Monday, October 16, 2017

Combined Reporting Won't Increase NJ's Revenues by $290 Million

For the last few years the New Jersey Policy Perspective have been leading a campaign for NJ to change its corporate tax laws to require something called "Combined Reporting."

Combined Reporting is an accounting rule that prevents a corporation from shifting profits from high-tax states to low-tax states via phony subsidiaries.  Under Combined Reporting, all of a corporation's subsidiaries are  treated as a unitary, combined unit and then a state taxes a percentage of the entire entity's profits.  Under Combined Reporting, any transfers of money between subsidiaries are disregarded and the whole corporation's bottom line is what gets taxed.

For years, the New Jersey Policy Perspective trumpeted Combined Reporting as a taxation game changer that would increase corporate tax receipts by 10-20%, or $235 million to $470 million a year.   The NJPP's proposal has been adopted by several major progressive groups and politicians in New Jersey, such as the CWA and Senators Ray Lesniak, Linda Greenstein, and Paul Sarlo.

As a matter of tax fairness, Combined Reporting seems like it is a very sound idea, but the revenue estimates that the New Jersey Policy Perspective disseminates (and have been picked up now by Phil Murphy) are highly inflated.

The reason why NJ would not see such a big uptick in revenue from Combined Reporting is that in 2002 we already reformed our tax code to make it harder for corporations to set up phony rental corporations, intellectual property holding companies, transfer pricing, captive real estate investment trusts, captive insurance subsidiaries etc that are legally domiciled in no-tax states. NJ already requires Combined Reporting for some businesses, such as casinos.

Owing to the anti-tax avoidance laws already on NJ's books, when the Office of Legislative Services came out with its own estimate in October 2016, it was for $110-$290 million, a 5-10% increase on NJ's historical Corporate Business Tax receipts.

That OLS report actually didn't base the 5-10% report on other states' experiences after implementing combined reporting. It estimated that based on their pre-reform projections and then used the 5-10% numbers for NJ.

A 2014 report by the Rhode Island Department of Revenue estimated an approximate 20 percent revenue gain, when isolating combined reporting from other tax law changes involving three-factor and single sales factor apportionment systems. Connecticut’s consensus revenue forecast for FY 2016 estimates a revenue gain of approximately 5 percent from implementing mandatory combined reporting as one part of a major corporate tax reform in that state. In 2008, New York State’s Division of the Budget estimated an increase of 8 percent for combined reporting. However, a report commissioned for the National Conference of State Legislatures in 2010 found little impact in the initial years of combined reporting reforms in New York and Vermont. The Massachusetts Department of Revenue originally estimated 26 percent revenue growth in FY2009 from combined reporting, although total corporate revenues grew by closer to 17 percent that first year and Massachusetts did not isolate how much was due to the tax change compared to economic conditions. Massachusetts also reduced the corporate tax rate during that period. 
Given that the prior New Jersey corporation business tax reforms of 2002 were also intended to limit the use of some corporate tax shelters, it is reasonable to anticipate that the potential revenue impact of mandatory combined reporting may be closer to the low end of the wide range estimated in other states. Accordingly, the OLS believes a potential corporation tax revenue increase ranging between 5 percent and 10 percent annually is possible, but also highly uncertain. 
Since NJ's Corporate Business Tax has historically brought in $2.2 billion to $2.9 billion, the OLS made the $290 million ceiling estimate by taking 10% of $2.9 billion, a double best case scenario. The $2.9 billion amount, however, hasn't come in since 2008.

Source, Page 10.

Also, the OLS does not consider that businesses might develop counter-tax planning strategies or even avoid New Jersey altogether.

Note, even the state studies that the NJ OLS used were on the high side.  Maryland's legislative research office predicted no boost.  In 1994 Iowa's legislative research office also predicted "minimal impact."  In an extremely thorough report, Indiana's Legislative Services Agency said that Combined Reporting would only increase revenue temporarily:

We used econometric techniques to examine how state tax policies, including combined reporting, influence state corporate income tax revenue. This method controls for variation in the tax base related to the economic cycle and other tax policies, and separates the impact from combined reporting. The econometric results suggest that combined reporting may have an initial positive impact on corporate income tax revenue but that this impact is not lasting. We estimate that the initial positive impact could potentially be economically significant. However, we also estimate that this impact will only be short term and will decline to zero in the long run.
Indiana also warned that while Combined Reporting more often increases a tax liability, Combined Reporting can reduce a company's tax liability too "In cases where one or more affiliates has a loss, combined reporting could reduce the entire unitary group’s taxable income."

The NJ Office of Legislative Services also used the historic high of NJ's Corporate Business Tax of $2.9 billion, when the most FY 2017 CBT haul was only $2.4 billion.  Using the 5%-10% parameters on $2.3 billion gives a range of $110-$240 million.

To its credit, the New Jersey Policy Perspective trimmed estimate it used in its publicity to $290 million, but has refused to acknowledge the tentativeness of the OLS's estimate or that the OLS was giving a range, not a $290 million target.

Despite obviously being aware of the uncertainties expressed in the OLS's report and even deeper uncertainty expressed in other states' reports, the New Jersey Policy Perspective uses the $290 million confidently, with a only a momentary qualifier of "up to."

Here is Sheila Reynertsen in February 2017:

One of the most responsible ways to create a path to financial sustainability is to ensure that corporations and the wealthy are paying their fair share in New Jersey. Closing tax loopholes is one way to do this. Expanding combined reporting in New Jersey would close corporate loopholes and help prevent multi-state corporations from artificially shifting profits out of state. This tax policy could raise up to $290 million in much-needed revenue each year to shore up underfunded investments like higher education and public transit.

Here is Jon Whiten giving the same "up to" half-truth in October 2017:

Other states – 25, to be exact – have combated [corporate tax evasion] by adopting a practice called “combined reporting.” And New Jersey should join them. Limiting the ability of profitable multistate corporations to use accounting tricks to dodge state taxes would help level the playing field for the state’s small and local businesses – and raise up to an additional $290 million a year to help the state pay its bills and make key investments.
For the NJPP to be honest and say Combined Reporting "could $110-$290 million" would actually employ fewer words, but "up to $290 million" makes Combined Reporting sound so much more lucrative than estimates say it would be.

Perhaps I have been too critical of the NJPP because they do use that "up to" qualifier, but Phil Murphy does not and the $290 million upper limit has become the actual expectation.

* Murphy would raise $290 million in his first year in office by closing a tax loophole that allows corporations to shift profit made in New Jersey to lower-taxed states, an idea based on bill introduced by state Sen. Raymond Lesniak (D-Union) that cleared the Senate budget committee last October, but was never put up for a vote.

Due to the Murphy campaign, that $290 million estimate for Combined Reporting has been repeated everywhere, as if it were just money laying on the table.  (Example 1, Example 2, Example 3)

Tom Moran, in an otherwise good column on how Phil Murphy would not be able to pay for the agenda he laid out, took it as truthful that Murphy's tax increase package would bring in $1.3 billion.

No, the wiggle room in Murphy's plan is on the spending side. He has three top priorities that represent his red lines: He wants to increase aid to local schools, boost pension payments, and begin repairs of our decrepit transit system. His $1.3 billion in new tax revenue will be devoted to those three initiatives, he says.   [my emphasis]

The first journalism I saw explaining that $290 million was the ceiling of a revenue range didn't come out until October 7th, when Samantha Marcus of NJ Advance Media explained

How much money would be generated by [Combined Reporting]? The non-partisan Office of Legislative Services has called the impact of combined reporting "uncertain and variable." It predicted the state could see $110 million to $290 million in new revenue annually.

Murphy's campaign builds its plan on the higher estimate.

The NJPP's near-certainty and Phil Murphy's complete certainty over the revenue increase created by Combined Reporting is reason why we all have to be very skeptical of anything we read about how "closing corporate loopholes" will produce massive amounts of easy money.

The fact that the $290 million estimate became canon in New Jersey media so quickly and easily is another example of how New Jersey is harmed by the lack of a center-right or free-market think tank.  Although a center-right think tank would misrepresent issues too, at least they could be a quick corrective for out-of-context papers from the left.

