Moody’s Sees New Jersey’s 2% Property Tax Hike as a Credit Negative

Moody’s Investors Service Monday said that New Jersey’s new 2% property tax cap is a credit negative for the state’s local governments as those municipalities are already facing lower tax collections and rising employee costs.

However, although capping those levies could place additional pressure on municipal budgets, the new 2% cap could help the state’s fiscal outlook in the ­future.

Gov. Chris Christie last week signed into law a bipartisan initiative to limit annual property tax increases to 2%, lower than the prior 4% cap.

The law, which would not alter the state’s constitution, includes certain exemptions to the 2% ceiling, such as debt service payments and pension and health care costs.

Moody’s indicates that the state’s high property taxes have contributed to out-migration and a slow job growth.

“Although the 2% cap will reduce financial flexibility for New Jersey local governments, in the long term, the state’s overall economic health may benefit should the cap successfully slow property tax growth relative to the nation.”

New Jersey has some of the highest property taxes in the U.S. The average homeowner pays $7,281 in yearly property taxes, according to the administration.

In an analysis released yesterday, Moody’s indicated that restricting property-tax hikes to 2% annually for cities, towns, and school districts would be difficult for some areas that are also facing other economic challenges.

“The new cap is credit negative for New Jersey local governments, already weakened by reduced revenue related to the economic recession, high fixed expenditures, and the previous 4% property tax cap put into effect in 2008,” the report reads.

Of the local governments in New Jersey that Moody’s rates, reserves declined by an average 22.6% in fiscal 2008 and audited financial statements for fiscal 2009 show further deterioration in reserves, according to the report.

In particular, certain local governments in the state are distressed financially, including the cities of Camden, Trenton, and Paterson, and also the boroughs of Seaside Heights, Haledon, and South Amboy.

“With the further lowering of the levy limitation, local governments such as these will be challenged to maintain adequate levels of financial flexibility in the absence of significant expenditure reductions,” the report says.

At the same time, Moody’s points out that some of the most pressing expenditures for local governments, like retirement and health care costs, are exempt from the 2% limit, which will help municipalities meet such expenses.

Pension and health care expenditures have increased by approximately 20% in each of the last two years, according to Moody’s.

Local governments can also increase property taxes above the 2% rate if a simple majority of voters approve the hike in a referendum.

Moody’s anticipates that most local governments, especially cities, will probably increase property taxes beyond the 2% limit by using exemptions.

On average, counties and school districts that Moody’s rates have remained under the prior 4% cap, raising property taxes by about 3% per year.

Conversely, cities have surpassed the 4% limit by using exemptions. Cities have boosted property taxes by an average of 7% in 2008 and 6% in 2009, according to the report.

To help cities and towns operate with a 2% cap, Christie has proposed a “tool kit” of legislation that aims to address rising employee costs. Lawmakers began work on that initiative Monday.

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