Seven State Aid Predictions for the Murphy Era

New Jersey is only one month away from the inauguration of Phil Murphy as governor. 

Murphy has never held elective office before and he typically avoided talking about the details of state aid during most of the campaign.

Most of Murphy's opinions on the details of SFRA are unknown.  Murphy has said he supports "tweaks" to SFRA, but never explained what that means.

However, the stances of people in Murphy's circle, like Sheila Oliver, as well as constituencies within the Democratic Party, are known.

My predictions are based on what Democratic constituencies and Sheila Oliver have said.

Prediction 1: $200-$300 million in Adjustment Aid will be redistributed. 

Basis: Phil Murphy said this at a town hall in Maplewood, NJ and again in a televised forum with Tom Moran. It is budgetarily necessary as well.

• Sub-conjecture: There will be some complex mechanism of cutting Adjustment Aid. The districts to lose Adjustment Aid will be ones who are above Adequacy and/or severely under Local Fair Share.
• Basis for Belief: The Education Law Center, which is NJEA funded, only (with extreme reluctance) accepts the loss of Adjustment Aid to above Adequacy districts.  Politically it will be necessary to cut Jersey City's state aid, since it taxes at one-third of Local Fair Share, but is below Adequacy.  

A few Adjustment Aid districts do not have the capacity to pay higher taxes and East Orange is one of them (the EOPS is overaided by $22.5 million, but the town has a 4.638 all-in tax rate, so making up that money will local taxes would be impossible). East Orange is Sheila Oliver's home.

The Education Law Center only wants districts that are below Adequacy to receive additional state aid "State aid increases must be directed to under adequacy districts" but this is such an extreme stance and contrary to what the legislature will want that I don't see Murphy completely denying over-Adequacy districts.

On the other hand, I would not be surprised if under-Adequacy districts get larger percentage state aid increases, which is what SFRA already calls for.  Underaided districts that are nonetheless above Adequacy due to their own high taxes, like Cherry Hill and West Orange, may not receive very much new aid.

Prediction 2: The Distribution PILOT Revenue Will be Changed So that the Money is Apportioned in the Same Way Regular Taxes Are:

Basis: This is something Steve Sweeney wants to see happen, it is something many Republicans (like Mike Doherty) want to see happen, and there isn't anyone visibly opposing this change. Even Steve Fulop of Jersey City is willing to let the Jersey City public schools have 10% of PILOT revenue (instead of 25% of regular taxes)

NJ's Urban Mayors Association met in November 2017 and endorsed this.

At present, 95% of PILOT revenue is given to the municipality and 5% goes to the county.  The local public schools get 0%.

Prediction 3: There will be an Attempt to Reduce Local Fair Share for Districts with High Municipal Taxes:

Basis: It makes fiscal sense, it would satisfy the powerful urban constituency within the Democratic Party, and it an Education Law Center demand.

EG, here is the Education Law Center's demand "Lawmakers must consider providing relief for school districts facing municipal overburden. These districts have high tax rates, but low rates of local school funding due to the high costs of other municipal obligations."

I agree that some urban districts have municipal taxes that are too high to allow them to meet their Local Fair Shares. New Jersey's average municipal tax rate is 0.694, but Newark's muni rate is 1.642, Trenton's is

A town like East Orange cannot pay
its full Local Fair Share.

3.329, Paterson's is 2.578, Elizabeth's is 2.206. East Orange's muni rate is 3.353, which is one of the highest in New Jersey.

It isn't a surprise then that these districts have school taxes that are so far below Local Fair Share. Newark's tax levy is $45 million below LFS, Trenton's tax levy is $16 million below LFS, Paterson's is $51 million below LFS, Elizabeth's is $36 million below LFS, East Orange's is $20 million below LFS.

IMO, factoring in municipal tax rate into the calculation of Local Fair Share would create an incentive to have high muni tax rates.  A fairer solution would be to condition Local Fair Share on a place having a low-income, since that is outside the control of politicians.

Prediction 4: The state will increase its reimbursement of districts for their charter students.

Basis:   Sheila Oliver does not like the principle of "money following the child" and neither does the NJEA.

In August 2017  at a forum with Randi Weingarten of the AFT Oliver said:

Oliver reaffirmed her support for [traditional] public schools. 

“The expansion and growth of charter schools has hurt our public schools,” she said. “We will make sure that our public schools will be front and center on our agenda.” 

Oliver said that although she embraces all kinds of schools, funds should not be diverted away from public education. 

“We can’t take funds out of district budgets to support them," she said.

If "we can't take funds out of district budgets to support" charters, then charters ought not to exist or districts should be double-funded for charter students.

Oliver has also said "What I am vehemently opposed to is using the money that goes to our public school system to support charters."

The NJEA does not appear to want "money to follow the child" either.  If a child goes to a charter school, the NJEA wants at least a portion of that money to stay in the residential district.

The NJEA has been a little more vague though, but it has demanded some change.

“NJEA has consistently supported the proposal by Assembly Speaker Vincent Prieto to gather the appropriate stakeholders to develop a plan to transition back to the current funding formula. In addition, we have called for that group to study the funding mechanism for charter schools, as the current mechanism is causing drastic program cuts in the districts from which charters draw their students.

And:

New Jersey should follow a similarly thoughtful and deliberative process for reviewing the current aid formula and recommending reasonable adjustments. That should include an honest look at the adverse financial impact that charter schools have on host district schools and ways to alleviate that harm.

Even the Christie administration has sent extra state aid to districts with growing charter school populations through a unilaterally-created aid stream called "Host District Stabilization Aid," a $27,653,005 expense for 2017-18.