It's worth noting that the NJPP authors of these op-eds for Combined Reporting are not tax experts. Neither has ever worked in a state's budget agency or Treasury.  Neither is an economist.  Jon Whiten's background is as a journalist. Sheila Reynertsen was a birth coach and hospital anti-merger activist.  Andrew Sidamon-Eristoff, who is a bona fide budget expert since he was NJ's Treasurer, says that Combined Reporting won't even bring in anywhere near $200 million.  (note, I'm not a tax expert either. I just read stuff online, like Whiten and Reynertsen.)

The New Jersey Policy Perspective does some good research, but they are an ideological group, staffed by people who are not experts in their fields, and union funded to boot.  Their pronouncements should not be taken as factual until further verification is performed.  The NJPP's silence on/opposition to redistributing Adjustment Aid and indifference to spending the state's existing money more efficiently, should be taken as how they are influenced by the big public sector unions who fund them.

Also, given that $290 million is a ceiling estimate, we have to be very skeptical about Phil Murphy's plan to increase revenues by $1.3 billion, of which Combined Reporting is a part.  Between the uncertainty of the Combined Reporting revenue increase and the uncertainty over NJ's ability to tax Carried Interest without Massachusetts, Connecticut, and New York cooperating, Murphy's tax hikes will not bring in $1.3 billion unless there is some simultaneous strengthening of New Jersey's economy.

Combined Reporting is a good idea in terms of tax fairness because it would even the playing field between multistate companies and local companies and because New Jersey needs all the new money it can get, but it will not bring in $290 million per year.

Given that New Jersey's budget crisis will continue under the next governor New Jersey is going to need to redistribute Adjustment Aid more than ever.

Thursday, October 5, 2017

2017 Changes in Equalized Valuation: the Urban Core Grows

The Department of Treasury has just released the Equalized Valuation of every town in New Jersey and thus given us an insight into NJ economic and demographic trends.

Equalized Valuation is the market value of all the (taxable) property in a town.  It updated every year by the county tax assessor and is used to apportion county taxes and, theoretically, school aid.  The way county taxes are apportioned is that if a town has 10% of a county's total Equalized Valuation, it pays 10% of county taxes.  Equalized Valuation also determines tax apportionment in (most) regional school districts.

Equalized Valuation is not the same thing as the aggregate assessed value, which is the sum of all the individual assessments on properties.  Assessed values are only used for a town's internal tax apportionment.

(see note at bottom for how Equalized Valuation is calculated)

Equalized Valuation is supposed to be used, along with Aggregate Income, to determine a town's state aid, but SFRA is a non-operating law and this use of Equalized Valuation is dormant. Even if SFRA were operating, Adjustment Aid disallows changes to the state aid of a third of New Jersey's school districts.

Nevertheless, after this review of changes in Equalized Valuation we'll look at how these changes affect districts's (theoretical) Uncapped Aid state aid.

The Broad View 

The State's total Equalized Valuation grew from $1,208,823,762,826 to $1,242,801,663,665, a one year net increase of $33.6 billion, or 2.78%.

Although Equalized Valutaion increases due to new construction, the change is mostly due to the increase or decrease in the existing physical stock and so Equalized Valuation is a rough way to gauge changes in real estate in a town.  Since inflation was 1.9%, we can see that the state (overall), beat inflation, although we must not assume that the average home increased by more than inflation, due to the concentration of the increase in only a few places and the increase in EV that comes from new construction. 

Looking longer term, this is an increase of 6.9% from 2013, when the state's total Equalized Valuation was $1.16 trillion.  The five year inflation rate was 4.98%.

The towns with Equalized Valuations above $10 billion are, with their change in ranking from last year:

1. Jersey City, $28.4 billion (unchanged)
2.  Hoboken, $16.427 billion (+2)
3.  Edison, $16.414 billion (-1)
4.  Newark, $16.1 billion (+1)
5.  Toms River, $15.4 billion (-1)
6. Jersey City's PILOTed property, estimate at $12-$13 billion.
7.  Ocean City, $12.2 billion (unchanged)
8.  Middletown, $10.849 billion (unchanged)
9. Woodbridge, $10.839 billion,  (unchanged)
10. Brick, $10.7 billion  (unchanged)
11. Millburn, $10.3 billion (+1)
12.  Franklin Township, $10.105 billion (+2)
13. Lakewood, $10.097 billion (+3)

The Urban Core Grows, Triumph of the Train Line Suburbs

As always, the average masks diversity and New Jersey's gain in real estate value was uneven.  Half of New Jersey's growth in Equalized Valuation took place in three counties, Essex, Bergen, and Hudson.

Of New Jersey's 21 counties, only seven gained more than the state average of 2.78% and only another two beat inflation.  Thus most towns in New Jersey are not doing well and homes are a poor investment for their owners.

Hudson County was, again, the biggest gainer, reaching $77.7 billion, which is growth of 8.86%, or $6.3 billion.  Hudson County's gain was 19% of New Jersey's total net gain, of $33.6 billion. For last year, Hudson County's gain was 25% of the state's total gain ($11 billion out of $43 billion).

Jersey City gained $2.7 billion, growing from $25.7 billion to $28.4 billion).

Jersey City's Equalized Valuation is now more than Gloucester County
Jersey City's $28.4 billion Equalized Valuation is equal
to 2.35% of the state's total.
($26.3 billion).  I estimate, based on the $128 million increase in Jersey City's official, assessed valuation, that about $634 million of Jersey City's growth came from new construction and the expiration of PILOTs, with the other $2 billion of the increase coming from appreciation.

As new buildings are built in Jersey City, like 99 Hudson (shown at right), Jersey City's Equalized Valuation will continue to soar.

Hoboken gained $1.3 billion to reach $16.4 billion, putting it ahead of Edison and Newark to become the second most valuable town in New Jersey.  Hoboken's Equalized Valuation is almost as much as Sussex County ($16.9 billion.).

Weehawken gained $359 million (12.6%), to $3.2 billion.

Jersey City's all-in tax rate will probably become about 1.9.  Hoboken's will probably become 1.1.

Hudson County's other riverside towns also did very well, an indication that the "Gold Coast" is spreading.  Bayonne gained 7.9% ($428 million), North Bergen gained $618 million (11.2%). Union City gained $290 million (8.2%).  West New York gained $121 million (4.5%).    Tiny Guttenberg gained $94 million (9.9%).  Edgewater gained $245 million (7.1%).

These school districts are underaided, so the consequence of this growth is that their (hypothetical) Uncapped Aid will decrease.

Essex County had the second biggest gain in percentage terms, at 5.9%, or $5 billion.

Newark (!) Led Essex County
 with a $2.3 billion/17% increase

in Equalized Valuation.
That growth is disproportionately from Newark, which grew from $13.8 billion to $16.1 billion, a remarkable 17% increase and, I think the biggest in New Jersey.

The other Essex towns on the train lines did well, including urban Essex.  East Orange grew from $2.7 billion to $3 billion.  Orange grew by 8.8%.

The train-line suburbs also thrived. South Orange ($228 million, +8.5%), Maplewood ($250 million, +6.6%), Millburn ($637 million, +6.6%). Montclair, Glen Ridge, and Bloomfield did almost as well.

Only three other counties gained more than 3.0%.  Bergen County gained 3.36%, Union County gained 3.01%, and Monmouth County gained 3.4%.  Monmouth County's gain included an 11% increase from Asbury Park, already one of NJ's most overaided school districts.

Ocean County gained 2.94% ($2.8 billion), disproportionately driven by Lakewood's $1.1 billion (12%) gain.

Morris, Gloucester, Passaic, Salem, Burlington, Warren, Mercer, Camden, Cumberland, Sussex, and Hunterdon all grew, but lagged inflation.  Morristown might be the best performing traditional suburb, with a blistering 12.6% growth.

