Sunday, June 4, 2017

Funding SFRA is Necessary but not Sufficient to Ease NJ Taxes

In the last few months, when addressing New Jersey's sky-high property taxes, candidates from both parties have converged on the solution of putting more money into SFRA:

Addressing Schools _ and Taxes _ Key in Governor's Race 
TRENTON, N.J. (AP) — All the candidates running to replace New Jersey Gov. Chris Christie agree that addressing the state's high property taxes is a priority, although any fixes will be closely linked to K-12 education in the state.... 
Decisions made by the governor about education affect not only kids in the classroom, but also the real estate taxes that their parents pay. 
New Jersey's property taxes are the highest in the nation and one of the key drivers of that is spending on schools. That has led to a 2 percent cap on property tax increases, but also to debate over whether the state's school funding formula needs to be overhauled.... 
On the Democratic side, all four of the leading candidates have pledged to fully fund the school aid formula. [sic] They have also all called for ending the requirement that the Common Core-aligned PARCC test be used as a graduation requirement. 
Democrat Phil Murphy, the former Goldman Sachs executive and Obama administration ambassador to Germany, and state Assemblyman John Wisniewski have both called for eliminating the test completely. Murphy was endorsed by the state's largest teachers' union, the New Jersey Education Association. 
Murphy, Democrat Jim Johnson, a former Clinton administration official, and Democratic Assemblyman John Wisniewski have also called for universal pre-kindergarten a part of their platform. Democratic State Sen. Ray Lesniak says that he would prioritize establishing programs for prenatal to 3-year-olds in low-income districts and that universal pre-K would come after that. 
GOP Lt. Gov. Kim Guadagno has called for capping [school] property taxes at 5 percent of income, which she describes as a first step that would provide immediate relief to tax-burned residents. Assemblyman Jack Ciattarelli calls Guadagno's so-called "circuit-breaker" plan "disingenuous" and said that it ignores the mandated funding formula.
Guadagno says that she wants to reform the "antiquated" school funding formula, while also increasing aid for special education while also auditing all of the state's school districts. 
Ciattarelli wants to reform the school funding formula by redirecting what he describes as "excess aid" sent to districts like Jersey City. 
Both Republican front-runners want to redirect pre-K money so that it is available for students based on income levels.

As an activist for adequate budget resources for New Jersey school districts and equal tax burdens, I'm glad that school funding is getting attention, but as someone who also wants New Jersey's all-in tax burden to normalize with the rest of the Northeast, concentrating on SFRA cannot be the only pathway to take.

Full and/or fair funding of SFRA is important, but New Jersey's tax burden will not ease without efforts to restrain and lower the cost of government.

The problem for New Jersey is that our property tax burden is so enormous ($28.35 billion) that fully
Click To Enlarge,
Source, "Additional School Funding Scenario"
funding SFRA - even if the state had the money - would do little to nothing for most towns because the amounts under discussion - either $1 billion or $2 billion - is so small compared to the statewide tax levy.

Moreover, much of the money districts would gain would likely be spent on the school programs and increasing staff salaries and not used to offset taxes.

Also, although fully funding or fairly funding SFRA would offer significant tax relief to some communities, SFRA is not really a tax relief law so much as a law that seeks to ensure communities with high rates of "at-risk" students spend more money than middle-class communities.  It is not a law that would actually produce "low" property taxes (compared to the national average) for any New Jersey community.

This post looks at SFRA's deficit in comparison with New Jersey's statewide, all-in property tax levy and examines how concentrated new money under SFRA might might be.

Had SFRA been followed for 2016-17, half of the $1 billion aid increase (at Capped Aid) would only go to sixteen districts comprising 14% of New Jersey's total population.  (see pie chart above)

1.  Local "Fair" Share is Still an Unfair Rate Compared to Any Other State

First, I need to point out how extraordinarily high New Jersey's Local Fair Share threshold is compared to the national average even for all-in taxes:

This is the 2017-18 formula for Local Fair Share:
  • (0.014009 x Equalized Valuation + 0.047823 x Aggregate Income)/2
I know that formula looks complex, but it is just arithmetic and what it says is that New Jersey school districts are expected to tax themselves at 0.7%  (.07 ≈ 1.4% / 2) of their property valuation plus 2.4% (2.4% ≈ 4.78% / 2 ) of their Aggregate Income.

For 2016-17, New Jersey's total Local Fair Share was $16,723,321,766. Since our total Equalized Valuation was $1.2 trillion ($1,208,762,819,428 to be exact), even SFRA's Local Fair Share equates to a 1.38% tax rate.

That 1.38 school tax rate, even if it were the only property taxes New Jerseyans paid, would be the 15th highest rate in the United States!  The amount would be almost $4,000 per household too, which would leave New Jersey's taxes in the top ten in dollars per household


No community is required to pay its full Local Fair Share, but still, since the amount is so high, it shows that the design of SFRA is not a design for low or even moderate school property taxes overall.