If funds aren't leaving district budgets for charters, then the students have to be kept in districts or the state has to reimburse districts for their charter transfers.

It's also possible that we will see the Department of Education give money directly to charter schools rather than route that money through local school districts.  This might relieve some tension between traditional public schools and charters, but it would be a gimmick in terms of any real budgetary assistance since now school districts would have less money to begin with.

Prediction 5: SFRA will move away from the Census-weighting for Special Education Students in the Calculation of Equalization Aid.

Basis for Belief: It's superficially common sense. Even some politicians already want to do it.

It's a benign demand by the NJEA:

Blistan also highlighted the plan’s commitment to providing relief to districts that have been harmed by the current approach to special education funding. 'Districts should be not be punished for providing students with the special education resources they need. This approach will bring fairness to districts while continuing to meet the needs of students,' said Blistan, who is also a special education resource center teacher in Washington Township.

At present, NJ assumes that every district has 14.69% of its students classified, when everyone knows that classification rate would vary, like all populations vary.

The Department of Education opposed using Census weighting during the Corzine years and Christie years for seemingly sincere reasons, but that may change under Murphy.

Unfortunately, changing the calculation of Adequacy Budgets in Equalization Aid is meaningless as long as the overall distribution is out-of-whack and the state cannot come up with the additional money to fund it.

So this is like renovating the kitchen in a house that is falling into a sinkhole anyway.  

Prediction 6:  There will be a Loosening of the Tax Cap

Basis: Steve Sweeney's state aid reform commission proposed some amendment to the cap, presumably to allow aid-losing districts to tap their tax bases.

The NJSBA supports loosening the cap to allow automatic tax authority to districts with high Out of District tuition costs.

Prediction 7: The State will Expand PreK Disproportionately

Basis: It's something the Democrats all say they want to do and there are well-funded lobbies in place to support PreK expansion, with support from VIPs like Jim Florio and Tom Kean.  From 2011-2016 basically all Democrats in the legislature were more interested in PreK than K-12. 

In a Zero-Sum Budget Enrivonrment, PreK Expansion
Comes at the Expense of Everything
Else

Although Steve Sweeney is more sensitive to New Jersey's tax stress and indebtedness than most other Democrats, PreK expansion is something he strongly supports nonetheless.

Children who attend preschool see greater achievement than their peers and are less likely to drop out. Pre-K is vital for kids to reach their maximum potential, and we are committed to continuing to increase funding for pre-K.

— Steve Sweeney (@NJSenatePres) December 11, 2017

I say the PreK increases will be "disproportionate" because the increases will be much larger percentage-wise for PreK than K-12 education.  NJ's PreK funding was going to be $655 million for FY2018, but the legislative Democrats got it a $25 million increase, or 3.8%.  The legislature's (net) last-minute increase for K-12 aid and Extraordinary Aid was only $125 million, a 1.6% increase.

The Wild Cards

1.  The Republican tax plan.

If the SALT deduction is capped at $10,000 per taxpayer and the Mortgage Interest Deduction is capped at $500,000, real estate values in middle-class and affluent suburbs will decline by perhaps as much as 10%.  

If real estate values fall, then it would reduce those towns' Local Fair Shares and SFRA would, in theory, send them more Equalization Aid.

NJ already has a severe outmigration problem and its suburbs are already in decline, but the capping of the SALT deduction would likely accelerate those trends.

See: "They're Staying Away in Droves."

2. The Janus decision

Mark Janus, Illinois Child Care Specialist &
Petitioner in Janus v AFSCME

In June 2018 the United States Supreme Court is expected to rule that mandatory agency fees for public workers are unconstitutional as "compelled speech" and a violation of the principle of free association.

This means that NJ's public sector will become right-to-work and the 20-30% of teachers and other staff who are discontented with the NJEA can stop paying dues. At a 30% dropoff, that would mean a loss of $40 million out of the NJEA's $140 million budget. (see this for NEA affiliate financial resources)


Since NJEA dues will now be voluntary, the NJEA will have to invest more of its remaining money into membership retention and keep dues lower so that more members do not quit. At present NJEA state-dues are $897 per full-time teacher, plus a few hundred dollars more for the national organization, county organization, and local organization.

The NJEA will still be very powerful even if 30% of members leave, but it will not be colossus it is now and the Democrats may have more latitude to side with taxpayers and not the NJEA and other unions.

How Maryland Does It: How Another Deep-Blue State Has Much Lower Property Taxes than New Jersey

Every once in a while I meet an advocate for school district consolidation in New Jersey who uses Maryland as a beacon state for us to emulate, since Maryland's schools are just as high-performing as New Jersey's, less segregated, and significantly lower spending (and taxing).

Indeed.  All of that is true.

If you could magically transport your typical New Jersey house to Maryland, your property taxes would fall from $8,477 to only $3,437.  Your other taxes would be lower too: Maryland's sales tax is 6% compared to our 6.875%.  Maryland's corporate tax is 8%, instead of 9%, too.

For state and local taxes combined, Maryland takes in less than New Jersey.  Maryland's taxes equal 10.9% of income, whereas New Jersey's taxes equal 12.2% of income.  To put it in terms of dollars per capita, Maryland's state and local taxes are only $5,920 per person.  New Jersey's are $6,926.  (see Table 2; corroboration E-1 to E-4)

Paradoxically, you get more for your taxes in Maryland for some services.  If your kids went to a public college they'll have less debt than their peers in NJ, since Maryland's public higher education system gets 42% more money per capita than New Jersey's.  Maryland lets people take out 529 profits tax-free. If you lose your job, Maryland's property tax "circuit breaker" will reduce your property taxes. You'll have the satisfaction of knowing that your state's bond rating is AAA, so you might feel more confident investing in Maryland too.