Atlantic County was the only county county to actually lose Equalized Valuation, dropping from $34.9 billion to $32.7 billion (-6.4%).  That loss was almost all from Atlantic City, which lost another $2 billion ($6.4 to $4.4 billion).  This is remarkable because Atlantic City was once NJ's #1 town in Equalized Valuation, at $22.2 billion in 2008.

New Jersey's other cities held their own or grew.  Elizabeth gained 6.5%. Camden gained 5.5%. New Brunswick had a 5.2% gain. Paterson gained 3.9%. Trenton was the laggard, with a 2.3% gain, which is still respectable considering Trenton's history.


Finally, New Jersey's big suburbs had a mixed year.  Franklin Township had a very good year, with 7.8% growth.  Edison grew at 3.7%, Woodbridge at 3%, but Clifton, Cherry Hill, Toms River, and Hamilton lagged inflation.  Brick and Wayne were nearly unchanged, so that's a significant decline in the real value of real estate there.    Bridgewater actually lost valuation.

Implications for State Aid

Changes in Equalized Valuation have implications for state aid because Equalized Valuation is one component of Local Fair Share and Local Fair Share is a component of the formula for Equalization Aid.

Local Fair Share is the amount of school taxes SFRA indicates a town is capable of paying.

The state calculates Equalization Aid with this simple formula

Equalization Aid = Adequacy Budget - Local Fair Share

The formula for Local Fair Share for 2017-18 is itself slightly more complex:

(0.014009 x Equalized Valuation + 0.047823 x Aggregate Income)/2.

The .014009 number is called the Equalized Valuation Multiplier. The 0.047823 number is called the Income Multiplier. The multipliers are supposed to be tweaked year to year.

Although the formula looks complex, it basically means that the state expects a school district to pay property taxes equal to 0.7% of its Equalized Valuation plus 2.3% of its Aggregate Income.

So, if a district gains $100 million in Equalized Valuation, that alone would increase its Local Fair Share by $700,000.  If a district gains $500 million in Equalized Valuation, that alone would increase its Local Fair Share by $3.5 million.  (assuming no change in Aggregate Income or the multipliers.)

So, for Jersey City to gain $2.7 billion would cause its Local Fair Share to increase by $20 million, Since Jersey City is overaided by $152 million for 2017-18, that means its excess aid for 2018-19 will be at least $172 million.  (not counting the growth in Aggregate Income)

For underaided districts, the increase in Equalized Valuation is hypothetical.  Bayonne's $428 million in new Equalized Valuation would theoretically reduce Bayonne's Uncapped Aid from $105 million to ~$102 million.  Since Bayonne's actual state aid is only $57 million anyway, there is no actual change for Bayonne's aid growth.

Lakewood's $1.1 billion in growth might actually be enough to erase its state aid deficit (which was only $3.2 million in 2017-18).  On one hand, this justifies Lakewood increasing its own tax levy, but it means that SFRA is even less applicable to Lakewood than before.

Atlantic City was already severely underaided and lost another $2 billion this year.  That loss should translate to $14 million in additional state aid, raising Atlantic City's Uncapped Aid from $79 million to $94 million.  Since Atlantic City only gets $46 million now, the change is hypothetical since an already out-of-reach target has now become more out-of-reach.

Since Hoboken's Local Fair Share is already 4.7x larger than its Adequacy Budget, Hoboken does not receive Equalization Aid.  Thus, the growth in Hoboken's Equalized Valuation and Local Fair Share has no implications.

Changes in Tax Base Indicate the Need to Redistribute State Aid and Amend the Tax Cap

The fact that the tax base wealth of New Jersey towns is constantly changing underscores the need to redistribute state aid.  Given the increases in Equalized Valuation in several districts who are already overaided, such Jersey City, East Orange, and Asbury Park, it is likely that the excess aid surplus will increase for 2018-19 again.

Since these towns, however, can't even tap their own tax bases due to the tax cap, we also need to amend the tax cap for districts losing state aid and/or badly under Adequacy.


See Also


How is Equalized Valuation determined?
Equalized Valuation is determined by calculating the ratio of sales prices to a town's official assessment for its own local taxes.  If sale prices are, on average, 110% of properties's official assessments, then Equalized Valuation would equal 110% of a town's total official assessment.  If sale prices are 93% of official assessment, then Equalized Valuation would equal 93% of a town's total official assessment.

Because Equalized Valuation based on a ratio of sale prices to official assessment, a town's refusal to do a reval does not affect Equalized Valuation.  

Contrary to assertions from Sen. Mike Doherty and the Toms River Board of Education, Jersey City's decades-long refusal to do a reval did not distort its state aid since JC's Equalized Valuation constantly grew along with its real estate market.  Jersey City's state aid was distorted by Adjustment Aid and PILOTing, not the lack of a reval.  

If a town's Local Fair Share exceeds its Adequacy Budget, a change in Equalized Valuation has no theoretical impact on state aid at all, since it doesn't matter if a Local Fair Share exceeds Adequacy Budget by 5% or 150%.  Equalization Aid is $0 in either case.


Wednesday, September 27, 2017

New Jersey Lags Nation in (Almost) Every Economic Sector

This post looks at what sectors of the New Jersey economy are growing, stagnating, and shrinking relative to the national economy.  It is a follow up to my county-by-county look at regional job growth.

The source is the Bureau of Labor Statistics's Quarterly Census of Employment and Wages.  Like my post looking at job gains/losses in county-level terms, the data goes from 2010 to March 2017.

As we can see, every single sector of the NJ economy - with the exceptions of "Other Services" and Local Government - is doing worse than the national economy.


Oy.  This is not good.

WTF on the growth of local government? According to the BLS, Local Government employment grew from 404,312 to 417,244.  Although that's not a lot in absolute terms, New Jersey's population is one of the most slowly growing in the country, there is no justification for local government employment to grow so much relative to the national baseline.

NJ also outperformed the nation in "other services," but I do not know what that includes and it is only a net gain of 12,200 jobs.

This is what the jobs data for NJ looks like in terms of absolute numbers:


NJ's net employment gain (public & private sectors) was only 219,445.

Based on the above chart with absolute numbers you might think that NJ was doing well with "Service-providing" jobs, but the 219,445 gain is only 8%.  The national average gain in that sector was 14%.  Also, this is not a highly-paying sector of the economy, so the increase does not provide that much revenue to the NJ Treasury.

A Continuation of Pre-Christie Problems

I need to emphasize that NJ's economic problems predate Chris Christie, a point that gets lost in many missives from groups like the NJ Policy Perspective, which date NJ's problems to the start of the Great Recession, but do not acknowledge that the problems existed prior to the Great Recession.  (example 1, example 2 etc etc)

During the seven years previous, from 2003 to 2010, New Jersey also significantly lagged the national economy in all of the same categories it lagged the nation in from 2010-2017.

During those years NJ's employment fell by 2.98% (-114,000 jobs), while the country gained 11.34%, which is actually a larger gap than the 13.4%-7% gap from 2010-2017.

Obviously 2010 was the trough of the recession, which hit NJ harder than most states, but even if you looked back to NJ's peak employment in January 2008, NJ's job performance would be only 2.1%.

This is a chart showing NJ's dismal job performance in the seven years before Christie.


NJ's history of economic stagnation precedes Chris Christie and will outlast him.  Like I've said before, New Jersey is up against several powerful macroeconomic forces and carries the country's heaviest debt load.

Given the macroeconomic forces, trends, and debt lined up against us, it's going to be clearer than ever that we need to redistribute Adjustment Aid and scale back Abbott utopianism.

Monday, September 25, 2017

New Jersey and Its Neighbors's Job Growth, County by County

If you care enough about public policy to read this blog, you already know that New Jersey's job growth has lagged the national average for at least two decades.

This post will look at New Jersey's private-sector job picture on the county level, for a more granular look that reveals more of the complexity of our economy and the economy of our "economic neighborhood;" Delaware, eastern Pennsylvania, downstate New York, and southwest Connecticut.

When the media and political organizations discuss job growth in New Jersey, the analysis and argument almost always focuses on the state of
This is too blunt to be helpful,
nor is it even 100% accurate
that NJ lags PA. See below for a more nuanced
 New Jersey as a whole, with sometimes some analysis of our employment rate, job gains in absolute numbers, income, or whatever sectors of our economy are shrinking or growing.

