Monday, August 31, 2015

Assemblyman Ciattarelli pension and state aid changes: a mixed review

Assemblyman Jack Ciattarelli proposes cutting teacher pensions and cutting state aid for the highest aid districts:

“It’s becoming more and more difficult to navigate our fiscal obstacle course and a lot of that has to do with us meeting these (pension payment) obligations,” said Assemblyman Jack Ciattarelli (R-Somerville). “In a state that already has one of the highest income tax rates, the highest property taxes, an estate tax, one of the highest sales taxes, we have all this tax revenue and we augment it with casino revenue taxes and lotteries, how is it that we can’t make these payments? The reason is because they’re becoming more and more expensive.”
Facets of Ciattarelli’s proposals include:

• No community is allowed to fund less than 25 percent of their school budget through the local tax levy (some communities fund less than 15 percent of their school budget, while others fund more than 90 percent)

• No community can abate school property taxes on new development (to encourage development, communities can abate municipal and county taxes if they so choose)

• For all current and future teacher retirees, no post-retirement Medicare Part B reimbursement if their pension plus social security equals or exceeds $30,000 per year

• For all teachers with less than 10 years in system, pension account is switched over to defined contribution pension plan (e.g., 401(k))

• All newly hired teachers go immediately into defined contribution pension plan (e.g., 401(k)) and their pension and Social Security are paid for by the local school district, not the state.

• "Cadillac" health insurance plans are discontinued for all newly hired teachers and all others at end of current contract

Even though they should support some change to the PILOT law, the NJEA, unsurprisingly, opposes these proposals wholesale.

“Assemblyman Ciattarelli’s proposal is deeply flawed for a number of reasons,” said NJEA President Wendell Steinhauer in an emailed response. “First, it specifically targets teachers. Given the scope of the state’s pension failures, that is utterly inappropriate. Second, none of his proposals do anything to reduce the unfunded liability that the state has created as a result of its many years of funding failures. The pension problem cannot be solved with more benefit cuts. It can only be solved with responsible funding. Finally, his plan would further degrade pensions of teachers, who are already paying far more for both their pensions and health benefits while the state fails to do its part.”
Wendell Steinhauer ignores that there is a funding component of Ciattarelli's plan. Ciattarelli proposes that every district pay at least 25% of its school budget from its local tax levy and then use the state aid savings for pensions. Since there are scores of large, usually urban, districts that pay less than 25% of their school budget locally, this potentially frees up large amounts of money.

While New Jersey will eventually have to cut education aid to pay its pension obligations and it will be necessary to cut the Abbotts, the 25% minimum share requirement for a school district budget needs refinement.

Just because a district pays for less than 25% of its school budget doesn't necessarily mean that the district is overaided nor that the town is undertaxed.

Paterson, for instance, has the state pay for about 80% of its budget ($405 million of $505 million), but Paterson has exceptionally low income ($15,543 per capita), low property resources ($242k per student in valuation), and a very high FRL-eligible percentage (90%). In fact, despite that $405 million in aid, Paterson only gets 85% of its uncapped aid.

Paterson's local tax levy is only $39 million on that $505 million budget, so Paterson would be due for immense tax increases/spending cuts under Ciattarelli's plan. For Paterson to pay 25% of its budget it would have to pay $126 million, or three times more than it pays now. Paterson's (equalized) tax levy is already 0.58 so sure, it could pay somewhat more, but if its school tax levy proportionally increased it would become 1.87.  A $126 Local Tax Levy for Paterson would be above its Local Fair Share of $97 million.

On top of the high school tax burden, Paterson residents would still have to pay county and municipal taxes. Paterson's tax levy is already 3.570, which is very high. If Paterson had to pay the higher school taxes that Ciattarelli is allowing, its very high tax burden would climb to nearly 5%.

A better solution would be to require any district receiving Equalization Aid to pay 100% of its Local Fair Share (or 80%, to use a more realistic figure).

Unfortunately, Ciattarelli's proposal would also leave untouched New Jersey's biggest aid hoarders.

For instance:

• Hoboken gets 184% of its recommended SFRA aid but would lose nothing since its Local Tax Levy is already 75% of its school budget.
Ocean City, Cape May gets 562% of its recommended SFRA aid but would would lose nothing since its Local Tax Levy is 50% of its school budget.
Jersey City gets 136% of its recommended SFRA aid (this translates to $111.7 million) but would lose only about $30 million (of its $566 million budget) because Jersey City already pays for 20% of its schools.

Of course Ciattarelli's proposal would face opposition from the legislature and the NJ Supreme Court. Ciattarelli gets credit for facing reality on pensions and I appreciate his boldness on PILOT problems, but this 25% minimum proposal needs some reform.

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