when one of McManimon’s clients, the Bergen County Technical Schools and Special Services District, had trouble finding bidders for a new short-term note recently, McManimon prevailed on another client, Bergen County, to buy it. The note, which matures in December, has an interest rate of 3.1 percent.
“So [Bergen County] gets a legitimate return and the vocational schools pay an interest rate that’s commensurate with the market,” McManimon said. “But that’s only a stopgap, not a long-term solution. We’re trying to find stopgaps until the market shakes out.”
Credit remains tight
The $700 billion rescue package for the financial system that President Bush signed into law Friday is not likely to immediately loosen credit for towns and cities, because so much of the money that had been invested in municipal bonds now locked up in treasury bonds.
“The spigot will turn back on, but it’ll be a progressive thing where it might take two or three weeks,” said Tom Hastie, a partner in McManimon’s firm.
Dressel, of the municipal league, said he is cautiously optimistic that experts are correct when they say the congressional bailout will help to create a better climate for New Jersey’s towns — and their residents.
“There’s no way of sugarcoating what’s happened in recent days,” he said. “But every expectation is that this thing is going to turn around as fast as it went on the downward spiral, that it’s going to come back just as fast as it went down. I hope they’re right, but time will tell.”
Staff Writers Stephanie Akin, Joseph Ax, Nick Clunn, Evonne Coutros, Richard Cowen, Jennifer H. Cunningham, John A. Gavin, Ashley Kindergan, Maya Kremen, Matthew Van Dusen, Barbara Williams and James Yoo contributed to this article. E-mail: lamb@northjersey.com