That state-level analysis has its place, but state-level analysis conceals that large portions of an apparently stagnant state are actually thriving and vice versa, ie, that large portions of a state whose growth is strong are actually stagnant or in decline.

In my opinion, the state-level comparisons that the New Jersey Policy Perspective uses obscure more than they reveal and their real purpose is to diminish Chris Christie, not shed light on NJ and local economic conditions.  The success of New York State in the last 7-8 years has nothing to do with Andrew Cuomo but everything to do with New York City already being the country's economic and cultural capital, and a huge tourist attraction to boot.


The source of my data is the Bureau of Labor Statistics's "Quarterly Census of Employment and Wages."  Look under "County High-Level" if you want to verify anything here.  

My comparison is Q1 of 2010 to March of 2017.  I used Q1 of 2010 because that is when Chris Christie became governor and is near the bottom of the Great Recession.

I would have preferred to use the Q1 average for 2017 instead of the month of March, but the average was not included in the data set.  I realize that the difference in data makes this something other than a perfect apples-to-apples comparison in terms of 2010 to 2017, but I am consistent in that inconsistency, so I think the comparison is valid between different counties.


Job Gains/Losses, Absolute Numbers

As you can see, New York (Manhattan), Kings (Brooklyn), and Queens are significantly ahead of all other counties.

Combined, those three counties alone have enjoyed more than half of the New Jersey & Neighborhood job growth.

In fact, Manhattan's job growth of 335,000 is 100,000 more than all of New Jersey combined.  

  • New York State Job Growth is Really New York City Job Growth
    New York State's job growth is extremely concentrated in New York City as well, with 73% of New York State's new private sector jobs being created in the Five Boroughs, even though they only have 43% of New York State's population.  40% of new jobs are in Manhattan alone, even though Manhattan has only 8% of New York State's population.
  • Hudson is the Strongest in New Jersey, but is not Dominant like Manhattan/NYC
    Although Hudson County is the only New Jersey county to outperform the country, with 15.9% job growth, New Jersey's job growth is not as concentrated in Hudson as New York State's is in New York City or Manhattan.

    Hudson County has 7.5% of New Jersey's population, but only gained 13.6% of New Jersey's new private sector jobs.  This is impressive, but it is also less than Brooklyn's share of new NYS jobs, which is 17%.
    Please notice the national average (in orange), is now included.

  • Reports of Exurban Death are Greatly Exaggerated
    Although we hear a lot about how the suburbs are less appealing to people and businesses, several outer-suburban, automobile-dependent counties in New Jersey actually did ok. Somerset gained 12.8%.  Middlesex gained 12.7%.  Morris gained 7.3%.  Ocean gained 10.9%, and Mercer gained 9.9%.  Gloucester gained 9.3%.

    Those gains are nothing to write home about, but it's better than what happened with New Jersey's denser, inner suburban counties. Essex gained only 2.2%, Bergen gained 4.4%.  Union lost -1.4%.  Passaic lost 1.2%.

    They aren't dense, inner suburbs, but Hunterdon County only gained 3.6% and Warren County lost 4.3%.
  • Although train-line suburbs like Glen Ridge, Millburn, Montclair, South Orange, and Maplewood, have New Jersey's hottest real estate markets, their local job pictures are in the doldrums.  Strong train-line real estate markets are not powered by New Jersey-employed buyers.  
Although we hear quite a bit about an Urban Renaissance, and I'm certainly a believer in that, a look at Philadelphia adds a critical nuance.
  • The Urban Boom is Missing the City of Brotherly Love
    Philadelphia, while it was in fourth place for total jobs gained, actually has underperformed the
    Philly: Doing Ok, but Not Booming
    nation.  Although Philadelphia's 44,000 new private sector jobs is impressive in light of Philadelphia's previous four decades, it is only a job growth rate of 8.5%, a figure significantly below the national average of 13.4%.

    On the other hand, Philadelphia's recent gain is better than or the same as its own collar counties. Bucks County only gained 5.7%.  Montgomery only gained 6.4%.  Camden, over in NJ, only gained 6.7%.  Delaware County only did slightly better than Philly, at an 8.9% gain.   
The Urban Renaissance isn't hype, but it's heavily concentrated in only a few superstar cities.

The New Jersey consequence of this is that proximity to Philadelphia isn't an asset like proximity to New York City is. (obviously Camden's fate is nothing like Hoboken's)

  • New York's Suburban Counties Underperformed the Country, but Outperformed Other SuburbsSuburban New York is lagging the nation, but holding its own.  Suffolk (+8.4%), Nassau (+7.8%), and Westchester (+7.0%) lagged the nation, but as developed, mature economies you would expect that.  Rockland actually slightly beat the national average with 13.6% jobs gain. Orange County isn't really suburban, but, for what it's worth, it had a strong 12.2% job growth too.  Putnam County (not graphed and not really suburban either), only gained 6%.

    Northeast New Jersey's economic performance is terrible.  As mentioned before, Essex gained only 2.2%, Bergen gained 4.4%. Union lost 1.4%.  Passaic lost 1.2%.  Sussex lost 0.6%.  More distant counties in NJ like Middlesex and Somerset did better, but they are not really in NYC's orbit in the same way.

    Although NJ's suburbs did the worst, suburban Philadelphia and suburban Connecticut didn't do well either.  As mentioned above, Bucks County and Montgomery County in PA only gained 5.7% and 6.4%, respectively.  Connecticut did worse than that, with Fairfield County and New Haven County only gaining 4.9% and 5.2%, respectively.  
I don't have a confident idea why suburban New York did better than the other suburbs locations.  Unlike Connecticut and New Jersey, New York State doesn't have a fiscal crisis, but the differences in governmental employment between the states were not significant.

It's also curious that Rockland and Orange County's job growth are so much better than counties on the NJ side of the border, Long Island, or Westchester.  The New Jersey Policy Perspective likes to attribute New Jersey's problems to an underinvestment in public transportation, as if contemporary and future NJTransit problems could have caused a statewide economic stagnation that began in 1997, but Rockland and Orange County get rail transit from... New Jersey Transit.

Could the growth be from Rockland and Orange counties's demographics?

Is there a Haredi Effect?
Ok, I'm going out on a limb here, so this is tentative, but does the growth of Haredi communities improve jobs growth?

Mostly the causality is economy growth > population growth, but it's not a one-way causation and there is a countereffect in which population growth itself can drive economic growth and jobs.

  • Ocean County is home to Lakewood, New Jersey's fastest growing town.  Ocean County's job
    Job Bringers?
    growth is 10.9%, and is fourth best in New Jersey, after Hudson, Somerset, and Middlesex and significantly better than its neighbors.  Monmouth is only at 6.9% growth. Burlington is only at 7.8%.  Atlantic was at a 11.4% loss.  

    Lakewood has gained over 26,000 people since the bottom of the recession.  Presumably most of the new population is children, but Ocean County's job gain is actually only 13,000.  It's likely a large portion of that growth is in Lakewood or from Lakewood consumers.
An analogous effect seems to exist with Rockland and Orange counties. Rockland is home to the Township of Ramapo and Orange is home to Kiryas Joel.  Most of Rockand and Orange counties's population growth is from their Hassidic communities.

As this 2015 report from the Urban Action Agenda on the Hudson Valley documented:

The greatest numerical increase in the Hudson Valley over the 13-year period was in the Town of Ramapo (Rockland County), with a 19,431 person increase. Ramapo's total population in 2013 - 128,336 - includes the population of the villages within its boundary, including New Square, Kaser and Spring Valley. Thus their rapid growth contributes to Ramapo's booming population. Of the five municipalities that saw 45% or more population growth, three (Kiryas Joel, New Square and Kaser) are almost entirely Hasidic or Jewish Orthodox communities.
To demonstrate the influence of these villages on overall county growth, if Kiryas Joel were factored out during the 2000-2013 period, Orange County's growth rate would drop from 9.5% to 7.6%. Kiryas Joel accounted for 23% of the county's total population growth during the time period. In Rockland County, if Kaser and New Square's growth were factored out over the 2000-2013 time period, the county's growth rate would drop from 9.9% to 8.7%. 

