Jerusalem – Toward a fiscal balance

Glenn Yago, Senior Director, Milken Innovation Center
Jacob Udell, Research Analyst, Milken Innovation Center
http://milkeninnovationcenter.org

In a word, Jerusalem is unique.  It is at once a world-class brand, a paradox of every type, and the obsession of about one-quarter of the people on the planet.  It is also a city – a municipality to almost 900 thousand people. Jerusalem is also structurally insolvent.  

With a 2016 operating budget of NIS 5.15 billion, Jerusalem received NIS 320 million to cover its operating deficit in 2015 and NIS 516 million in 2016.  In the simplest terms, this is 10% percent operating deficit. On its face, such a deficit is a big budget problem.  There is not enough money to pay the current bills – and to take care of long term needs and obligations such as infrastructure spending, pension obligations, and other legacy costs. With about one-third of the city’s population at or below the national poverty level (compared to one-fifth nationally, and just over one-tenth in Tel Aviv) and the high concentration of land use in government and non-profit activities, total property tax exemptions more than double that of Tel Aviv and Haifa – in 2015, such exemptions totalled over NIS 587 million, or 23% percent of all taxable real estate in the City.  Though Jerusalem businesses and residents who do pay property tax are burdened with rates at almost twice the amount per square meter than in other cities, total property tax collection per capita is still significantly lower than that of other major cities in the country (see chart).  All in all, per capita municipal expenditures in Jerusalem are about half the per capita expenditures in other major cities in Israel.   Jerusalem is like an employee who has to work sixteen hour shifts day after day and get only half the salary.

Each year, the public is treated to the spectacle of the City reaching out to the Government to help it settle its budget woes.  To his enormous credit, the Mayor has taken the position of promoting, leveraging, strengthening, and building the city out of this persistent deficit. 

The 2020 Plan, so called for both its perfect vision and unrealistic deadline, is a robust effort to leverage the region’s strengths, attract private investment, and increase the tax base sufficiently to overcome the budget deficit.  The joint investment of private capital, government, and philanthropy of NIS 1.2 billion over the next decade, along with the corresponding improvements in transportation and access within the city and with other cities on the coast, and the rehabilitation of neighborhoods, will spur economic growth in Jerusalem valued at NIS 4.15 billion. The influx of municipal revenue from new housing, new commercial activities, and new offices, and, yes, even new residents, even while adjusted for escalated costs of municipal operations over this period, is expected to eventually yield a viable operating margin to support the city’s growth and strengthen its financial condition. 

But how to achieve this fiscal balance when the new cash flow will be gradual over a long period of time and the amount needed to get there is so large?  Borrow against this incremental annual cash flow to pay for the needed investments in the city that will make these new sources of revenue possible.  This is a familiar fiscal strategy for cities around the world – New York (1975-1980), London, Chicago (1985-1995), Boston (1990-2010), Paris (1988-1995), Cleveland (1985-1995).  The Government can enable this new fiscal vision for Jerusalem by creating financial tools that create opportunities to investors that understand the long term benefits of a city in fiscal balance.

Municipal Assets – Public Goods

Ruth Avraham

Jerusalem Institute for Israel Studies 

www.jiis.org

Municipal assets are assets which the municipality owns or rents, as well as manages. These are a rare public resource, mostly used by various municipality departments or private voluntary associations that receive the building in a land allocation process.

In 2012, the "Public Knowledge Workshop" together with "Hitorerut" movement compiled a list of municipal assets in Jerusalem. The list contains 2,590 assets, with a total area of 3,400 dunams, or 3% of Jerusalem's municipal area. Sixty-eight percent of the assets serve as educational facilities such as kindergartens, elementary or intermediate schools, yeshivas, ulpena etc.; eleven percent are used by community, sport and welfare facilities; eight percent are bomb shelters; and the other 13% are divided between various cultural venues, libraries, mother and child care, offices, storage and others.

East Jerusalem residents constitute 37% of the city's population, but only 10% of the municipal assets are located in East Jerusalem. In Ultra-orthodox neighborhoods, whose population composes approximately 20% of the population, the "Public Knowledge Workshop" and "Hitorerut" found 25% of the assets. East Jerusalem has less than two assets per thousand residents; the large neighborhoods such as Gilo, Pisgat Ze'ev, and Har Homa have 2-5; and southern neighborhoods, mostly populated by the "General" Jewish population (non-Ultra-orthodox), such as Bak'a, Kiryat Yovel, Ein Karem and Makor Haim have 5-8. The overall average in Jerusalem stands at 3.2 assets per 1,000 residents.

All cultural venues, according to the list, are located in West Jerusalem. Only 5% of community, sport and welfare facilities are in East Jerusalem, along with only 3 branches of mother and child care (5% of the total in Jerusalem). Only 2 of 196 bomb shelters are in East Jerusalem.

The street and facility mapping's accuracy is limited, so there may have been errors in the geo-coding process. A further error may have been caused by the analyses of the number of assets, which greatly differ in size, but the overall trend is quite clear, and in line with other findings. We did not compare these findings to world trends, since definitions are very different in different countries.

Fight for Your Right (To Pay Tax)

Dafna Shemer

www.jiis.org

Jerusalem’s Arnona (municipal tax) is particularly high, the highest in Israel. In 2014 Jerusalem’s total due Arnona was 1,173,000,00 NIS (New Israeli Shekels) for 212,000 housing units. Arnona discounts amounted to 26% of the total, with 40% of the discounts going to residents from Jerusalem neighborhoods of low socio-economic status (a socio-economic status of 2-5, with 20 being the highest status, according to the 2008 census). 

An examination of Jerusalem’s lower socio-economic neighborhoods reveals an interesting picture regarding the exercise of rights on the part of East Jerusalem versus West Jerusalem residents. These neighborhoods are geographically and socially distinguishable as areas populated by the ultra-orthodox (haredi) in West Jerusalem and by Palestinians in East Jerusalem. 

Most (72%) of the properties in West Jerusalem that belong to residents of lower socio-economic standing have a ranking of 4 or 5, whereas in East Jerusalem only 49% of the properties belong to residents with a ranking of 4 or 5. 

Building on the assumption that people with the same socio-economic status would receive the same discount in Arnona, given their income, we examined lower socio-economic neighborhoods in West Jerusalem and in East Jerusalem. We examined how many discounts were granted on the basis of income, as a proportion of the total number of apartments in the neighborhood. Evidently, the percentage of Arnona discounts based on income, as a proportion of the total number of apartments, is higher in West Jerusalem (39%) than in East Jerusalem (26%). For the sake of comparison, we note that in neighborhoods of higher socio-economic standing (15-19), 6% of the apartments receive a discount on the basis of income. 

Both East Jerusalem and West Jerusalem neighborhoods show a decrease in the percentage of discounts granted on the basis of income as the socio-economic ranking of the neighborhood rises. East Jerusalem neighborhoods with a socio-economic status of 2 received discounts for 27% of the apartments therein, whereas West Jerusalem neighborhoods with a ranking of 2 received discounts for 42% of the apartments therein. East Jerusalem neighborhoods with a socio-economic status of 5 received discounts for 15% of the apartments therein, while for West Jerusalem this figure was 35%. 

When we examine the total Arnona collected, in relation to the total due without discount, amidst residents of lower socio-economic standing, we find that collection rates in East Jerusalem (72%) are lower than in West Jerusalem (85%). Here too, as the socio-economic status increases from 2 to 5, Arnona collection rates increase. For higher socio-economic rankings (15-19), collection rates are higher too – at 96%. 

In sum, one might conclude that residents of West Jerusalem are more effectively exercising their rights vis-à-vis Arnona than East Jerusalem residents. And perhaps as a consequence, Arnona collection in West Jerusalem is more effective and efficient than it is in East Jerusalem.

Where the streets have names

Omer Yaniv

How are street names chosen? Here in Jerusalem, a city with a rich history and religious symbolic importance, we can presume that there are not enough streets, alleys, roads, avenues and squares to commemorate the thousands of figures, spots and events that deserve to be remembered. At present there are over three thousand named streets and sites in the city. To successfully face a growing demand to memorialize so many people, two committees are active in the Jerusalem Municipality, a public municipal name committee and an advisory committee, which together decide whether or not the contribution and legacy of the nominated figures justifies the commemoration. Lately the municipality has been making an effort to give names to the many nameless streets of East Jerusalem, with the participation of the local residents.

A theme in street names can be found in some Jerusalem neighborhoods. Intellectuals of the Middle Ages, for example, can be found in Rehavia; the tribes of Israel, alongside biblical judges, characterize Bak'a; and animals are the theme in Malcha.

Looking at the street names in Israel as a whole, we see that plant names, and especially the seven species, are the most common. Other popular choices are the names of precious stones, animals, Jewish and Israeli leaders, military units and more. The most common street names in the country are HaZayit - 'The Olive' (225 streets around the country); HeGefen - 'The Vine' (213); HaRimon - 'The Pomegranate' (204); and HaTamar - 'The Date Palm' (174). Israel's first prime minister, David Ben-Gurion, is the most popular person among street names, with 79 streets named after him. The woman who is commemorated in the highest number of streets is Hannah Senesh - 41 streets in Israel are named after her. 

Municipal Tax and Municipal Profit in the City Center

Dafna Shemer

The 2014 Statistical Yearbook of Jerusalem includes data regarding arnona (municipal taxes) in Jerusalem, providing an opportunity to examine which parts of the city generate the bulk of income for the municipality from non-residential arnona. In 2011, residential and non-residential arnona constituted 81% of all independent income for the Municipality of Jerusalem, and 57% of its entire income. Non-residential arnona constitutes nearly half of all municipal income from arnona.

The data reveal that over a tenth of municipal income from non-residential arnona derives from non-residential properties in the city center. About 20% of municipal income from arnona comes from the main centers of business (the Old City, the city center in general, and Romema), and a similar percentage comes from Jerusalem’s trade, business, and industrial areas (Talpiot, Giv’at Sha’ul, and Har Hotzvim).