So how are Maryland's taxes so much lower?

The most obvious difference between Maryland and New Jersey is that Maryland has only 24 countywide districts whereas New Jersey has 586 town-based districts, but Maryland's school district consolidation versus New Jersey's fragmentation is just the tip of the iceberg as to why Maryland has lower property taxes than the Garden State.

The direct savings of Maryland's district consolidation - ie, less redundancy in administration - are minimal.  It is in the indirect savings created by Maryland's consolidation - ie, less intense interdistrict spending competition - that produce the real savings.

This blog post will look at two under-discussed, and more significant, reasons why Maryland's property taxes are lower than New Jersey's:
1.  Maryland localities have their own income taxes.
2.  Maryland spends 22% less per student.
    a.  That lower spending is across-the-board.
        i.  There are several structural and political reasons for that lower spending.
 
A subsequent post will look at a third major reason:
3.  Maryland gives more state aid to middle-class districts than New Jersey does.

-----------

The source of revenue doesn't make a district higher spending or lower spending, but technically speaking, one reason Maryland's property taxes are lower is because counties have a significant alternative source of revenue.

1.  Maryland Localities Have Their Own Income Taxes

Maryland's average property tax rate is only 1.05, compared to New Jersey's 2.40.  The Maryland jurisdiction with the highest property taxes, Baltimore City, only has a property tax rate of 2.248, which is below New Jersey's average.  The Maryland jurisdiction the lowest property tax rate is Talbot County, which has a rate of 0.547.

New Jersey's property tax average is 2.4.  Irvington, the New Jersey town with the highest all-in property taxes has a 4.9 rate, which is nearly five times Maryland's average. 

Maryland's 1.05 average property tax is a lower tax rate than even the richest towns in New Jersey have.  Millburn's tax rate is 1.8.  Princeton's is 2.0.  Madison's is 1.7.  Franklin Lakes's is 1.5.  Even Hoboken, with its $5.5 million in Adjustment Aid and proportionally small student population, still has a 1.3 tax rate.  The only NJ towns in NJ with property taxes lower than 1.05 are resort towns at the Jersey Shore and wealthy enclaves like Alpine and Harding.


Maryland's county income taxes range from 1.75% to 3.2%, with 3.0%

Source,  pg 28 

as the median.  Baltimore City, mentioned above for its high property tax, has a 3.2% income tax, so you would pay higher local taxes in Baltimore City than you would in most of New Jersey.

On average, Maryland localities get 34.8% of their taxes from income taxes, 53% from property taxes, and then 12% from "other taxes."  (ie, liquor stores)

Aside from Baltimore City, Maryland's property taxes are so much lower than New Jersey's that most New Jerseyans would come out ahead despite the local income tax.  A 3% median income tax is real money, but since Maryland's average property tax is $5,000 lower than New Jersey's, a family would have to make over $166,000 a year before it would pay higher Maryland local taxes than it would in New Jersey, assuming it lived in average-value houses.  Since families making over $166,000 in New Jersey probably live in more expensive-than-average houses anyway and pay higher than the $8,477 average in property taxes, the crossover income point would be higher than $166,000 per year, unless those

families had lived well below their means back in Jersey.

Above, a Montgomery County Liquor Store

Maryland's state income tax brackets are  higher for people at low-incomes, but lower at average to

above-average incomes.

Maryland taxes income $4,000-$100,000 at a 4.75% rate.  New Jersey has lower rates for low income filers, but NJ starts taxing at 5.525% at only $40,000 a year, then 6.37% at $75,000, and then at 8.97% $500,000.

Maryland's top bracket, 5.75%, kicks in at $250,000.  Because Maryland's second-highest and higher brackets are so much lower than NJ's, Maryland collects less in income taxes per capita than NJ ($1,297 p capita versus $1,361 per capita) and Maryland's system is less reliant on its top 1%.

In terms of all state taxes, Maryland captures less than New Jersey, $3,172 per capita versus New Jersey's $3,325 per capita. (see E-12)

How Maryland developed an income tax-based system whereas New Jersey developed a property tax-based system is complicated, but Maryland had a forty year head start on NJ in state income taxes, enacting its own income tax in 1937, whereas New Jersey held out until 1976.  Maryland also enacted a sales tax in 1947, whereas New Jersey didn't enact a sales tax until 1966.

2.  Maryland's Taxes are Lower Because School Spending is 22% Lower than New Jersey's

Maryland's property taxes are lower than New Jersey's because it has local income taxes, but another major factor is that Maryland's PreK-12 schools spend so 22% less per student than New Jersey's. New Jersey's spending is $21,243 per student, compared to Maryland's $16,985 per student, a difference of $4,258 per student.  (see Table F-1)

If New Jersey spent as much as Maryland on PreK-12 schools, we would save $5.9 billion.  At savings at that level, we would have no pension crisis, no NJTransit crisis, no underfunded higher ed, and have enough money left over to lower taxes.

Source, NEA Rankings & Estimates, Table F-1, 2016.
http://www.nea.org/assets/docs/2017_Rankings_and_Estimates_Report-FINAL-SECURED.pdf

Maryland's spending is also significantly lower in terms of spending as a percentage of State GDP.

Source, Figure 3.  "Median" refers to the national median.
https://drive.google.com/file/d/0BxtYmwryVI00VDhjRGlDOUh3VE0/view

Maryland's lower school spending exists despite its cost of living being the same or higher than New Jersey's. 

There isn't a federal ranking of states by cost of living, but many independent organizations put out their own rankings. The respected MERIC ratings rank Maryland's cost of living as higher than New Jersey's. The Council for Community and Economic Research agrees and ranks Maryland higher in cost of living too.