  • Atlantic City's Implosion Has Hurt, but without It, New Jersey's Growth Would Still LagAtlantic County lost 11.4% of its private sector jobs, but Atlantic County is small, so that 11.4% loss only is 12,782 private sector jobs.

    From Q1 2010 to 2017, New Jersey only gained 220,000 private sector jobs, so even in a hypothetical where Atlantic City didn't lose any private sector jobs or gained 12,782 jobs, New Jersey's economic performance would still lag the nation.  If, hypothetically, Atlantic County gained 12,782 jobs, NJ's private sector job growth would only be 7.2% instead of 7.0%.

    The same effect of smallness goes for Cape May County.  Cape May lost 19.6% of its private sector jobs, but that's only 6,127 jobs.
This is a Better Look at NJ's Comparative Job Growth

"South Jersey" is Atlantic, Burlington, Camden, Cumberland,
Cape May, Gloucester, Monmouth, Ocean, and Salem.

I disaggregated North and South Jersey here, but if they were combined, it would be clearer that NJ is ahead of Pennsylvania since most of NJ's population is in North Jersey.

New Jersey's job performance is often ranked below Pennsylvania's (like the NJPP's example in the top of this post), but that is only when you compare from the bottom of each state's respective jobs nadir.

When you compare from most common points of time, like I did by using Q1 of 2010, New Jersey's job performance is actually better.

Excluding New York City, New Jersey actually outperformed the rest of New York State.


Can New Jersey Be Saved?

The tremendous job growth in New York City might lead people to dream that New Jersey's salvation is to build that Gateway Tunnel so that New Jerseyans can get to jobs in New York; or, New Yorkers can move to New Jersey.

Phil Murphy says this sort of thing, but I'll use a quote from Justin Fox, my favorite econ writer, who suggests the key to saving to NJ is to build a tunnel:

I have no idea what combination of roads and trains and bike lanes and hyperloops postsuburban New Jersey will need to thrive, but I'm guessing that good connections to resurgent New York City will be really important. So it can't have helped that two of the signature actions of Chris Christie's governorship -- killing a plan to dig a new rail tunnel to Manhattan in 2010 and causing a horrific traffic jam at the George Washington Bridge in 2013 -- have involved cutting his state off from the city. Blame him for that, definitely.

OK, New York City is a good way to keep New Jersey's workforce employed, but unfortunately it's no way to keep New Jersey's Treasury filled, since anyone who works in New York State pays income taxes to Albany, regardless of where they live and what state provides them or their children with public services.

Indeed.  New Jerseyans pay more than $3.1 billion a year in New York State taxes, versus only $616 million that New York residents pay to Trenton.

The New Jersey share of New York's total personal income taxes stands out even in the context of the larger state's enormous tax base: for example, the income taxes paid by New Jersey commuters equaled the total income tax owed by 1.3 million workers and small-business owners in the 17-county Western New York region, including metropolitan Buffalo-Niagara Falls and Rochester. 
New Jersey generated more New York State income tax than the 1.1 million filers living in Brooklyn -- more, for that matter, than any New York City borough except Manhattan.

New Jersey could build the Gateway Tunnel and double capacity to New York City for commuters, but it would do little directly for New Jersey's Treasury, and thus our neglected public services and pension crisis.

I worry that policy-makers are too quick to write off suburbia and exurbia, but a pathway forward for New Jersey might be to invest in strengthening Hudson County's role as New York City's "Sixth Boro."  This might have to include offering tax incentives to businesses willing to come to Hudson County in order to build up a denser mass of business activity.

Ironically, the state, under Phil Murphy, may be about to embark on a multi-billion dollar tunnel project that, in fact, only takes people under Hudson County on their way to Manhattan, not to New Jersey at all.

Regardless of the path forward for New Jersey, I don't think Christie deserves all of the blame for our problems.  As shown above, the job growth in our part of the country is heavily concentrated in New York City alone.  Philadelphia, its suburbs, all of downstate New York, and all of Connecticut, have also lagged the nation.

Although Christie has made many mistakes, New Jersey is up against powerful macroeconomic forces that are not his making.

Let's keep that in context.


Saturday, September 16, 2017

Dream First, Figure Out the Costs Later: Paul Tractenberg's Idea for an Essex County Superdistrict

In my most recent post I looked at a proposal by Newton mayor Wayne Levante to create a single, countywide district for Sussex County.

Although such a consolidation would be politically difficult and perhaps only reduce Sussex County's taxes by 1%, I realized that consolidating Sussex was a sound idea, since Sussex County's taxes are extremely high, its school districts are very small, and several of Sussex's small districts will not be able to accommodate further enrollment loss and/or loss of Adjustment Aid as stand-alone entities.

Aside from a sentimental (but strong) attachment to home rule, the primary difficulty of consolidation would be evening out unequal school taxes and spending, but Sussex's tax and spending differences are narrower than in most other counties, so Mayor Levante's "uphill fight" for Sussex consolidation is less steep than it should be for other counties.

In this post I turn my attention to proposals by Paul Tractenberg to create a consolidated Essex County district and how such a design would be infinitely more difficult to implement and operate than a consolidated Sussex County district would.

Tractenberg has advocated for an Essex County consolidated district several times.  Here's an extended argument for an Essex superdistrict from 2013:
The use of Essex County as a pilot for the county school district model requires elaboration. By the usual New Jersey political calculus, it is a solution with no chance of being tried. It runs afoul of some formidable political bosses and some very wealthy and influential suburban residents. It runs head-on into the glib and dismissive badmouthing of cities like Newark, Irvington, East Orange, and Orange. If there was ever a quintessential political third rail, this seems like it. 
Yet Essex County, although it is quite populous, is one of New Jersey’s smallest and most compact counties. You can drive from one end of it to the other in not much more than 30 minutes. In other times, Verona actually implemented a voluntary program under which students came from Newark to attend the Verona schools and that was not seen as logistically or politically infeasible. 
NJ's Most Segregated County 
Essex County is also by far the state’s most segregated county. Its 21 school districts include four that are urban, desperately poor, and almost entirely populated by students of color; five that are relatively diverse, two (Montclair and South Orange-Maplewood) by conscious choice; and 12 that are overwhelmingly white and higher-income with virtually not a single low-income student. 
These extraordinary disparities, and frightening isolation and separation, literally exist side by side. If ever there seemed to be a situation that met the New Jersey Supreme Court’s constitutional standard -- that schools have to be racially balanced “wherever feasible” -- Essex County seems to be it. And if Brown v. Board of Education and its implementation in the South established anything, as a matter of law, it was that politically and racially inspired opposition to a constitutional command could not succeed. 
Now it’s time for us to decide. Do we stay with the status quo of two separate and unequal state systems of education, or, if we don’t, do we embrace a “radical” reform approach based on constitutional imperatives and the best available evidence or one that defies the constitution and the evidence?
Before I outline the huge difficulties of consolidation, I want to say that I live in an integrated suburb (South Orange) and agree that integration benefits poor, minority students academically.  The inequalities of taxation in Essex are also brutal and and do much to stifle revival in Newark, Orange, East Orange, and Irvington.  Because tax rates are so bad in urban Essex I've called for a countywide school tax to be distributed between independent districts.

However, the bottom line of Essex consolidation is that the same inequality makes consolidation all the more educationally necessary makes consolidation all the more fiscally difficult.

Whereas in Sussex, consolidation is feasible within the existing budget and might even save money on administration, in Essex, consolidation would require massive infusions of municipal aid for the urban towns and probably quite a lot of additional money for bussing.

Also, were the tax benefits of consolidation solely to the poor, and its tax costs were solely borne by the rich, at least it would be a unambiguous goal for progressives to fight for, but in actuality the costs of consolidation would primarily be born by the four Abbotts, not the rich suburbs.

