A Tangled Budget Mess Mires Municipal Government in Paterson, N.J.

Prompting the partial government shutdown that took place in Paterson, New Jersey last week was an ongoing budget impasse, which involves City Council members who object to a 6.1-percent property tax increase Mayor Jose “Joey” Torres is supporting.

But Paterson’s budget difficulties extend beyond a straightforward disagreement over taxes.

The city’s finances have for years been tangled with a state aid program for fiscally distressed municipalities in New Jersey that, according to at least one City Council member, creates an incentive to pad budget plans with questionable expenses. Another aspect of this program is that Paterson officials typically do not know how much aid the city will receive from the state until late in the fiscal year, which can foster unpredictability and delays in the budgeting process.

At the same time, Paterson’s tax base and local economy have eroded during recent decades. But city government expenses remain unrelenting, according to some councilmembers, who say that salaries, overtime and healthcare for city employees continue to exert significant pressure on Paterson’s coffers.

Two homeowners in the city, reached last week, said that although they are fond of Paterson, property taxes there had become unaffordable. For one of the owners, the taxes had become so cumbersome that he said he’d decided to sell his house.

On Tuesday night, a Council meeting is scheduled and Torres plans to attend. At that time, the elected officials intend to make another attempt at reaching some sort of agreement on the budget.

Currently, the city is about eight months into the 2016 fiscal year without a finalized spending plan. Since the budget cycle began on July 1, the City Council has approved a series of temporary appropriations in order to keep Paterson’s government running.

The partial shutdown that occurred last week began at the start of the day on March 1 after one of these temporary appropriations expired. The suspension of non-essential services, like curbside trash pick-ups and after school programs, lasted until around midnight when another funding patch was approved by the City Council.

Torres introduced his original budget proposal for fiscal year 2016 in October.

On Feb. 23, a few days before the city found out the amount of its state aid offering, his administration presented the City Council with amendments to that plan, which called for reducing the proposed amount of general spending to $275 million, from $283 million. The required property tax levy went down also, to $157 million from $174 million. The Council rejected the amendments that day in February, and did so again last Tuesday before passing the stopgap plan to end the shutdown.

“We have not yet adopted a budget and we have about three months left in the year,” Councilmember Ken Morris, Jr. said during a phone interview last Friday. Morris chairs the Council's Finance Committee and voted against the mayor’s proposals last week.

Council President William McKoy, who supported Torres’ amended budget, said that using temporary measures to fund the city government can be problematic.

“There's a natural tendency for the administration to ask for more expenditures, and there's a natural claim by the Council to say: ‘Let's curtail spending until we have an approved budget,’” he explained.

"Because if you keep spending,” McKoy added, “you are essentially approving whatever the proposed budget is and we don't know that we have the full revenue.”

‘It's Smoke and Mirrors’

Located about 13 miles west of New York City, Paterson is New Jersey’s third-most-populous city, with about 146,000 residents. Known as America’s first planned industrial town, Paterson thrived in the late 1800s and early 1900s and was once a hub for silk production.

But, in more modern times, the city’s fortunes have turned.

“I would say for the last 20 to 25 years, if not longer, the city of Paterson has been classified as a distressed city, or a city in need of financial assistance, because we're unable to close a budget gap,” McKoy, who has been on the Council for nearly 16 years, said by phone last week.

Dating back to 2011, Paterson has received what is known as “transitional aid” from the state of New Jersey. This type of aid is provided to cities facing severe fiscal distress. Municipalities apply for the money through the state’s Department of Community Affairs.

Paterson received $25 million of transitional aid in 2015, or about 9.6 percent of its budget, according to information distributed by the Mayor’s Office last week.

There are some quirks with the transitional aid program.

One is that it operates on a cycle more aligned with the calendar year—out of sync with Paterson’s fiscal year, which runs from July 1 to June 30. This means the city tends to not know exactly how much aid it will be awarded until it’s beyond the halfway point of its fiscal year.

“The state comes in very late, in the third quarter, to give us the award," McKoy said. “We start the year without knowing what our transitional aid will be.”

Some councilmembers have floated the idea of switching to a calendar year budget cycle to help alleviate this problem but, at the moment, a formal proposal is not in play.

Morris, the Finance Committee chairman, said that the state recommends cities anticipate receiving 95 percent of the transitional aid they were awarded in the previous year, as they work to craft their upcoming budgets.

But balancing a budget plan based on that number can have unwelcome consequences if a city’s goal is to get as much state aid as possible.

“If you plug in 95 percent of your previous award, and you do budgeting the way you're supposed to do it, now you show that there's not a need for the entire number,” Morris said. “So the state of New Jersey says: ‘Hey, great Paterson, you showed that you’ve got a workable budget with 95 percent of the award, what compelling reason do I have to give you more?’”

In other words, there’s an incentive to show that the city has a bigger, rather than smaller, budget shortfall. Morris claims that one tactic used to plump up proposed spending figures is to budget for unfilled city positions—a move, he stressed, that he and others on the Council have opposed. “You keep those positions in, you budget for them, you show a deficit, you go to the state of New Jersey,” he said. “Now you get your award, you go back, you pull those positions out, and it now brings the budget down more in line with what your actual need is.”

Earlier in the conversation, he said: “It's smoke and mirrors.”

Morris offered a theoretical example where the city presents a budget plan to the state with its aid request, but does not include the unfilled positions in it, and asks for $20 million.

"The state of New Jersey may say: 'You're not going to get 20, you're going to get 15.' Now you got a $5 million problem."

‘Beyond the 11th Hour’

Mayor Torres and Paterson’s business administrator, Nellie Pou, did not respond to multiple requests for comment for this story.

But for this fiscal year, the mayor’s administration initially submitted an application for transitional aid that asked for “nearly $40 million,” according to Tammori Petty, director of communications for New Jersey’s Department of Community Affairs. That amount would have been an increase of about 60 percent over what the city was awarded the previous year, and “would nearly double the amount awarded to any other town,” Petty said by email.

She added: “This request was unreasonable.”

The department’s Division of Local Government Services eventually agreed to award Paterson $25 million in transitional aid, still more than what was granted to any other municipality.

There’s a catch though.

To get that entire sum, the city would need to impose the 6.1-percent tax increase that is now at the center of the budget dispute between Torres and members of the City Council. If the city chooses to raise property taxes by less, the state could withhold a portion of the transitional aid award, equal to the amount of forgone tax revenue.

"It's a no-win situation," said McKoy. The way he sees it, from the city government's perspective: "This is the best offer you're going to get. Settle up and move forward with a better plan for next year."

Morris grumbled a bit about the relationship between the Department of Community Affairs and the city. “DCA has historically treated Paterson, and the elected officials of Paterson, as step children,” he said. “I've often called them overseers."

He pointed out that Paterson provides services like drug rehabilitation programs, and charitable medical care that are used by state residents that come from outside of the city. “I wish I could put a dollar value on all that and then send a bill to the state of New Jersey,” he said.

Councilman Andre Sayegh voiced a similar view of how the state is treating the city.

“I believe we're owed more state aid, because Paterson contributes a lot to the state coffers,” he said. “In fact, we're never told how much Patersonians pay in sales tax and the gas tax and the cigarette tax. I think they want to portray us as a welfare city, but I believe we're contributing a lot.”

Sayegh is staunchly opposed to the mayor's budget proposal. But he acknowledged during an interview last week that it’s probably past the time where the city can get any other concessions from the state as part of this year’s transitional aid package.

“I would admit,” he said, “it's beyond the 11th hour.”

Petty dismissed the Council member’s gripes. “While the Council has had the introduced budget since last fall, the [Division of Local Government Services] is unaware of any suggestions for prudent and effective cuts,” she said. “Rather, they have resorted to politics and gamesmanship that threaten the City’s overall financial health and adversely affect taxpayers and employees.”

‘We Have to Find New Ways of Solving the Problem’

Morris has introduced two resolutions related to the budget, which are expected to come up on Tuesday night. With one, he is seeking to rein in overtime spending. With the other he’d like to curtail what he sees as the hiring of unnecessary city employees in certain situations.

He could not provide a dollar estimate for how much his two proposals might save the city.

There are other areas where Morris believes Paterson could find savings. Pointing to health insurance for city employees, he suggested that Paterson transition to a system where providers are paid a negotiated, capped rate for managing a set population of people.

Another area where he said the city was spending heavily was union contracts and pay for police officers and firefighters. He raised the idea of a ceiling on salaries for these employees.

“I'm not saying they need to be low. I'm just saying they need to be reasonable,” he said. “I got sergeants making six figures. I got captains making in the high six figures. I got firemen making six figures and they're not in leadership positions.”

Police and firefighter union representatives could not be reached for comment on Monday.

Morris, McKoy and Sayegh all agreed that the long-term solution to the financial challenges facing Paterson had to include economic development.

"We have to become more self sufficient,” said Sayegh. “And that starts with introducing new revenue streams. We have to broaden our tax base." That means leveraging assets, he said. Sayegh pointed to Great Falls, a waterfall in Paterson that is now part of a national historical park. A pending hotel project in the city, he said, could also provide new jobs and tax revenue.

McKoy, the City Council president sees promise in Paterson.

“We have great transportation infrastructure, we're close to New York, we believe we'll be able to climb out of this hole that we're in," he said. "But it will take us some time, and we will need the state to continue to support us.”

‘I Have Put My House Up For Sale’

As the city’s budget troubles continue to play out, property owners in Paterson are left with tax bills that they say are becoming an increasingly difficult nut to crack.

“The homeowners are being asked to bear more of the brunt,” said Michael Symonds, a Paterson homeowner who has lived in the city for about 20 years. “Every year the property taxes climb.”

"People are barely hanging on to their homes,” he added. “Hard working people, they've had it, they just can't pay the taxes.”

One of those people is Richard Walter.

“We can no longer afford the taxes here,” he said in an email last week. “I love living in Paterson but I am saddened to say that I have put my house up for sale.”

Walter, who is now retired, said he bought his house 11 years ago for $375,000. The taxes then were $8,000 a year. He said he is now paying $16,000 a year, and noted the proposal to raise property taxes 6.1-percent, and that local school district officials have called for a 27-percent increase as well.

Symonds sees loads of unrealized potential for tourism and other types of development in Paterson.

“Paterson is an incredible city,” he said. But, in order to capitalize on all it has to offer, he believes “there needs to be a really clear vision for the city. There really isn't. And it's a shame.”