Some sources rank New Jersey's cost of living higher, but the difference in cost of living is not proportional to the difference in school spending.  For instance, the Tax Foundation says that $90.66 in Maryland would only buy $87.34 worth of the same goods and services in New Jersey.  That's a difference, but not something that accounts for a 22% difference in school spending. Giving the closeness in the two states' cost of living, New Jersey's high education spending is due to political-judicial preference, not economic necessity.

Some would consider lower school spending a negative tradeoff, but Maryland's education performance is as high as New Jersey's, despite much lower spending.   Since Maryland's schools perform about as well as New Jersey's (topping Education Week's rankings six years in a row), I would not consider the lower spending a tradeoff except in that Maryland offers less public PreK.

(It's worth pointing out that more Maryland children attend private school than New Jersey children.  Only 85% of Maryland children attend public school, versus 89% of NJ children (see Figure 5)

2a.  Maryland's Spending is Lower than NJ's Across the Board

Many people attribute Maryland's lower spending to having fewer school districts, and thus less administration.

• Maryland has 24 school districts for 874,514 students, or one district per 36,438 students.
• New Jersey has 590 school districts for 1,347,166 students, or one district per 2,283 students.

That's a huge difference and yes, Maryland's administrative spending is lower, but Maryland's spending is lower almost everywhere.

Source: Table 7
https://www.census.gov/library/publications/2017/econ/g15-aspef.html

So Maryland's General Administration is $236 per student lower than New Jersey's.  Maryland's lower General Administrative spending would translate to savings of $328 million, which is a large amount, but only a fraction of the NJ/MD spending difference.

Attributing Maryland's lower taxes to district consolidation and administrative efficiency is correct, but highly incomplete.

The most financially significant difference between Maryland and New Jersey is that Maryland has fewer teachers.  NJ has 112,377 teachers, so a student:teacher ratio is 11.9:1, the second lowest in the US.

Maryland has 60,053 teachers, so a student:teacher ratio is 14.6:1, the 30th lowest in the US.

On top of Maryland having fewer teachers, it pays them less well, at an average salary of $66,456 versus New Jersey's $69,330.

I think the more significant relationship between having big districts is that those districts are socioeconomically diverse, and therefore there are no rich districts like in New Jersey to bid up salaries which middle-class districts end up struggling to match.  IE, Maryland does not have a "Millburn-Princeton Effect."

From an education point-of-view, Maryland's having fewer teachers and then giving those teachers lower salaries is a negative, but from a taxpayer point-of-view, having fewer teachers and lower salaries is a positive. 

i: there are many reasons for MD's lower spending

Why Maryland has lower school spending is a very complex matter, but I think the following are major reasons.

1.  Maryland's teacher unions are less powerful than New Jersey's.

Maryland only gave teacher unions the power to impose agency fees in 2013, and this law hasn't gone into effect statewide because there are counties where too few teachers want to actually join the union to trigger implementation.

New Jersey gave its teacher unions the power to impose agency fees wayyyyy back in 1979.

The newness of mandatory agency fees means that union fees in Maryland have not climbed as high as they have in New Jersey.  In 2014-15 the Maryland State Education Association had a budget of $21.6 million.  By contrast, the NJEA had a budget of $134.4 million.

It is perhaps due to the NJEA's superior power that New Jersey teachers have post-retirement healthcare coverage, which doesn't exist statewide in Maryland.  It is perhaps due to the NJEA's superior power that pensions in NJ are 100% a state obligation, versus a hybrid state-local obligation in Maryland.  It is perhaps due to the NJEA's superior power that NJ pours so much more into PreK-12 education aid than it does into higher education.

2.  Maryland has Far Fewer Students in Out-of-District Placement

New Jersey leads the nation in the percentage of special education students who are in out-of-district placement.  Maryland's placement rate is also above the national average, but barely half of New Jersey's.

According to the most recent data I could find, 0.9% of NJ students are in Out-of-District placement, the highest of all states, versus only 0.47% of Maryland students, which is itself the 6th highest of states.

I do not have data for Out-of-District placement total costs, but the spending difference must be in the hundreds of millions, both for tuition itself and transportation.

Maryland's having large districts may make feasible for districts to create specialized programs for kids that New Jersey's small districts cannot create, however, in Maryland the legal burden-of-proof is on the parents to prove that an in-district program is inadequate, whereas in New Jersey the legal burden-of-proof has been on the district to prove that a program is adequate.

In other words, in Maryland if there is a parent-district special education dispute, the special education program is assumed to be adequate, but in NJ if there is a dispute the special education program is assumed to be inadequate.  Thus, it is very hard for a New Jersey district to win a lawsuit against parents who want their child in a private-school setting.

When a New Jersey district loses special education litigation, the district pays the other side's legal fees, thereby incentivizing the district to accede to the parents' demands before litigation begins.

3.  Maryland does not have a "Princeton-Millburn Effect."

This is the large indirect benefit of having large, diverse districts.

Maryland has many rich towns, but it has no rich districts.  If Maryland's rich towns like Chevy Chase, Potomac, Bethesda, and Ocean City had independent school districts they would surely spend huge amounts of their own money on their own children, but all of those towns are subsumed into big, diverse countywide school districts and therefore they can't spend as much as what Princeton, Livingston, Franklin Lakes, Millburn etc can.

The highest-income school district in Maryland is Howard County, whose median income is $110,238.  That's pretty affluent, but but only 3.1x higher than Maryland's poorest school district, Somerset, whose median income is $35,154.  (see pg 96)

New Jersey has over 40 school districts with a higher median income than Howard County, and our ceiling is closer to $200,000 per year than $100,000.