Even the tax problem were solved and consolidation were implemented, the countywide district's schools would be segregated due to housing patterns.  It would be necessary to use bussing to solve school segregation, which is itself an expense greater than any savings through needing fewer administrators.  If the bussing were mandatory it would incense large segments of the population.

Even if the tax problems were solved and any bussing were voluntary, there is a lack of space in all the large suburban districts in Essex.  Unless residential students in suburban Essex were induced to attend school in urban Essex, there would not be enough space to accommodate more than a relative handful children currently attending school in Orange, Irvington, East Orange, and Newark.

Tractenberg's Proposal Would Make the Poor Pay More

The first challenge in devising a countywide district is how taxes would be apportioned and on this issue consolidation slams into the rocks.

Let's assume that an Essex County superdistrict would apportion taxes based on Equalized Valuation, like county government already does.

Essex County's (weighted) average school tax rate is 1.3, based on $1.099 billion in total school taxes on $84.8 billion in Equalized Valuation, but that rate varies and the pattern of school taxation is ∩-shaped, where rich towns and the Abbotts tax the least and middle class towns tax the most

Thus, a move that would create a common, flat tax rate, like a consolidated district would require, would make the rich and the Abbotts to pay more.


East Orange actually has the lowest school taxes in Essex, at a rate that is only 0.797.  The other Essex County Abbotts, Orange (0.818), Newark (0.9), Irvington (0.943), have low taxes as well.

A few of Essex County's rich towns, like Essex Fells (0.923), Roseland (0.963), and Millburn (0.853) also have low tax rates and so would pay more in taxes, but their combined increases are less than the increase for Newark alone.

How high would taxes go?

For instance, Newark now pays 12% of Essex County's school taxes ($130 million out of $1.099 billion), but Newark has 16.2% of Essex County's Equalized Valuation, so if an Essex County superdistrict were formed and the tax levy stayed the same and converged on that 1.3 average, Newark's 16.2% of school taxes would become $178 million.

Own calculation, based on a town's share of Essex County's total Equalized Valuation and $1.099 existing tax levy.

East Orange would also see a large increase.  East Orange has 3.2% of Essex County's total Equalized Valuation ($2.7 billion out of $84.9 billion).  If East Orange paid 3.2% of Essex County's school taxes its bill would be $35.1 million, a dramatically higher figure than the $21 million figure it pays now.

Orange would pay another $7 million, Irvington would pay another $7.2 million.

Millburn has 11.5% of Essex's total Equalized Valuation. In an Essex County superdistrict Millburn's taxes would have to be 11.5% of $1.099 billion, or $102.5, a $20 million increase on the $83 million Millburn pays now.  Roseland would pay another $6.1 million, North Caldwell would pay another $2 million.  Fairfield would pay another $10 million.

The biggest tax beneficiaries of Essex consolidation would be working class and middle-income non-Abbotts of Essex County who lack the tax bases to have low taxes, but receive so little state aid that they have no choice but to be high taxers.  South Orange-Maplewood, West Orange, Glen Ridge, Verona, Bloomfield, and Belleville could look forward to lower taxes.  Glen Ridge, Belleville, Bloomfield, and Verona would probably spend more too.  Verona might get the full-day kindergarten that it currently lacks.

Montclair's taxes would theoretically fall by $25 million.  Bloomfield's would fall by $16.9 million.  South Orange-Maplewood's would fall by $30.3 million.

West Orange's taxes would fall the most.  West Orange's taxes would fall from $132 million to only $62 million! 

West Orange, however, is a high spending district, with a Total Budgetary Cost Per Pupil of $18,277.  It's likely West Orange's schools would have to make cuts if a countywide district came into being, so not everyone in West Orange would be happy about the other implications of consolidation.

The need for certain districts to make cuts exacerbates the political impossibility of a countywide district.  Home rule has is benefits and one of them is that districts can decide for themselves how much to tax and spend.

Disparities in Municipal Taxation Exacerbate Challenges

What heightens the challenge of equalizing Essex County's school tax rate is that municipal taxes are extremely high in the Abbotts (due in part to decades of massive school aid offsetting their school taxes). Unless there were some tremendous infusion of municipal aid for the Abbotts and/or cost cutting there, the differences in municipal taxes also make consolidation deeply unpopular even in the urban districts that Tractenberg believes would benefit.


Cedar Grove, Essex Fells, Livingston, Millburn, and North Caldwell have muni tax rates below 0.5, with the other suburbs having gradually larger tax rates.

Newark's muni tax rate is 1.642, but Orange's tax rate is 2.872, East Orange's is 3.353, and Irvington's is the highest in New Jersey, at 3.475.  Belleville's municipal tax rate is very high too, at 1.836, although nothing compared to East Orange and Irvington.

Essex County's inequalities of municipal taxation are actually the worst in New Jersey, as measured by the standard deviation of the tax rates.

If Newark, had to pay a 1.3 school tax rate, on top of its 1.642 muni tax rate and the existing county government tax of 0.5, it would have a 3.3 tax rate.  Orange's tax rate would rise to 4.7, East Orange's would rise to 5.1, and Irvington's would rise to 5.2.

If school taxes are somehow conditioned on municipal taxes so that towns with higher muni taxes paid less, it would mean higher school taxes for Essex's wealthy towns and probably its middle class towns too.  Making school taxes conditioned on municipal taxes would also incentivize municipal bloat, since higher municipal taxes would mean lower school taxes.

Although the main reason the urban towns have high muni taxes is greater need, there is also waste. In urban New Jersey, municipal spending is a jobs program as much as public service.  (example 1, example 2)

Although I would expect Orange, Irvington, East Orange to have high muni taxes given their poverty and support robust municipal aid for them, there is little justification for their municipal tax rates to be double what Belleville's is.  When poor non-Abbotts like East Newark (1.4), Fairview (1.1), Dover (1.1), Prospect Park (1.5) have much, much lower municipal taxes, I suspect that the huge infusion of state aid allowed municipal taxes to spike sky-high since school taxes were frozen.

What About Abbott PreK and 100% Construction Funding?

A further inequality of Essex that doesn't exist in Sussex is that Essex County has its four Abbott districts and these districts thus get the state to pay for 100% of their construction costs and pay for universal PreK for 3s and 4s  (PreK in the four Abbotts costs NJ a combined total of $136 million)

If Essex County were consolidated into a single district, it's hard to imagine how these privileges would continue just for Newark, Orange, East Orange, and Irvington.  Kids who live in the same jurisdiction would have to be treated equally and the new district and the state and new superdistrict are unlikely to have the money to fund that.

I estimate that Belleville alone has 650 children who are three or four years old.  If all of those children were to get "free" PreK it would cost $8.1 million.  Even if PreK were restricted to Free & Reduced Lunch eligible children in the hitherto non-Abbotts it would cost tens of millions countywide.

Tractenberg's new Essex County superdistrict would also have a disparity to settle regarding construction funding, since right now the Abbotts don't pay for any of that.

So, a fix for construction funding would have to be yet another issue settled before an Essex superdistrict could be created.

What About Per Pupil Tax Apportionment?

A tax scenario that would be even more difficult for poor towns would be to apportion taxes based on how many students come from a town.

I don't think any objective observer would want taxes to be apportioned by student population, but as a political compromise it might be necessary to get affluent towns to go along with a consolidation proposal.

If, hypothetically, taxes were apportioned by student population, and Newark ended up paying 38% of taxes because it has 38% of the student population, Newark's taxes would be $338 million, an impossible amount for Newark that would require a 2.5% school tax rate.

(See note at bottom on apportioning taxes by Local Fair Share)

Suburban School Districts Don't Have Room 

Another practical problem with consolidation is if Tractenberg's goal is for urban students to be able to attend suburban schools, there is no room for them without new schools being built.

In the last ten years, almost all of suburban Essex districts have seen student population increases, topping out with 14% increases in South Orange-Maplewood and Bloomfield.

Although Montclair's increase has been modest since 2006-07, that 1% increase on top of existing crowding was enough to persuade Montclair's superintendent to not participate in Interdistrict Choice, despite the huge state money infusion it would have provided and despite the fact that Montclair had recently opened a new school.

