Redevelopment Issues that Concern School Districts

12.11.15

Many municipalities are taking advantage of the extra powers available to them under the Local Redevelopment and Housing Law (LRHL), where appropriate, to provide for the redevelopment of an area that may be deemed to be an area in need of redevelopment. Under the LRHL and the Long Term Tax Exemption Law, municipalities may be permitted to enter into financial agreements to assist redevelopment projects by permitting payments in lieu of taxes or PILOTs instead of conventional property taxes. The municipality receives the service charges or PILOTs under the financial agreement in lieu of conventional property taxation with the county permitted to receive 5% and the school district nothing. This agreement may ease the burden of the redeveloper and permit certainty as to the cost of the redevelopment from year to year during the term of the agreement, which may make the redevelopment economically feasible. The expectation is that the redevelopment will produce more revenues than previously and will further generate additional ratable growth nearby by turning previously unproductive properties into productive properties.

If the redevelopment project involves housing that generates additional school children, the school district becomes concerned that it will not have the funds to provide for those children. While the school district receives all the money it requires to meet its budget from the taxes raised through the municipality, the value of the redevelopment project is not reflected in the property tax valuation. The school district is subject to the 2% tax levy cap, which limits its ability to spend notwithstanding additional costs. While there is a cap adjustment permitted for student population growth, this is often not sufficient to meet the district’s needs for new or improved schools and more teachers. Without an increase in its ratable base, the school district may have difficulty generating funds within cap to meet the needs of additional children produced by the new housing. Also the school district’s borrowing margin does not increase as the borrowing margin is determined as a percentage of the property tax valuations. They can hope that the redevelopment will generate additional development and ratables, but that may take a long time and be difficult to predict and rely on. Moreover, in municipalities with redevelopment needs, the schools may already have unaddressed needs. It is in the interest of the school district, the municipality and the redeveloper to have a school district that provides at least an adequate education to support the value of properties in that district.

To meet the concerns of the school district and be sure adequate provision can be made for the children of the school district without increasing class size and causing the district to suffer, municipalities frequently search for ways to assist their school children through the implementation of the redevelopment projects. One approach is to suggest that the redeveloper make a contribution. This can be made up front as a donation or over time. This may not work within the feasibility models for the redeveloper, which are often tight and gave need for the municipal assistance to begin with. Under general land use law, any developer contribution must be directly related to the developers’ projects’ needs and requirements. Under redevelopment law, there may be more flexibility. However, with the feasibility concerns, the municipality and the redeveloper may be more interested in using the program to assist the school district with the mechanisms to obtain the school improvements when prior attempts at referenda have been unsuccessful than in actually providing the funds to do it. At the very least they may want to provide funding only from funds realized as a result of the redevelopment.

Under general law, the school district has the power to raise funds to operate the school district and to provide facilities to do that. The municipality has limited powers to assist. These may include cooperating with districts to purchase and convey land to the school district for school buildings, to provide for parks, playgrounds and other recreational and athletic facilities, and other community facilities and to enter into shared services arrangements to reduce costs for both the municipality and the school district. N.J.S.A. 40:48-17.1 may permit a municipality annually by resolution to transfer funds from surplus funds provided an appropriation for that purpose was included in the annual budget. Redevelopment powers may provide additional mechanisms to assist.

N.J.S.A. 40A:12A-22(m) provides that a municipality or other redevelopment agency may enter contracts with another public agency, to the extent that it is within the scope of that agency’s functions, to provide services customarily provided by that agency, to be rendered for the benefit of the occupants of the redevelopment area. Specifically the other agency may provide and maintain parks, recreation centers, schools, sewerage, transportation, water and other municipal facilities adjacent to or in connection with a redevelopment area or project. This could be done as a side agreement tied to the redevelopment agreement and financial agreement to ensure adequate consideration to support the enforceability of that side agreement. The redeveloper may also be asked to donate or promise to make payments. The district may feel more comfortable in an arrangement with the municipality than with the redeveloper especially if the delivery is to be performed over a long period of time. While the Long Term Tax Exemption Law may not permit a portion of the PILOTS to go directly to the school district, the municipality may be able to use a side agreement to provide funds to the school district annually to support services required by children related to the redevelopment or even debt service due on bonds necessary to build additional school facilities to meet their requirements.

From time to time, it has been suggested that an improvement authority may build school facilities. The County Improvement Authorities Law certainly supports that theory. However, the New Jersey Department of Education (NJDOE) has always taken the position that a school district may only enter into lease arrangements specifically authorized by school law, notwithstanding the provisions of the County Improvement Authorities Law that school districts among other public bodies may enter into binding leasehold arrangements for the period that authority bonds are outstanding to build public facilities within the county or in certain instances other counties. When school law applies, a board of education may only enter into a five year lease purchase arrangement for additions and renovations to existing school buildings, subject to annual appropriation and with NJDOE approval, and not longer term, hell or high water leases for new schools. It might be possible for a school district to enter into a long term lease of property from an improvement authority if the school district does not get title at the end. Certain NJDOE approvals would be required. Moreover, if the school district owns the property to be improved, it might not be able to enter into a lease-lease back arrangement as generally a school district can only lease land after determining it does not need it for a school purpose. In the case of either a lease purchase or a true lease arrangement, the rent would be within the 2% tax levy cap, competing with other operating cost priorities, and generally no facilities aid would be available.

If a municipality and school district can enter into a binding agreement for the municipality to subsidize the school debt service from revenues it receives as PILOTS, as described, the school district might find it easier to pass a school bond referendum. The debt would then be outside the 2% tax levy cap, be covered by the school bond reserve, sell at favorable rates and be eligible for state school facilities aid.