Berkeley Heights Taxes

October 22, 2016

As part of a multi-part series on our taxes,  part 1 will focus on how Berkeley Heights deals with debt and in particular what usually happens at the end of a Berkeley Heights Bond’s Life.

Introduction:

The Berkeley Heights Council historically has a bad habit of re-ante-ing up every time a bond matures.   If we have $100,000 less in payments this year compared to last, they will write a new bond that will have roughly $100,000 in payments.    I believe this to be an undisciplined approach to capital expenditures.   

How Municipal Bonds Work

Municipal Bonds are issued for Capital Expenditures for the Town.   Capital Expenditures are for items or projects that have a lifetime associated with them.  For example, buildings, roads, and fire trucks  are some examples of the Capital Expenditures.

When the council needs to purchase a capital item it passes an ordinance that specifies what it wants to get, the life of the item and its approximate cost. One ordinance can specify multiple capital items. This capital ordinance is subject to challenge by the voters and can be voted on if enough voters agree it should be voted on.

Typically the township will issue short term notes, called bond anticipation notes to raise the money that is needed to pay for the capital item(s).

Once enough ordinances and notes are outstanding the township then issues long term debt called municipal bonds. The life of these bonds is related to the average life of the capital items that were purchased.   The full faith and credit of the township is used to guarantee repayment of the municipal debt. This means taxes must be raised to pay the debt.

Each year the township passes a budget and in that budget is sufficient appropriations  to repay principal and interest on the outstanding debt. This debt service is exempt from the 2% levy cap so that can partly explain why the tax levy can exceed the 2% cap.

In some years a bond will mature so that no more payments are needed. This is just like paying off a home mortgage.  Sometimes one can see a relative large drop in the debt service due to a maturing of debt.  This council can be tempted to replace the debt and can argue that you will not see an increase in taxes.

For example in 2007 there was about $800 thousand of debt service rolling off.   The council wanted the bond for $10M to build in new community center and buy a fire truck.  This was put to referendum and the taxpayers voted 3000 to 2000 against doing that. The fire truck was eventually purchased.  In that case the taxpayers were not fooled into raising taxes.

Over the next couple of years, the town will have around $300,000 in debt service rolling off.       Again the town will have a choice, either allow the $300,000 to roll off or to find something to spend it on.    If the council does nothing our tax burden will be reduced.   This is not a one time reduction, but would be $300,000 less that we would need to pay every year.  If the town chooses to issue new bonds, they are really raising your taxes.  

Rather than allowing the people to have some tax relief they find excuses to spend on something else, so that the taxpayers don’t notice the opportunity to cut back.     In the past rather than allowing $10,000,000 to roll of they wanted to keep the debt load high.   Will they choose to force spend $5-$8M for the debt that will roll off?    I am sure that is what they plan to do.    

If we are really serious about reducing municipal spending we need to start by getting out of the habit of replacing maturing debt.     Let us spend only on what we really need.   As Ed Delia likes to say,  “the town has a Want List not a Needs List”.   Spending according to a carefully crafted capital plan is essential with voter approval of large items desirable.