By contrast, the richest K-12 school district in NJ (by income) is Millburn, whose income is $158,888, an amount that is 5.6x higher than Camden's $28,000.

The richest district in Maryland by tax base per student is Worchester County (on the Atlantic Ocean), but Worchester is only 4.1x richer than Maryland's poorest district by tax base, Caroline County.

Likewise, New Jersey's tax base differential is wider too.  Millburn's tax base per student is 18.6x higher than Camden's, but Millburn's tax base is nothing compared to microdistricts at the Jersey Shore.  Deal, which was cited in the Robinson v Cahill decision as an example of tax rate injustice, has a tax base per student that is 6.5x Millburn's and 121x than Camden's.

Even though Maryland and New Jersey are peers in income on a statewide basis, Maryland has no rich districts like New Jersey has.  One Maryland education expert I talked to said that Montgomery County had more salary competition against Washington, DC than it did against any other county in Maryland. 

In New Jersey, the existence of relatively small, affluent, high-spending districts like Princeton and Millburn has driven up overall education spending through what I will (semi-facetiously) call the "Princeton-Millburn Effect."

(Note: Millburn's spending has always been much lower than Princeton's, even though Millburn is wealthier.)

Residents of New Jersey's affluent districts have several reasons to accept higher taxes.

1. First, high taxes in small towns give concentrated benefit to the children of that town, whereas in Maryland having big districts means that the benefits of high-spending are diffuse and that extra money may even go to high-poverty schools within that county.  
2. Second, many people in high-income districts sincerely believe that high-spending = good schools and good schools= higher property values for that town, whereas in Maryland people would be less likely to believe this due to how large districts are and how diffuse any higher spending would be.

Since New Jersey has stronger interdistrict competition in teacher salaries and school services than NJ, affluent high-paying districts of New Jersey have bidded up salary scales statewide.

Indeed, even in the 1970s, New Jersey's property taxes were larger than all state revenue.  In 1990, before the Abbott II decision transformed NJ state aid, New Jersey's all-in property tax rate was 2.0, a figure I believe was the highest in the US.

The secondary Princeton-Millburn Effect is through compensatory state aid, since the existence of high-spending, affluent districts has forced the state to devote massive amounts of income tax revenue to state aid for the Abbott districts in order to equalize spending with affluent suburbs.  By 2006, 22 of the country's 30 highest spending districts in the United States were Abbotts and New Jersey had a U-shaped spending pattern, where poor, urban districts and affluent towns spent the most.  High-spending in the Abbotts added to other districts' upwards pressure on spending.

4.  In Maryland County Councils and Executives Set School Taxes, Not Boards of Education

Maryland school districts are "dependent districts," meaning they do not have their own taxing authority.

Maryland school districts get their money from the county governments they are part of.  The county council and executive determine how much money the school districts will have, not the Boards of Education.

County councils, I would think, would be more taxpayer-sensitive than Boards of Education are, who see their primary responsibility to do what is best for students, not taxpayers.

----------

Part 2: State Aid

Maryland has lower taxes on its middle-class residents because Maryland's middle-class districts get more state aid than their equivalents do in New Jersey.

State aid is a highly complex subject in which interstate comparisons are tricky.  New Jersey has more streams of indirect aid than Maryland does and New Jersey state aid is badly off-formula.  Part 2 of this series addresses state aid.

NJ's Uneven Fall in Births Foretells Starker State Aid Inequalities, Economic Stagnation

Since the 1980s the number of births in New Jersey has been steadily falling year to year, but not steadily falling place to place.

According to state statistics, The number of births in NJ peaked in 1990, when 123,125 babies were born in the Garden State.  Despite the overall growth in our population,  in 2015, only 102,199 babies were born here, a 17% fall.

The slowdown in births since 1990 has only had momentary and tiny letups since 1990. The number of births falls more steeply during recessions than in times of growth, but it hasn't completely rebound after recessions either.

Update: 99,549 babies were born in NJ in 2019, so the decline has continued.
Without going too far into the causes, I think there are two major ones:
1.  The disproportionate departure from New Jersey of Millennials, who are the largest generation in

Millennials Are Abandoning NJ.

American history.
2.  A cultural trend toward having smaller families in general.

New Jersey's Total Fertility Rate has fallen from 2.09 in 2007 to only 1.8 today, which is the 15th lowest in the United States.

Given that populations grow and shrink exponentially, the decline in the Total Fertility Rate will have accelerating demographic consequences for NJ.  If a society's TFR is 1.8 instead of 2.0, then in two generations it will have 19% fewer children, not 10% fewer.  (81% = 1.8²/2.0²)  Thus, the number of births in New
Jersey should decrease further as the steadily smaller cohorts of children born in the 1990s and 2000s enter their childbearing years.

So, unless there is a massive increase in immigration, the demographic challenge will not end.

(The difference in two generations between 2.09 and 1.8 is 25%.)

---------

As you would expect, the decline in births has been highly uneven.  Since 1990, Sussex County's births have fallen by 49%, from 2,274 in 1990 then to 1,154 per year today.  Warren has fallen by 45%, Hunterdon by 38%, and Monmouth by 30%.