2.  Even if There Were a Miracle and We Fully Funded SFRA, the Money is a Small Percentage of New Jersey's All-In Property Tax Burden

New Jersey's all-in property tax burden for 2016 was $28,353,988,495.

Of that $28.35 billion burden, $5.1 billion was for county taxes, $14.9 billion was for school taxes, and $8.4 billion was for municipal taxes.

The gubernatorial candidates are unclear about how much money they actually want to put into school funding.

Jim Johnson and Phil Murphy consistently and repeatedly cite New Jersey's deficit against Capped Aid, which is $1 billion a year.  John Wisniewski gives a $1.55 billion deficit.  I have not listened enough to Lesniak on state aid, but he did say at the second Democratic debate that he wanted to get rid of the Enrollment Caps, so he is the most likely to understand that the real deficit is $2 billion.

The Republican candidates, Kim Guadagno and Jack Ciattarelli, want to fairly fund SFRA and change SFRA.  They do not  not "fully" fund SFRA in the same sense that the Democratic candidates purport to want to do, so estimating how much new money the Republicans would put into SFRA is even more conjectural.

Anyway, since the real deficit for SFRA for 2016-17 (against Uncapped Aid) was $1.93 billion and our all-in tax burden is $28.35 billion, if New Jersey's next governor put in $1 billion that would only reduce New Jersey's taxes by 3.5%!  If New Jersey's next governor put in $2 billion that would only reduce New Jersey's taxes by 7%!!

Even if every cent of that $1 billion went into offsetting property taxes and not new spending, New Jersey's taxes would still be the country's highest!  Even if every cent of $2 billion went into offsetting property taxes New Jersey's taxes would be the country's second highest!!

Moreover, the candidates are only talking about a gradual phase-in of new spending, so, after five years, the $1 billion or $2 billion would be an even smaller percentage of New Jersey's all-in property tax burden than it is now.

I cannot calculate what the tax reductions would theoretically be for every town in NJ because it would be too time-consuming for me to pull together the SFRA deficit data and all-in taxes, but these are what the tax reductions would be for 30 largest towns in New Jersey if every currently-underaided district got its Uncapped Aid and every dollar of new aid went to offsetting taxes, not new spending.

For Spreadsheet, see

If SFRA were funded at Uncapped Aid levels and all new money that districts got went into tax reduction, some communities, like New Brunswick (-51.5%), Bayonne (-30.5%), Clifton (-17%), Paterson (-23%), and Newark (-32%) would get significant tax reductions.

But at Uncapped Aid, the reductions are not large for middle-class communities in percentage terms.  Edison would get a 3.3% tax reduction.  Cherry Hill would get a 7.1% tax reduction.  Franklin Township would get a 2.4% tax reduction.  Union Township would get a 4.2% tax reduction.  Wayne would get a 1.7% tax reduction.

You might notice that most of the towns with the biggest reductions of taxes are Abbott districts.  This, again, is because SFRA is not intended to be a broad-based distribution of state aid.  SFRA, by design, targets nearly all of the state's money at poor districts and the Aid Caps give more money to districts who already get a large amount of aid, so if SFRA were gradually funded with the Aid Caps intact, non-Abbotts would get trivial increases that would almost surely be consumed by spending.

(As you, Dear Reader, might know, several of the towns here, such as Jersey City, Brick, and Toms River, are overaided.  Since frontrunner Phil Murphy opposes redistribution, I have assumed that they will have constant aid and used that in the chart.)

If we look at districts who are the most underaided (in percentage terms), the tax reductions are not consistent.

Clifton, for instance, would be able to lower its taxes by $48 million, or 17%. Woodbridge would be able to lower its taxes by $54.5 million, also 17%. Chesterfield could lower taxes by $3.8 million, or 19%.  Ridgefield Park could lower its taxes by 32.5%.  Bound Brook could theoretically reduce taxes by 69%.

On the other hand, Passaic Valley would theoretically get a 1.1% reduction. South Orange-Maplewood would get a 3.7% reduction.  Monroe a 3.3% reduction.  North Arlington a 9.7% rededuction.

Note: These Reductions are for UNCAPPED AID, even though no gubernatorial candidate in either party is committed to full funding at Uncapped Aid.

The reductions in property taxes would tend to be larger for districts who are the most underaided in dollars per student (since they would tend to be the most underaided in dollars per resident too), but my point is to show how little tax relief SFRA actually offers most districts, so I'm focusing on one category of severely underaided districts.

3.  Boards of Education Will Spend Much of Their New Money

Most of New Jersey's most underaided districts are also officially below Adequacy or feel that their spending is too low even if they are technically above Adequacy (eg, Cherry Hill and South Orange-Maplewood are above-Adequacy districts with chronic budget cuts.).