The “profitability” of an area in terms of the non-residential arnona it generates may be assessed by looking at the municipal income derived from this area in relation to the area’s built-up territory. The attached map demonstrates how non-residential arnona fees are distributed across the built-up territory of every sub-quarter of Jerusalem. It is important to note that arnona for offices, services, and trade is higher than arnona for residential purposes. For example, in what is defined as Area A, the arnona rate for a residential apartment up to 120 square meters is NIS 86 per square meter, whereas the rate for a space up to 150 square meters that is used for trade purposes is NIS 327 per square meter. 

An analysis of arnona fees in relation to the built-up territory of neighborhoods reveals that (non-residential) tax payments per dunam (about one-quarter of an acre) in the city center is about NIS 137,000 per dunam per year. For the sake of comparison, non-residential arnona in the city center is 1.7 times greater than that of the Old City’s Christian Quarter (about NIS 80,000 per dunam per year), and 3 times greater than that of the Talpiot industrial zone (about NIS 47,000 per dunam). The attached map indicates the relative distribution of space designated for non-residential purposes, including the trade, services, and industry concentrated in the city center, in contrast to Jerusalem’s peripheral neighborhoods, which have few territories that generate municipal income from non-residential purposes. Exceptions in this context are the Talpiot industrial zone, the area in which the Malha Mall is situated, the Technological Garden, and the area of Ein Kerem, which includes Hadassah Hospital Ein Kerem. 

An examination of data from previous years indicates that the status of the city center has remained relatively stable, as reflected in the 7% decline in the amount of non-residential arnona income over the past 30 years, despite changing geographic patterns of consumption such as the opening of the Malha Mall in the early 1990s and despite the security situation, which has had a great impact on the city center.

Data source: 2014 Statistical Yearbook of Jerusalem

High School Matriculation: The Key Is to Understand the Whole

Yoad Shahar 

Each year the Ministry of Education publishes statistics about the rates of eligibility, by locale, for high school matriculation certificates among 12th grade students. According to this data the rate of eligibility in Jerusalem declined from 51% in 2007-2008 to 46% in 2009-2010 to 43% in 2011-2012. Yet some observers claim that these figures do not accurately represent current trends, which are influenced by policies regarding matriculation.

The Municipality of Jerusalem publishes annual statistics based on those of the Ministry of Education, after arranging them by population sectors. These data reveal that the percentage of students eligible for matriculation certificates from among 12th grade high school students enrolled in the state and state-religious education systems has in fact been rising in recent years: from 63% in 2009-2010 to 68% in 2010-2011 to 72% in 2011-2012.

Simultaneously there is a trend underway in which schools are transitioning from the independent (ultra-orthodox) and Arab education systems to the educational curriculum that prepares students for the Israeli matriculation certificate. In other words, more students are taking the matriculation exams within these sectors, and therefore presumably more students are eligible for the certificate. Here lies the key to understanding the gap between the data published by the Ministry of Education and the data published by the Municipality of Jerusalem.

As noted, eligibility for the matriculation certificate is calculated on the basis of the total number of students enrolled in 12th grade. However, the 12th graders who are counted are only those enrolled in schools that offer students the option of taking the matriculation exams. Thus two different problems arise regarding calculation of the whole. First, if we were to calculate the number of students eligible for a matriculation certificate in 2011-2012 out of the total number of 12th grade students (including those enrolled in schools whose students do not have the option of taking matriculation exams), the whole figure out of which the proportion of eligible students is calculated would be greater, and therefore the eligibility rate would be less than 43%. Second, under the current system of calculating the whole, as more ultra-orthodox and Arab schools transition to the Israeli matriculation curriculum, all of their students are counted in the calculation of the total number of students – the whole – even though during the early years only a few of their students actually take the matriculation exams. In other words, as more schools transition to the matriculation curriculum, they bring down the overall eligibility rate within the city. 

So what is the correct way to calculate eligibility for a matriculation certificate? The question depends on the objective of the calculation. One objective could be the assessment of eligibility as an indicator of students’ future earning power. Towards this objective it would be appropriate to include all the city’s 12th grade students in calculating the whole, and consequently the eligibility percentage for 2011-2012 is less than 43%.

Another objective could be to develop an indicator of the quality of the city’s educational institutions. A high eligibility rate indicates a successful educational system, which often serves as a criterion for parents who are considering moving to the city. Towards this objective it is appropriate to calculate the eligibility percentage on the basis of the number of students enrolled in schools that have adopted the matriculation certificate as a measure of the quality of their education. However, this approach does not address the catch created by the transition of ultra-orthodox and Arab schools to the matriculation curriculum: at least in the short term, these schools bring down the city’s eligibility rates. Accordingly, the Municipality of Jerusalem is right to calculate the matriculation certificate eligibility rates by education sectors, thus producing a more complex representation of existing trends in the city with regard to this issue.

Data Source: The 2014 Statistical Yearbook of Jerusalem