	1990	2000	2015	Change Since 1990	Change since 2000
Ocean	6277	6542	8494	35.3%	29.8%
Hudson	9828	8868	10390	5.7%	17.2%
Cumberland	2348	2026	1958	-16.6%	-3.4%
Gloucester	3538	3178	2805	-20.7%	-11.7%
Passaic	8414	7936	6982	-17.0%	-12.0%
Middlesex	10346	10590	9313	-10.0%	-12.1%
Union	7,653	7,727	6,782	-11.4%	-12.2%
Bergen	10,507	10,897	9,413	-10.4%	-13.6%
Mercer	5077	4672	4027	-20.7%	-13.8%
Atlantic	4,070	3,421	2,936	-27.9%	-14.2%
Camden	8,869	7,028	6,020	-32.1%	-14.3%
Essex	14469	12156	10294	-28.9%	-15.3%
Cape May	1,373	1,043	881	-35.8%	-15.5%
Burlington	5,949	5,186	4,353	-26.8%	-16.1%
Salem	899	811	649	-27.8%	-20.0%
Somerset	4031	4425	3297	-18.2%	-25.5%
Morris	5882	6438	4717	-19.8%	-26.7%
Monmouth	8379	8051	5849	-30.2%	-27.4%
Sussex	2274	1778	1154	-49.3%	-35.1%
Hunterdon	1487	1441	916	-38.4%	-36.4%
Warren	1449	1328	792	-45.3%	-40.4%

The only two counties that have had growth in births are Ocean County and Hudson County, both of which are demographically and educationally unusual.

If Lakewood were excluded from the Ocean County count, Ocean County's number of births would have declined by 12% (there were 4,598 births to non-Lakewood Ocean County women in 2000 but only 4,030 in 2015)

If you know anything about Lakewood, you know that most of the children born to Lakewood-resident mothers will not go to public school.  The increase in the non-public student population will create strain on the Lakewood Public Schools for transportation and Out-of-District tuition, although the strain would not be as much as it would be if those students were enrolled in public schools.

Hudson County's family size is average, but it has a disproportionately large population of people of child-bearing age.  What I see as educationally unusual about Hudson County is that many of the parents there move out before their kids enter public school.

For instance, there have been over 1,000 babies born to women resident in Hoboken for the last five years, but the first grade cohort in Hoboken (charter and public), has about 350 kids.  Likewise for Jersey City - although not as extreme - there 4,300-4,400 babies are born per year, but the first grade cohort there has about 3,000 kids.

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Implications for Public Schools

Due to the fall in the number of births, New Jersey's student population actually peaked in 2005-06 at 1,393,782.  It has fallen now to 1,373,267.

That decline is only 1.6% and may not sound like a lot, but it occurred despite a lower drop-out rate, closings of Catholic schools, and some PreK expansion.  (source, NJ Enrollment Files)

The chart below shows the percentage change in births from 2000 to 2015.

There are many implications of the decline of births for New Jersey's public education system, state aid distribution, and the economy.

1.  The State Aid Distribution Will Become Even More Uneven

As the populations of rural districts fall, their formula aid will decline even more and be replaced by Adjustment Aid.  This enrollment decline will continue to push up the state's total of excess aid, even as the deficit grows for underaided districts.

SFRA, as it was written in 2008, does allow a district to lose state aid if its post-2008 enrollment loss exceeds 5%.  It is likely that more districts will encounter the enrollment loss threshold that allows some aid loss under SFRA's status quo.

Since the state has severe budgetary problems, the huge excess aid totals of permanently shrinking districts will be harder to justify when scores of other districts are severely underaided.

The distribution of PreK aid will also need to be redistribution.

Some districts will need more PreK money, like Hoboken and Jersey City.

 In 2015 there were 1,124 babies born to Hoboken mothers, up from 729 in 2005.  In 2015  there were 4,495 babies born to Jersey City mothers, up from 3,733 in 2005.)

On the other hand, other Abbotts have had a decline in births.  In 2015 Union City mothers only had 954 babies, compared to 1,119 in 2005.  In 2015 Pleasantville moms only had 303 babies, compared to 363 in 2005.

2.  Shrinking Areas Will Continue to Shrink

Consolidating New Jersey's rural counties into superdistricts won't just be a "could do" or "should do," but a "must do."  Cape May, Salem, Hunterdon, Warren already have fewer than 1,000 babies born per year, and Sussex is just 1,154 per year.

These five counties are New Jersey's smallest.

• Sussex's total enrollment is 20,512.00
• Salem's total enrollment is 10,906.50.
• Hunterdon's total enrollment is 19,474.50.
• Cape May's total enrollment is 12,583.00.
• Warren's total enrollment is 16,443.50.
  

And there's more contraction ahead for all of them.

As districts shrink, many will find it difficult to sustain the classes and extracurriculars that most parents think their kids should have.

As shrinking districts shrink further, their per student costs will become even higher.  If these districts actually lose Adjustment Aid, their taxpayers may not be able to make up the difference, since a district's fall in costs is not proportional to the fall in enrollment.

(see "Sussex County Consolidation.")

3.  The State's Economy will Face a Demographic Headwind

Population growth isn't, by itself, a good thing, but it is something that an economy usually needs to grow and is, itself, a sign of economic growth.

New Jersey already has the country's worst net outmigration rate and has 80,000 more people leave the state than it has new arrivals from other states.

As New Jersey has smaller cohorts enter the labor force (and so many young New Jerseyans leave

Source, http://bit.ly/2ib9Zmb.  NCES.

anyway) employers may struggle to find enough workers.  Many employers who contemplate a New Jersey expansion or investment will decide against it, given concerns about the labor supply.

The shrinking population will also harm the economy on the consumer-side, since there will be less aggregate demand, ie, less spending, less household formation etc.  Less aggregate demand equals less sales tax, less corporate tax etc for the Treasury.

New Jersey's unemployment rate should stay low, which is a plus.  Housing prices will be lower than they would otherwise be, which is another plus.  Perhaps an equilibrium will be established by our net outmigration decreasing.

But the state economy will grow very slowly and New Jersey will struggle mightily against its debts until there is a federal rescue or another round of pension cuts.

