New Jersey Towns Face Tax Vacuum Minus Drugmakers: Muni Credit
Four northern New Jersey towns face the loss of $29 million of combined revenue as some of the world’s largest pharmaceutical companies depart, complicating Republican Governor Chris Christie’s drive to boost business and cut the highest U.S. property taxes.
Merck & Co. (MRK), the second-biggest U.S. drugmaker by sales, is shutting its headquarters in Readington and a complex in Summit as part of a 16,000-job reduction. Roche Holding AG, the world’s biggest maker of cancer drugs, by year-end is closing its campus spanning the municipalities of Nutley and Clifton. The latter has seen the extra yield investors demand on some of its debt almost double in the past six weeks.
Nearly half of New Jersey’s life-sciences jobs are in its northern region. Summit and Readington, which are 16 miles (26 kilometers) and 50 miles, respectively, west of New York, both count Merck as their largest taxpayer. Roche is the biggest in Nutley, 8 miles from Manhattan. The closings are a credit negative for the localities, with pressure on taxes and revenues, Moody’s Investors Service said in an Oct. 10 report.
“New Jersey generally has not been attracting a lot of growth in the employment area, and this is not helping,” said Howard Cure, director of municipal research in New York at Evercore Wealth Management LLC, which oversees about $4.7 billion. Residents “may be asked or may be required to pay more to balance budgets.”
The state bills itself as “the medicine chest of the world,” as it is home to 17 of the 20 largest pharmaceutical companies, according to New Jersey’s website. The industry has cut jobs by 23 percent since 2006, according to Moody’s.
While the industry accounts for about 3.8 percent of New Jersey’s non-government jobs, double the national average, the companies’ moves are more damaging for localities than at the state level, according to Moody’s.
“Site closures are more credit negative for New Jersey municipalities than layoffs because property taxes are the main revenue source for local governments,” Michelle Choi, an analyst for New York-based Moody’s, said in the report.
Even with the companies’ job reductions, New Jersey debt is beating the $3.7 trillion local-debt market, earning 3 percent in the past three months, compared with 2.5 percent for the entire municipal universe, Standard & Poor’s data show.
Christie, a 51-year-old Republican who won a second term on Nov. 5, has touted the addition of 142,400 jobs in New Jersey since he took office four years ago. That tally, though, is only 59 percent of the amount lost during the recession that began in December 2007. Neighboring New York has regained more than it lost.
Under Christie, the unemployment rate fell to 8.4 percent in October, the lowest since 2009, from 9.7 percent in February 2010. The level still eclipsed the 7.3 percent U.S. average for August, and tied for the seventh-highest among the 50 states. New York’s August rate was 7.6 percent and Pennsylvania’s was 7.7 percent.
Christie has awarded at least $2.1 billion in tax breaks to keep or lure businesses, including Panasonic Corp. (6752) and Revel Entertainment Group LLC. During his first term, the state’s Business Employment Incentive Program gave at least $10 million in grants to drugmakers, including Amneal Pharmaceuticals LLC in East Hanover, Kashiv Pharma LLC in Piscataway and Ferring Pharmaceuticals Inc. in Parsippany-Troy Hills, according to state records.
In June, the governor vetoed legislation to give funding to towns that lose drugmakers and other companies whose departures may stress the tax base. Colin Reed, a spokesman for Christie, declined to comment and referred to the governor’s veto message, in which he lumped the measure with others that he said should have been part of annual budget negotiations.
Merck is seeking a buyer for its 88 acres (36 hectares) in Summit, which has Moody’s highest Aaa rating. Residents there paid an average property-tax bill of $16,051 in 2012, more than twice the statewide figure.
“We’re mildly concerned at this point,” said Mayor Ellen Dickson, 61, a Republican. “They are 7.2 percent of our tax base. They pay $9 million a year in real-estate taxes. They’re committed to paying the taxes through 2014, but of course they’ll be doing a tax appeal effective 2015.”
Kelley Dougherty, a spokeswoman for Merck, declined to comment on the company’s plans for the sites. She referred to an Oct. 1 news release that said the closures were part of worldwide cost reductions.
Roche, which is firing 1,000 employees by the end of 2013, plans to pay Clifton and Nutley property taxes totaling $14.5 million annually through mid-2014, according to Darien Wilson, a company spokeswoman. It wants to sell the site, zoned for office and manufacturing, within two years, she said.
Nutley is rated Aa2, Moody’s third-highest level. In an August report, the company said the township could have its rating lowered if it’s unable to make up the revenue losses caused by Roche’s exit.
“These towns are left high and dry,” said Assemblyman Ralph Caputo, 73, a Democrat from Nutley. “Now they’re going to have to cut police, fire, school funding.”
Clifton sold bonds last month to finance road improvements and sewer upgrades, according to bond documents.
General obligations maturing in October 2023 and rated three steps below AAA traded Nov. 5 with an average yield of 2.96 percent, or 0.51 percentage point above benchmark munis, data compiled by Bloomberg show. That difference is almost double the 0.28 percentage point spread on Oct. 1, when the bonds first started trading.
A Democratic-sponsored bill to give $13.5 million in aid to towns hit by corporate departures was met with Christie’s veto on June 28, the same day he signed the $32.9 billion state budget. The measure was among eight he rejected because they would increase spending above the amount he negotiated with the Democratic-controlled legislature.
“While each bill may have merit, consideration of that merit is better accomplished in the context of a balanced budget,” he said in a veto message.
“This is something the state has to think about, in terms of these drastic moves of large companies,” said Caputo, a sponsor of the bill. “How are we going to deal with these large spikes?”
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