'The issue for us is limited school space, even with the new Bullock School,' [Superintendent] Alvarez explained. 'We don't have excess capacity, and the capacity we do have can be utilized better by bringing our district's special needs students back to Montclair.'
Paul Tractenberg praises Verona for accepting a few dozen Newark students for one year a generation ago, but that was in 1969, a moment when Verona's student population had fallen significantly and classrooms had empty seats.

Essex County is the only county in New Jersey without an Interdistrict Choice participant, and that is due to the lack of capacity in suburban districts, not a lack of a desire to have the students and state money.

This excludes districts with populations under 1,000 because Essex Fells and Fairfield have had large percentage declines
but those declines are small in absolute size.
Source, NJ Enrollment Files

Would Consolidation Save Money?  

Tractenberg also endorses the "folk hypothesis" that governmental fragmentation is the cause of New Jersey's extreme property taxes.

Finally, we could once and for all confront New Jersey’s particularly virulent form of home rule. Consolidation of school districts and municipalities is routinely referred to as “a political third rail.” For three-quarters of a century this attitude has disabled us from addressing the gross inefficiencies -- fiscal, educational, social, and constitutional -- of our crazy quilt of undersized and colossally expensive municipalities and school districts. A former speaker of New Jersey’s Assembly, Alan Karcher, referred to it in a book title as Multiple Municipal Madness. As citizens and taxpayers, we excoriate politicians for our property taxes, by far the highest in the nation, but we cling with equal passion to our costly and dysfunctional governmental bodies.

It's a common belief that governmental fragmentation is the basic reason for New Jersey's high taxes, but it's based on a false premise that New Jersey has an inordinate number of localities.  It is true NJ has a lot of localities per land area, but in terms of localities per capita, New Jersey is average.

In small districts and municipalities administrators tend to have multiple roles, so the ratio of students:administrators is the same as in larger towns.

Yes, New Jersey does spend more on central office administration than other states, but we spend more on absolutely everything else too.  

Source, US Census,
On the municipal level at least, there is zero correlation between population size and government spending.

Where I do think consolidation could eventually save money is if it caused changes in voting behavior.

Right now, many residents tolerate high school taxes because they know the money benefits their own children and they believe that higher school spending increases their own property values.

However, in a consolidated superdistrict, people would know that the money raised isn't directly benefiting their own kids and it would be illogical to believe that money spent countywide would disproportionately benefit one's own town and real estate values.

So, if consolidation into a countywide district made voters a lot more conservative with school taxes, then that would save money, but this isn't what Paul Tractenberg wants to happen.

Practical Problems Drive Political Opposition

Tractenberg chalks up opposition to consolidation to nameless "political bosses" and "wealthy suburbanites" who are motivated by racism, but opposition to municipal and school consolidations in New Jersey is more often motivated by pure sentimentalism.

Think of all the examples of demographically similar and adjacent towns refusing to consolidate municipal government.
  • Scotch Plains and Fanwood already share a school district but have not even gotten to the referendum stage on effecting a municipal merger.
  • Roxbury and Mount Arlington have not gotten to the referendum stage either, after seven years of study and advocacy.
  • Sussex Boro and Wantage Township already share a school district and several other services, but have rejected a merger.
  • South Orange and Maplewood already share a school district but have not been able to arrange a municipal merger. It is actually Maplewood, the slightly poorer town, that has spurned attempts at merging.  When Maplewood had a vote on a merger commission the anti-merger slogan was "Keep Maplewood Maplewood."
Princeton is the exception that proves the rule, because voters there rejected consolidation three times (1953, 1979 and 1996) before narrowly approving it at the bottom of the Recession in 2011.

Where school district consolidations have occurred, like South Hunterdon, tax apportionment has been on a per student basis, a completely impractical idea for socioeconomically dissimilar towns in Essex like we are discussing here.

New Jersey's landscape of wealth and opportunity is very unequal and I wish that countywide districts had been created a century ago, but 100+ years of independent development of towns and school districts have created stark differences in taxation and school spending between towns and districts that would be very difficult to undo.

The Abbott decisions have, ironically, made consolidation even more complex since the Abbott decisions allowed distortions to occur in school and municipal spending.  At this point, school tax rates have risen so much in non-Abbotts that if an Abbott and non-Abbott merged, the Abbott districts would end up paying higher taxes, meaning there would be strong opposition to consolidation even amongst the groups Tractenberg thinks would benefit the most.

Even if the tax problems, space problems, and transportation problems could be solved, I doubt any districts would want this because it is a loss of power over their own schools.  Newark, which just got back local control over its schools, may be reluctant to give up that power again to a county it only has partial influence over?

Paul Tractenberg is right logically that consolidation follows from our noblest impulses and is suggested by Brown v Board of Education, but the practical challenges of consolidation are too large to overcome.  Even aside from political acquiescence (or judicial diktat), it would require some massive infusion of state municipal aid and transportation aid to be workable at all.

The elected officials (or "bosses," if they disagree with Tractenberg) who would oppose consolidation have some legitimate reasons for doing so.

See Also:

What About Apportioning Taxes By Local Fair Share?

In theory, we could use an apportionment based on Local Fair Share in order to mitigate low income:property ratios in poorer towns, although this would actually not make much difference for most towns.

Newark has only 13.3% of Essex County's Local Fair Share, whereas it has 16.2% of Equalized Valuation, so Newark's tax increase would be smaller than under a pure Equalized Valuation apportionment, but the other Abbotts would pay basically the same amount.

Millburn's tax share would go from 11.47% of Equalized Valuation to 12.36% of Local Fair Share.  Again, not a big difference.

Monday, September 11, 2017

Sussex County Consolidation?

A recurring proposal to mitigate New Jersey's crushing property taxes is school district (and municipal) consolidation.

The argument seemingly has some merit.  Starting from the fact that New Jersey has 590 school districts, proponents say that if New Jersey had fewer school districts we would need fewer superintendents, fewer assistant superintendents, fewer business administrators, fewer assistant business administrators, etc and then save money.  The most informed advocates for consolidation might use Maryland as an example, which has only 24 county-size districts and much lower spending than New Jersey, with a 1.1 average property tax rate versus New Jersey's 2.4 average tax rate), while seemingly getting equivalent results.

The latest advocate for consolidation is Mayor Wayne Levante of Newton. Levante, a former teacher in Paterson, says that if all 25 of Sussex County's districts consolidated into a single countywide district it would save $6-$9 million.

Why even consider such a thing?
The major reason for consolidation: To save money. 
Per-pupil costs are rising in the county despite decreasingly enrollment, resulting in higher property taxes, according to the Newton resolution. 
Levante said a consolidated district would reduce school administrative costs in Sussex County by anywhere from $6 million to $9 million annually. 
Some school buildings might close as a result, Levante said.
He added that local school boards could still exist, with board presidents perhaps serving on an advisory committee for the county superintendent.

How it would work
The Newton resolution calls for having one county superintendent, one county business office, and all schools within the county overseen by the county office.

Levante, a former teacher in Paterson, drew a parallel to the set-up in New Jersey's third-largest city.

"I worked in Paterson ... It's like 50-something schools. You have one superintendent," Levante said.

Although I'm going to throw cold water on Mayor Levante's proposal, if any county in New Jersey merged into a countywide district, Sussex would be a good candidate.

  • Sussex County has a 2.94 all-in tax rate (with a 1.75 for the schools alone), compared to New Jersey's 2.4 all-in average.  Since Sussex County's taxes are so high, the need to do anything to save money is more acute.
  • Sussex County's districts are very small, with an average size of 805 students, compared to a statewide average of 2250.
  • Existing tax rates do vary, but not by as much as in other counties.
  • Sussex County towns are less unequal than towns in other counties. Sussex County has no districts in DFGs A or B or in DFG J. 
  • Sussex County's school taxes actually have the lowest Standard Deviation of any NJ county and the municipal taxes are the sixth lowest, meaning there would be less difficulty in equalizing school taxes and then municipal tax encumbrance.  
  • Sussex County is losing student population and its 21 overaided districts are overaided by $41 million.  If Adjustment Aid is cut, Sussex County districts will face budget cuts that could more easily be managed by a larger district.