37% of New Jersey college students already go to college out-of-state.  When the students look back home towards New Jersey in its death throes, it'll be hard to think of a reason to come back.

After more NJ-born college students don't come back, the demographic headwind will become a hurricane.

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State Aid Deficits and Surpluses are Dynamic

The fact that NJ's population continues to grow in some places and shrink in others underscores how dynamic the state aid distribution is.  

Given the continued decline of births in NJ - and outright collapse in some places - the districts in NJ that have lost enrollment over the last few years have not seen the end of it.

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See Also:

• They're Staying Away in Droves, NJ's Outmigration is Really a Lack of In-Migration

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2020 Update.  NJ's birthcount has continued to fall.

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Update for 2022:

Having 21 Fortune 500 Companies Doesn't Mean NJ has a Strong Economy

There are many ways to assess the a location's business climate, such as quality of workforce, quality of life, quality of transportation, access to capital, cost of living, proximity to professional services, litigation exposure, labor laws, and yes, tax rates.

There are many groups who try to rank states by "Business Climate."   CNBC has a very broad based ranking that depends, in part, on economic growth itself.  US News's ranking relies entirely on innovation and entrepreneurship.  Forbes's ranking goes by low costs for things like energy and labor, lax regulations, and then "quality of life" thrown in too.  The Tax Foundation, for its part, has a ranking entirely focused on tax rates.

New Jersey does terribly in the Tax Foundation ranking, coming in 50th place (dead last) for several years in a row.

Jon Whiten, Vice President of the New Jersey Policy Perspective and NJ's most prolific economics commentator, doesn't dispute that NJ's taxes are indeed comparatively high, but he claims that low taxes can't be identified with "good business climate" and our high taxes aren't hurting the state.

To construct an argument that New Jersey's taxes aren't damaging the state and taxes can go even higher, Whiten points out that 21 Fortune 500 companies are headquartered in NJ.  He adds that Fortune 500 headquarters are concentrated in other high-tax states too and that they are relatively absent from the lowest-tax states.

In sum, Whiten says that the presence of 21 Fortune 500 companies here proves that "High-Tax States Are Great Places to Do Business."

The latest update to the annual Fortune 500 list of the largest American companies was released this week, and 21 Garden State businesses made the list. It’s an impressive showing for a state that usually falls to the bottom of misleading national rankings that claim to measure how attractive different states are to business investment. In fact, most of these so-called “studies” are promoted by organizations that are not advocating for a truly stronger business climate but only for lower corporate taxes.

Perhaps the most popular of these rankings is the Tax Foundation’s annual “Business Tax Climate” index. Business lobbying groups in New Jersey and anti-tax lawmakers frequently cite New Jersey’s perennial dismal ranking on this survey as proof that the Garden State’s taxes are stifling business investment and creating a drag on economic growth.

But an interesting trend emerges when one cross-references the Fortune 500 with the “Business Tax Climate” index: The “worst” states in the Tax Foundation’s index have a disproportionate share of America’s largest corporations, while the “best” states hardly have any. ...

In fact, not a single state that ranks in the top 10 of the Tax Foundation’s index has more Fortune 500 companies than New Jersey, which ranks dead last in the index. And the entiretop 10 states, with just 28 Fortune 500 companies, barely have more of these big businesses than the Garden State alone. [Whiten's emphasis]

And then Whiten provides:

While I don't think that tax rates are the end-all-be-all of business climate, neither are they unimportant, and I do see NJ's high taxes creating drag on the economy.  The fact that New Jersey has 21 Fortune 500 headquarters is interesting, but not important when it comes to the real measures of health of our economy.

If having Fortune 500 Headquarters Vindicates High-Tax Economics, What Does Their Absence from South Jersey and Central Jersey Mean?

As Whiten says, is tied for sixth place with Pennsylvania for having the most Fortune 500 companies, after New York (54), Texas (54), California (53), Illinois (36), Ohio (25), and then Virginia (22).

But even if you agree with Whiten and you believe that the presence of Fortune 500 companies vindicates high-tax economics, the distribution of New Jersey Fortune 500 companies exposes NJ's economic weaknesses as well, as well as undermines the NJPP's constant denunciation of tax incentives.

Of the 21 Fortune 500 companies in NJ, all but four are in northern NJ.

NJ's Fortune 500 Companies, 2017
Name & Rank	Location	Founding Year
Johnson & Johnson, #35	New Brunswick	1886
Prudential Financial, $48	Newark	1875
Merck, #69	Kenilworth	1917
Honeywell, #73	Morris Plains	1906
PBF Energy, #172	Parsippany	2008, grew by acquisitions
NRG Energy, #205	West Windsor, Op HQ is in Houston	1992
Cognizant Technology Solutions, #205	Teaneck	1994
Newell Brands	Hoboken	1903
Becton Dickinson, #225	Franklin Lakes	1897
Bed Bath & Beyond, #233	Union	1971
ADP, #240	Roseland	1949
Toys 'R' Us, #244	Wayne	1957 (is now in Chapter 11)
Celgene, #254	Summit	1986, spinoff from Celanese Corp.
PSE&G, #306	Newark	19th century
Avis-Budget, #319	Parsippany	1940s, 1950s
Campbell Soup, #339	Camden	1869
Quest Diagnostics, #366	Secaucus	1967
Ascena Retail Group, #384	Mahwah	1962
Realogy Holdings, #449	Madison	1990s, 2006, Spinoff from Cendant
Wyndham Worldwide, #461	Parsippany	2006, Spinoff from Cendant
Burlington Stores, #463	Florence	1972

Central Jersey has exactly two Fortune 500 headquarters, NRG Energy (actually a co-headquarters) and Johnson & Johnson.  South Jersey has two small ones, Burlington Stores and Campbell's.

