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Newark City Hall may come under state supervision.

((Aristide Economopoulos/The Star-Ledger))

NEWARK — A financial takeover by the state may be the only way to balance Newark's 2014 budget, city officials disclosed recently.

A property tax collection shortfall coupled with state budget regulations have forced city officials to figure out how to come up with more than $93 million in additional revenue to pay Newark's bills in 2014, Acting Director of Finance Danielle Smith said in a public disclosure statement to investors, dated April 24.

“They said the sky is falling and we don’t know what to do,” Dan O’Flaherty, an economics professor at Columbia University said of the disclosure. “It was a pretty grim statement.”

In September, the city council adopted a $639.5 million budget that included a tax break for property owners. The reduced tax rate was introduced in large part because a city-wide re-evaluation in 2011 and 2012 shifted more of the tax burden onto commercial properties and away from homeowners.

The city had expected to collect more than $199.3 million in property taxes, but fell about $25 million short, collecting $174.8 million instead, according to the public disclosure statement.

Though a state takeover would give Newark more wiggle room to overcome its financial challenges, the state doesn't have much cash to spare.

"The state isn’t exactly in the best position to give help," O'Flaherty said. “They have a bigger collection shortfall than the city.”

State officials announced last month that anticipated revenues from sales, use, gross income, and corporate business taxes will fall $600 million below budget. That shortfall would widen New Jersey’s budget gap to more than $800 million, officials said.

"Like the State, the City’s financial issue is largely due to significant reductions in anticipated tax revenues,” Newark Business Administrator Julien Neals said in a statement Thursday.

Adding to Newark's shortfall in property tax collection, the city also did not hold a planned accelerated tax sale, which sells the liens of delinquent taxpayers to investors.

The city also didn't ask the state for transitional aid, as it has in previous years.

Newark spokeswoman Esmerelda Cameron said in an email that it was "not feasible to do an accelerated tax sale in December due to the revaluation." It also wasn't clear why why the city didn't ask for the extra aid.

The shortfall and other issues contributed to a $30 million operational deficit in the 2013 budget. State regulations require Newark to roll that deficit over into the 2014 budget.

The city may also have to find ways to replace one-time revenue sources in the 2013 budget and the property tax revenue it did not collect in 2013 for the 2014 budget.

In addition to the $30 million operational deficit, the city anticipates an estimated $63.4 million gap in the 2014 budget, bringing the total funds needed to balance the 2014 budget to more than $93 million.

Mayor Luis Quintana, who took office in November after Cory Booker won a special election in October to the U.S. Senate, has not offered a 2014 budget because city officials say the administration is still preparing it. The budget requires City Council approval.

The city intends to explore ways of generating revenue, such as increasing property tax rates, escalating tax collection efforts and selling city-owned properties, the public disclosure statement said.

But even with additional revenue, the city doesn't expect to make up the anticipated 2014 shortfall.

And since state law requires that the city adopt a balanced budget, the city said in its public disclosure statement that doing so may not be possible without the state's help.

"Accordingly, the City now believes the most likely basis upon which a balanced 2014 cash basis budget, entails the placement of the City under State Supervision," the city said in its statement.

State supervision might allow Newark to pay its deficit over a number of years or better position the city to receive more state aid. The state would likely have the final say over how Newark spends money, hires staff, and taxes residents.

State officials have already acknowledged that supervision of Newark's finances may be necessary.

In early March, Thomas Neff, director of the state's Division of Local Government Services notified Quintana that his division would begin discussing “the level of financial stress in Newark and Newark’s lack of compliance with certain budget laws.”

Later that month, Neff said during a meeting of the Local Finance board that his division may ask the Attorney General’s Office to ask a judge to place Newark under supervision.

Newark's budget woes are in the spotlight with less than 10 days to go before the city's mayoral and city council election on May 13. Some city council members said recently that they are surprised the city's financial situation had come to this point.

“I’m shocked," said central ward councilman Darrin Sharif. “I was left with a strong impression that we would be able to introduce a 2014 budget without state supervision”

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