Despite the relative practicality and need of consolidating Sussex, large, probably insurmountable, political difficulties would remain.

Saving $6-9 million is better than nothing, but it would be wrong to assume that every Sussex County taxpayer would benefit, since right now Sussex County contains 25 school districts with 25 tax rates, ranging from 2.365 in Hampton Boro to 1.435 in Branchville.  Consolidation would also require shifts in taxation, depending on how school taxes in a Sussex County superdistrict were apportioned.

If a town does not have a K-12 district, school tax rates reflect combined districts.

One way taxes could be apportioned is the way county taxes already are, where the percentage of school taxes paid equals a town's percentage of the county's total Equalized Valuation.   Under this setup, if a district has 10% of the county's total Equalized Valuation, it would pay 10% of the school taxes.

Under apportionment by Equalized Valuation, Sussex County's swings in taxation wouldn't be as large as the swings in more diverse counties', but there would still be complaints.  If Equalized Valuation were used, Vernon's tax increase would be the largest.  Vernon right now taxes at 12% of Sussex County's total school tax levy ($37.9 million out of $295.5 million for 2016-17), but Vernon has 14% of Sussex County's total Equalized Valuation ($2.35 billion out of $16.85 billion).  So, if the total school tax bill stayed at $295.5 million, Vernon's taxes would rise to 14% of that, or $41.4 million.

Apportioning by Equalized Valuation isn't the only model.  A Sussex superdistrict could also apportion taxes based on what percentage of the total student body comes from the town, so if a town contributes 10% of the students, it pays 10% of the taxes, regardless of what its tax base is.

If tax apportionment is based on student body, tax rates would vary between towns.

Since tax rates would vary by town, the consolidated Sussex BOE's tax increases would hit some towns much harder than they would others.

Newton's taxpayers might pay the highest tax rate in Sussex County under a per student apportionment, since Newton has 5.2% of Sussex County's student population, but only 3.7% of the tax base.  If Newton had to pay 5.2% of Sussex County's school taxes, I estimate the school rate would become 2.5 alone.  (on top of municipal and county taxes)

(Math for calculation.  5.2% of $296 million = $15.4 million; $15.4 mil divided by Newton EV of $621 mil = 2.5%.  I cannot estimate whose tax rate would become the lowest, since not all Sussex districts are K12s.)

New regional districts in New Jersey, like Pittsgrove-Elmer and South-Hunterdon, use per pupil apportionment, but these new regional districts are created between towns that have similar tax bases and similar student populations.  The towns "look before they leap" and learn what their new tax rates will be. For South Hunterdon the variation is small, going from 1.2269 for Lambertville to 1.5710 West Amwell.

A hybrid tax apportionment, between Equalized Valuation and a per student apportionment, is also possible.

Manchester Regional in Passaic County has a hybrid system, where apportionment is based 50% on Equalized Valuation and 50% on pupil contribution.  This exists because North Haledon wants to exit the regional district entirely, but the NJ Supreme Court has not allowed it. The 50:50 apportionment deal is a compromise.

While the Manchester Regional model is defensible in the abstract, since Manchester Regional's component districts differ greatly in wealth, there are thus large differences in tax rate.

Thus, North Haledon has a tax rate of only 0.1866, but Prospect Park has a tax rate of 1.3346.

The problem is not Manchester Regional's tax apportionment formula itself; the problem is that Manchester Regional's component districts differ greatly in wealth.  If Manchester Regional's taxes were apportioned solely on pupil enrollment, like Pittsgrove-Elmer and South-Hunterdon, the differences in Manchester Regional's tax rates would be even greater.

In any case, if Sussex County used a per student tax apportionment plan, there would be large differences in tax rate.

See "Manchester Regional: NJ's Most Underaided and Most Divided District"))

Also problematic is that there would have to be a convergence of spending too. Right now Hamburg Boro is Sussex County's highest spender, with a Total Budgetary Cost Per Pupil of $25,092 per student. That high spending is mostly driven by over $2,027 per student in excess aid, but Hamburg also has extremely high school taxes, with a 2.132 tax rate.

Hardystown Township is Sussex County's lowest spender, at $13,873 per student. Hardystown is also overaided, but by only $1,353 per student, but it has chosen to be an undertaxer, with a 0.9 tax rate.

User Friendly Budgets,

Unless higher spending is justified by more challenging demographics, what are now Sussex County's highest spending districts would have to make cuts after they become mere schools within the larger Sussex County superdistrict.

That Being Said, Sussex County Taxes are Less Unequal Than Most Other Counties

The Reference to Essex is because this graph is used in my Essex post as well.
Excel Calcuation of SD
The Reference to Essex is because this graph is used in my Essex post as well.

Sussex County's Taxes Would Still be Among the Nation's Worst

Assuming that the $6-$9 million in savings is correct, how much of a tax reduction is that for Sussex County really?

Sussex County's all-in tax levy was $490 million for 2016.  ($91,924,069 for county taxes, $295,631,557, for school district taxes, $103,186,926 for municipal taxes)  (see "Property Tax Information")

Sussex County's all-in tax rate is 2.9, which is much higher than the state average of 2.4 and 240% of the national average of 1.19.

So, even saving $9 million (the upper-bound estimate) would only equal 1.8% of the all-in tax burden, or 3% of the school tax burden.

The lower bound estimate, $6 million, would only be 1.2% of the all-in tax burden, or 2% of the school tax burden.

Even if there were complete municipal consolidation too and the savings were of the same order, Sussex County's taxes would still be at 2.8, which is still way about New Jersey's average, let alone the national average.

The truth is that governmental fragmentation doesn't lead to that much more administrative spending in New Jersey.

If school district consolidation allowed the closings of schools and a reduction of the teaching force, then yes, it would produce bigger savings.

If living in a big, countywide district led voters to be less tolerant of school tax increases than they are for increases for their own town, then that would produce large savings too.

Can Sussex County Afford Not to Consolidate?

Here is where state aid comes in.

21 of Sussex's districts are overaided with a total surplus of $42 million. (not counting Interdistrict Choice money. Three Sussex districts are underaided (Green, Lenape Valley Regional, and Newton), but with a deficit of only $5.8 million, most of which is Newton's.

Right now the distribution of state aid in Sussex County makes zero sense. Hopatcong is overaided by $9,126,016, or $5,888 per student, whereas Newton is underaided by -$4,205,916, or -$3,776 per student.

It's likely that Sussex County schools will lose state aid in the next few years, thereby creating budget stress. If a district only has a single school, managing those cuts is going to be very hard. if a district had multiple schools, managing the cuts is easier since an aging school could be closed.

Is this worth the fight?  

Although Sussex County could more easily consolidate than most other counties in New Jersey, the odds of consolidation happening are not high, with even Mayor Levante admitting "I know it's an uphill battle."

With that acknowledgement, I don't think a countywide consolidation is a fight worth fighting. Individual Sussex County districts could consolidate or create send-receive relationships, but creating a countywide district would be such a huge political lift that I think people who want lower taxes should fight on other fronts.

To be honest, district fragmentation and a proliferation of administrators isn't the real reason New Jersey has such high taxes.  The real reason is that New Jersey's teachers are the fifth best paid in the country and New Jersey has the third-lowest student:teacher ratio, and the same thing goes for other government employees.  The utopianism of Abbott, which diverts billions per year into Abbott districts in excess of what other states give their low-income districts, also forces extremely high taxes on non-Abbotts.  (See Education Spending and New Jersey Taxes)

Taken in a vacuum, county-wide districts have much to recommend them, but New Jersey has had home rule and governmental fragmentation for over a century.

As good looking in the abstract county districts are, and as functional as Maryland looks, when it comes to county-wide districts that ship sailed long ago.


See Also:
"New Jersey Doesn't Actually Have That Many Districts"
"Dream First, Figure Out How to Pay for It Later: Essex County Consolidation"