Friday, June 10, 2016

Sweeney State Aid Bill: A Preliminary Analysis

I've now gotten to see a copy of Steve Sweeney's state aid reform bill and can present a preliminary analysis of it.  

The text of the bill appears to differ in some key respects from what has been reported and what its own authors have said in public.  There are also provisions in the bill affecting the tax cap and PILOTing which are important and yet I hadn't seen discussed yet.

9/15/2016 Update:  This post was accurate when it was written.  The final text of the Sweeney -Ruiz bill is much improved from the original.  This post is mostly not accurate anymore.

Bringing All Districts to Adequacy, Not Necessarily 100% Funding

First, this bill is not a bill to bring every district up to 100% funding.  Using ballpark figures, 100% funding for every district would cost $2 billion without redistribution and with redistribution would cost $1.5 billion.  

What the Sweeney bill appears to be is redistribution plus new spending in order to bring every under Adequacy district up to 100% of Adequacy.    This differs from how Sweeney has described the bill in public and I'm confused as to what the actual intent is.  

This is the relevant statutory text: 

2. a. It shall be the duty of the commission to study: (1) the adjustment aid and State aid growth limit provisions of the “School Funding Reform Act of 2008” (SFRA), P.L.2007, c.260 (C.18A:7F-43 et al.), to determine recommendations for revising those provisions in order to bring all school districts to their adequacy budgets as calculated pursuant to section 9 of that act over a period of five school years;  

So affluent underaided districts who tax themselves above their Local Fair Shares and therefore spend Above Adequacy, would apparently not benefit from this bill.  Very wealthy districts like Princeton and Millburn wouldn't gain, which is ok, but neither would diverse districts like West Orange, Teaneck, Wayne, East Brunswick, Fair Lawn, South Orange-Maplewood, Mount Olive, and Cherry Hill. (source for Adequacy Figures, the Fair Funding Database)

However, NJ's most severely underaided districts (who are all below Adequacy) would gain and there are hundreds of districts in this category.  

However, there is no risk to underaided/above Adequacy districts in this bill since the commission is charged with looking at Adjustment Aid and, by definition, these districts receive no Adjustment Aid.  So, this is a redistribution conditioned on state aid relative to uncapped aid, not residential wealth, which I believe is how redistribution should be handled.   

Since the text of the bill differs from how its authors have described it, there could be a pure mistake here. SFRA spells out Adequacy Budget in Section 9, Local Fair Share in Section 10, and the calculation of Equalization Aid in Section 11. If the bill read "calculated persuant to Sections 9-11 of that act" it would square much better with how Steve Sweeney has presented it in public.

Correcting this possible mistake or changing what is a bad idea is needed is for the commission to be able to differentiate between districts that are above or below Adequacy because of their own tax effort, not just state aid.

For instance many underaided districts are also below their Local Fair Share, so if they were to be brought up to Adequacy without a requirement that they tax at their LFS, they would become overaided. 

A few of the Abbotts are prominent districts in this category, like Trenton, Newark, and Paterson. Paterson is underaided by $36 million for 2016-17, but under its Local Fair Share by $46 million.  If Paterson were to be brought up to Adequacy it would get about $82 million.  (these are ballpark figures, the DOE has been confusing this year as to what exact Adequacy budgets are)

Conversely, there are underaided districts who are below Adequacy and tax massively above their LFS. Manchester Regional's taxes are more than twice what they should be.  

So, if a district is $10 million below Adequacy, but taxes $4 million above Local Fair Share, would it only get $6 million?  If so, the district is still underaided and the taxpayers overburdened.  

To avoid perverse tax incentives, the goal of the law should be to bring districts up to 100% of SFRA aid, not 100% of Adequacy.  This would also free up some more state money that could go to overAdequacy/overtaxed districts.

I accept that districts like Paterson, Newark, and Trenton cannot pay their full 100% Local Fair Shares because their residents are poor and their municipal taxes are very high, but the solution should be to change the formula for Local Fair Share should that it is calculated differently for poor districts than for wealthy districts.

Without a systematic change to the LFS formula or the language of the bill, there is a risk that the state will make up the tax deficit and districts will be, in effect, penalized for not paying their full Local Fair Share. So, if one district taxes at 100% of LFS and another district taxes at 50% of LFS, they would both get whatever the state aid needed is to bring them up to Adequacy and the district with taxes at 100% of LFS will be punished for that.  

A sensible change should be to task the commission with reforming the formula for Local Fair Share for poor districts.  If the formula were changed to "Aggregate Income -$10,000 per adult" the drop in a low-income town's Local Fair Share would be significant and Equalization Aid would increase, but the drop in a high-income town's LFS would be small.

Reforming the calculation of LFS may already be allowable under the existing text, but it's ambiguous.

Those of us in the fair aid community will have to constantly point out that a district's tax levy affects is spending relative to Adequacy, not just state aid.  

Reforming the Tax Cap

(2) the tax levy growth limitation as established and calculated pursuant to section 3 of P.L.2007, c.62 (C.18A:7F-38) and its impact on the ability of school districts to adequately fund operating expenses;

Reforming the tax cap is necessary for aid redistribution because even though an overaided district might be below Local Fair Share, it cannot tap its tax base if it is only allowed to increase taxes by 2% a year anyway.  

For Jersey City to increase school taxes by $20 million a year would be economically manageable, but it is illegal since Jersey City's tax levy is only $114 million.

This proposal to reevaluate the tax cap law is also a big deal even absent redistribution since overaided/low tax levy districts are scheduled to be flat-funded forever.  Since these districts have tax levies that are proportionally small in relation to their budgets, a 2% tax levy increase for them would bring in minute increases in the overall budget.  For instance, Jersey City's tax levy is 19% of its budget.  2% of 19% is nothing.

Personally, I believe that property taxes are too high in most towns and that the tax cap gives districts leverage in bargaining with unions.  I hope that the tax cap is only amended for districts whose taxes are below Local Fair Share.  

Reforming PILOTs

(4) the equalized valuation and income measures used to determine a school district’s local share of its adequacy budget as calculated pursuant to section 10 of P.L.2007, c.260 (C.18A:7F-52), and the impact of property tax abatements on that local share

PILOT reform would only have an impact on a few districts that receive Equalization Aid and grant many PILOTs, such as Jersey City and to a lesser extent Asbury Park and Harrison.   However, since Jersey City is the state's second biggest district, anything affecting it has a large impact on school finance and this is a case of a reform that would affect a small number of districts but have a big financial impact.    

Hoboken is another heavy PILOT user, but it does not receive Equalization Aid so PILOTs do not distort Hoboken's Local Fair Share in a relevant way since Hoboken's LFS is quadruple its Adequacy budget anyway.  

However, the list of overaided/heavy PILOT districts could expand in the future, so it's good that the bill addresses PILOTing now.

Overall, I have a lot of respect for Steve Sweeney and think his proposal is a very good one, but I hope that certain changes are made between now and passage or that the appointed commission takes the local tax levy into consideration in making it above or below Adequacy.  

1 comment: