The state bolstered its arsenal of business incentives in July 2009, when Gov. Jon S. Corzine signed a bill to expand the Urban Transit Hub tax credit and create the Economic Redevelopment and Growth grant program. But an important side effect to the law was to strengthen the state's defenses in the realm of economic development.
The measure allowed the Economic Development Authority, which administers the incentive programs, to create the so-called net benefits test that it uses to calculate its awards and gauge whether subsidizing a project will grow the state's tax rolls. For two years, the test has been the barometer for some of the largest incentive packages in the state, which sometimes gain national attention — and with it, criticism.
The analysis estimates the public revenue that will come from the jobs and capital investment tied to a project, including income and sales taxes, said Timothy J. Lizura, the EDA's senior vice president for finance and development. For jobs, he said, the calculations are based largely on formulas devised by the federal government, which "tell us that for every dollar somebody earns, this is how much economic activity that dollar generates."
The results are not exact, but the EDA errs on the conservative side, Lizura said: The model considers the activity generated during only 75 percent of a tenant's lease term, or up to 20 years, and calculates sales tax revenue based on half the actual percentage.
When the results are compiled, the overall net benefit of the project must be at least 110 percent of any tax credit that the EDA awards, a safeguard the agency calls the coverage ratio for a project, Lizura said.
"You can be very aggressive with it or you can be very conservative with it. It's like a spectrum," Lizura said. "We've erred on the conservative side by using the shorter lease term, the coverage ratios and things like that."
The test came under fire in May, when three Newark building owners sued to block the EDA's award to Prudential Financial Inc. In November, the insurance giant was awarded a $251 million tax credit to build a new office tower a few blocks from its current offices, sparking protests from the landlords who would lose the firm as a tenant.
But attorneys for the landlords said the net benefits test failed to consider the plan's fiscal impact on the Newark office market, infrastructure costs and the sales tax drain on businesses around the Gateway buildings. The landlords say Prudential would vacate about 900,000 square feet of space at the properties if it follows through with the project.
"This was a cost-benefit analysis where the benefits were generated very optimistically and the costs were given very short shrift," said Paul Josephson, the Hill Wallack attorney representing the Gateway landlords. He said the EDA's model "generated unrealistically high estimates" for Prudential's corporate spending, when compared to the actual figures from prior years, and for inflation.
The EDA's board, however, upheld Prudential's award at a board meeting early last month, calling it speculative to try to determine what will happen to Newark's office market. The only change to the tax credit — a $40 million reduction — resulted mostly from a change in the federal formula used in the net benefits test.
"At the end of the day, you could argue that when a company builds a new space in a city … all of those new jobs that would backfill the vacant space are economic activity that resulted from this project," Lizura said. "So we don't include any of those things because that's speculative. We really look at what we know."
The suit is still pending before a state appellate court, Josephson said, though a judge is unlikely to hear arguments until late December.
Josephson also said the case raised questions about whether the net benefits test goes far enough in general. He conceded the EDA "recognizes its obligation to use the net benefits test as a guidepost, but to also use their own experience and judgment" when considering an application.
But he said the EDA uses sometimes inexact federal estimates "to make a very concrete financial reward. And the two of them don't quite match up all the time."
Lizura said the calculations are based only on new jobs created by the applicant or jobs that are considered at risk of being moved out of state. Those projections are certified in writing by the company's CEO, a safeguard that carries a lot of weight in the C-suite, EDA board Chairman Alfred Koeppe said.
"You really get the highest level of corporate attention when a CEO signs an attestation, obviously with the numbers we're talking about for some of the tax credit awards," said Koeppe, the former Bell Atlantic New Jersey CEO and Public Service Electric & Gas president. "If I were sitting there, I'd say, 'there's no fooling around here.'"
New Jersey is not the only state that uses a test to determine the size of its incentives, said Jay Biggins, executive managing director of Biggins, Lacy, Shapiro & Co., a Princeton-based site selection and incentives advisory firm. Connecticut and Pennsylvania also have strong methodologies that gauge the return on investment for their programs.
"Some are more sophisticated, more advanced and more detailed than others," Biggins said. He later added, "But New Jersey uses the most rigorous methodology of any that we work with nationwide."
Koeppe said the EDA staff makes the test even more rigorous by scrutinizing the applicants' data before "pumping the numbers into the software." The board then takes it a step further by "test(ing) the staff's interpretation of those numbers." Both practices reflect the agency's longstanding obligation as it administers the state's programs.
"If we don't do that well, if we don't have the most conservative standards that we can put forward, then we're not really doing our job," Koeppe said.
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