So, if a district gained money from the state, it's a near-certainty that much of that money would go towards new spending, not tax reduction.  I would not be shocked if the NJEA wrote something into any aid reform that requires new spending and limits a district's ability to cut taxes.

Also, once new  teacher contracts are negotiated, unions will put more pressure on Boards of Education to agree to larger settlements since they now know that their Board of Education has more money to spend.

4.  No Gubernatorial Candidate is Purporting to Fully Fund SFRA at Uncapped Aid Anyway

Of the gubernatorial candidates, I'm not certain that any one of them other than Jack Ciattarelli and Ray Lesniak understand that there is a difference between Capped Aid and Uncapped Aid.  Jim Johnson and Phil Murphy are particularly egregious in insisting the deficit is only $1 billion.

What frontrunner Phil Murphy is saying he will eliminate corporate tax incentives (yeah right) and pump another $1 billion into state aid over a number of years. I assume Murphy would accept changes to the State Aid Growth Limits and use a new mechanism to determine new aid, but still, we are not talking any real relief from state aid since $1 billion is so tiny compared to what New Jersey's all-in property tax burden will be in four years, so few districts will see the bulk of that money, and much of the money will be spent anyway.

To Lower Taxes, New Jersey Must Address the Cost of Government for Everything, but Especially for Education

Articles about why New Jersey property taxes are high seldom get into just how high New Jersey's education spending is, but it is consistently the 2nd or 3rd highest in the country in dollars per student and it is even the 2nd highest in the country in terms of spending as a percentage of GDP.

According to the far-left Education Law Center itself, New Jersey spends 4.6% of GDP on education, a full point over the national median of 3.6% of GDP.

This tax effort translates into one of the country's lowest student:teacher ratios and among the highest paid teachers.

According to the NEA, the average New Jersey teacher makes $68,238. not counting pensions and other benefits, the fifth highest in the US, behind New York, Massachusetts, California, and Connecticut.  Even when you account for differences in local salary conditions, New Jersey teachers only drop into 7th place.

What puts New Jersey's school spending and taxes above its peers in high salaries is how many more teachers we have.

The national average for student:teacher ratio is 15.8:1, but NJ's ratio is the third lowest, at 11.9:1, after Vermont and New Hampshire.  

The four states who have higher teacher salaries than New Jersey have fewer teachers.  New York has a 12.7:1 student:teacher ratio, Massachusetts has a 13.3:1 ratio, California as a 22.5:1 student:teacher ratio (!!!), and Connecticut has a 13.1:1 student teacher ratio.

Hence, high salaries x many teachers = extremely high spending.

The same pattern exists for other public employees.

New Jersey police officers are the second highest paid in the United States.  We are not the highest in police officers per capita, but are in second place in the Northeast.  New Jersey firefighters are the country's best paid.

Municipal Consolidation Won't Bring In Big Savings

The closest that the candidates come to in addressing New Jersey's high cost of government is calling for (voluntary) municipal consolidation and shared services.

This is based on the premise that New Jersey has an inordinate number of local units, but this is only true in terms of units per land area.  In per capita terms, the number of local units New Jersey has is only average.

And when it comes to spending per resident, New Jersey's large municipalities spend the same amount as New Jersey's small municipalities, so I am unpersuaded that consolidation and shared services would save that much money anyway.

Fair State Aid Is Necessary But Not Sufficient

So it's good that the gubernatorial candidates are focusing on state aid a _a_ solution to New Jersey's property tax crisis, but fairly funding SFRA would only even out some tax disparities, it would not produce low or even moderate taxes for anyone.

To begin to address New Jersey's tax burden, policy makers have to look at the spending side, especially public sector staffing, salaries, and benefits, as well.

---Extra Note---

What is Capped Aid?  What is Uncapped Aid?

SFRA contains two concepts of "full funding."  The first concept is Capped Aid, which is funding by SFRA's currently statute.  Under Capped Aid, districts gain 10% if they are above Adequacy or 20% if they are below Adequacy from the year previous, with 2007-08 as the base year.  This means that if a district is receiving $20 million, but SFRA says it needs $50 million, the most money it can gain is 20% of $20 million, or $4 million.

The second concept of full funding is the real thing, ie, Uncapped Aid.  That would entail the hypothetical district getting the full $50 million.

For New Jersey to fund SFRA at Capped Aid would require an additional $1 billion.  For New Jersey to fund SFRA at Uncapped Aid (without redistribution) would cost $1.93 billion for 2016-17.

There are several significant flaws in the design of the Aid Caps, chiefly that they are a percentage of the aid a district already receives.  This percentage-determined mechanism means that districts who already receive a lot of state aid, but are modestly underaided, receive the biggest boosts.

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