It has been a busy week for litigation over New Jersey’s Payment In Lieu Of Taxes (PILOT) program. On October 11, Governor Pete Murphy’s office announced that the State intends to appeal an Atlantic County Superior Court ruling from late August.
The PILOT program allows areas needing redevelopment to entice developers by enabling them to avoid property taxes. In return, the developers make smaller payments, calculated according to a different system.
The ruling in question, from Judge Michael Blee, struck down changes the State had made to the calculations for Atlantic City casino owners.
Those amendments, which date back to 2021, have proven controversial. They reduced the extent to which online gambling revenue factors into the calculations. That meant smaller payments to Atlantic County, which in turn led to the lawsuit.
The day after the Governor’s office announced its intention to appeal the recent ruling, Judge Blee heard arguments over whether to grant a stay pending the resolution of the appeal.
That follows the news at the end of September that Atlantic County was seeking to skip the Appellate Court and go straight to the New Jersey Supreme Court.
On Friday, two days after the hearing, Judge Blee issued a 90-day stay of the decision. Therefore, the amendment will remain in place, at least temporarily.
What is All This Fighting About?
In 2016, New Jersey developed the PILOT program to spur certain regions’ redevelopment. These were places the State had identified as needing additional attention from developers. Property taxes are based on the assessed value of a property. As a result, they can sometimes discourage owners from investing in improvements.
The crux of the program was simple. Developers would not need to pay property taxes for the length of the program. Instead, they would make smaller PILOT payments. The programs were intended to last 10 to 30 years. Therefore, many properties would end up exempt from property taxes for a significant portion of the building’s existence.
Revitalizing Atlantic City
In 2016, Atlantic County and its aging casinos became one of the targets for the PILOT program. As part of a 2018 settlement between Atlantic County and the State, Atlantic County was slated to receive 13.5% of all gaming revenues from contracted casino properties. The 2018 settlement covered the eight years remaining on the PILOT program grant.
In 2021, New Jersey amended the way that it was calculating those gaming revenues. Specifically, the legislature removed online casino and online sports betting revenue from the calculations. Naturally, this would significantly reduce the amount of money going to the County.
As justification, the legislature pointed to the effects of COVID-19 on the industry. The shutdown of casinos caused retail revenue to nosedive while online revenue soared. The trouble for the casinos was that they share that online revenue with their operator partners but make PILOT payments on the full amount.
Some claimed that this could bankrupt certain properties. However, a ProPublica investigation questioned the lawmakers’ math and their justification for providing extraordinary relief to the casino industry.
Judge Blee Rules Against the State
In late July, Judge Michael Blee ruled that New Jersey had violated its 2018 agreement with Atlantic County. He ordered the State to issue a shortfall payment within five days of the ruling. He also demanded that it make larger payments to the country quarterly, with the first payment due on August 15.
Judge Blee’s ruling noted that the amendment was an extraordinary act to benefit the casino industry. To his eye, it did not serve any public purpose. Blee acknowledged that the pandemic may have caused hardships. However, he found no indication that it had had any significant effect on the casino industry’s ability to make its originally agreed-upon PILOT payments.
The State Fights On
Immediately after the ruling, the State indicated its intention to appeal. It is likely to argue that the amendment does not violate the New Jersey constitutional principle forbidding favorable treatment to specific groups or industries without a demonstrable public purpose.
In the meantime, its request for a stay will “maintain the status quo,” according to the Press of Atlantic City. The State argues that without a stay, city and County budgets will be left in disarray due to the uncertainty about what amount of money they stand to receive from the program.
The Rationale for Granting the Stay
Judge Blee cited the constitutional nature of the question as the basis for granting the temporary stay. By law, the New Jersey legislature’s statutes are presumed to be constitutional. That is, there is an automatic presumption in favor of the State. The Press of Atlantic City further confirmed that the Governor’s office had filed an appeal of the decision.
What’s Next for the Atlantic City PILOT Case?
The appeal of the case will play out over the coming year. Ultimately, the New Jersey Supreme Court will determine whether the 2021 Amendment to the PILOT calculations was lawful. Until that time, however, the status quo will remain.
Judge Blee initially set the stay for 90 days. It’s incredibly unlikely, however, that the appellate court will hear the case and issue a ruling within that period. Therefore, we should expect this stay to receive an extension until the appellate court renders its final judgment.