There is contrast between the Pennsylvania-side suburbs of Philly and NJ-side suburbs.  The PA suburbs have seven Fortune 500 companies and Allentown has another two. 

Proximity to New York City might be an asset that companies will tolerate high taxes to have, but the farther away a location is from New York City, the less tolerant businesses are of NJ's tax premium.  The tax rates that Whiten defends do unequal damage to NJ; the parts near New York are less vulnerable than outlying regions.

States are artificial entities and the presence of Fortune 500 headquarters means anything, it means something for the five counties in North Jersey alone that host 19 of them, not the entire state.

Also, several of these companies only stayed in New Jersey or came to New Jersey under the tax incentives that Whiten loathes.  Newell came to New Jersey from Georgia after a $27 million award. Honeywell stayed for $40 million, NRG Energy stayed for $37.5 million, Quest Diagnostics stayed for $18.6 million, Burlington Stores stayed for $40 million.  Campbell's and the Prudential might have been bluffing on their threats to leave, but they have got large tax incentives too.

Job Gains Count

But I think counting Fortune 500 companies misses the forest for the trees because most job creation takes place in small businesses, subsidiaries, US branches of multinational companies, back offices, and the headquarters of big businesses that are below the Fortune 500 cutoff.

Even headquarters themselves do not necessarily have many employees.  Only nine of the 21 Fortune 500 companies in New Jersey even appear among New Jersey's 100 largest employers and that includes retailers like Bed Bad & Beyond and Toys 'R' Us and service employees at Quest Diagnostics.  NJ's biggest company is Johnson & Johnson, but J&J is down to 9,600 New Jersey employees out of 127,000 worldwide.

If you look at comparative jobs gains from the start of this decade, the lowest-taxed states have done better, so the contention that high taxes are "stifling business investment and creating a drag on economic growth" doesn't seem to be invalidated to me no matter how many Fortune 500 company headquarters high-tax states have.

From Q1 of 2010 to Q1 of 2017:

Source, https://www.bls.gov/cew/datatoc.htm. Jobs include public sector + private sector.
Note, WY, AK, and LA are affected by swings in energy markets.

New Jersey actually does even worse if you look at business creation than it does in overall job gains.  According to the Bureau of Labor Statistics's "Establishment Count," New Jersey only gained 2,260 private-sector businesses from 2010 to 2017 (264,287 to 266,547), or 0.9%.  The US gained 10.9%.

The salary of jobs counts as well, and here NJ does terribly. According to Richard Hughes of the Bloustein School at Rutgers, since the Great Recession NJ has approximately 100,000 fewer jobs paying above-average wages and 135,000 more jobs paying below-average wages.

That's great that Jon Whiten thinks New Jersey is still a "great place to do business" despite its high taxes, but real businesses aren't convinced and there are fewer well-paying jobs here than in the past.


Of course the fastest growing states listed here have advantages other than low-taxes, like lower costs-of-living for non-tax expenses, warmer weather, and right-to-work, but the lack of Fortune 500 headquarters seems to not reflect meaningfully on their economic health, nor does the presence of Fortune 500 headquarters reflect health for New Jersey.

Utah's economy grows by over 3% a year, but it has zero (0) Fortune 500 headquarters.  Utah's economy thrives in nearly everything, including high-salary fields like technology and finance.  I doubt the lack of a Fortune 500 headquarters matters to many people there.

Likewise, I don't think that New York State's 54 Fortune 500 headquarters matters to anyone living in Buffalo, since New York City is a world away from that part of New York.  While Upstate New York might be part of the same state as dynamic, booming New York City Upstate New York suffers from significant economic erosion and population loss.

Despite it having the high taxes that Whiten believes lead to growth, Upstate New York is in permanent decline.  Depending on the year, Upstate New York only has 2-4 Fortune 500 headquarters (Corning, Constellation Brands, newcomer Wegman's, and M&T Bank off-and-on).

If Upstate New York were an independent state, it would have fewer Fortune 500 companies than any other state bordering the Great Lakes.

The Disproportionality is Partly a Coincidence

Whiten is factually correct that NJ and the nine other highest-tax states have dramatically more Fortune 500 headquarters than the ten lowest-taxed states, but then again, this is something you would expect based on the fact that the highest-taxed states's population is 240% as large (102 million versus 42 million) as the lowest-taxed states.  On a per capita basis there is still a disproportionality, but not as wide as the raw-numbers comparison that Whiten uses.

This trend of the ten highest taxed states having a lot more Fortune 500 companies than the ten lowest taxed states is also partly a coincidence created by the Tax Foundation's rankings, because if you look at the next five highest-taxed states and the next five lowest-taxed states, the next five-lowest taxed states have more headquarters than the next five highest-taxed states.

Comparing the Next Five Highest-Taxed and Next Five Lowest-Taxed States (ranking by the Tax Foundation)
	# of Fortune 500 Comps		# of Fortune 500 Comps
Total Ten Highest Taxed	199	Total Ten Lowest Taxed	28
Georgia	17	North Carolina	12
South Carolina	1	Michigan	19
Arkansas	7	Tennessee	11
Wisconsin	10	Texas	54
Iowa	2	Missouri	10
Total Next Five Highest	37	Total Next Five Lowest	106
Total 15 Highest	236	Total 15 Lowest	134

So the next five highest taxed states only have 37 Fortune 500 companies, but the next five lowest taxed states have 106.  To be sure, the fifteen highest taxed states still have more Fortune 500 companies (236) than the 15 lowest taxed states (134), but the gap isn't nearly as wide as between the highest-taxed ten and lowest-taxed ten.

Whiten "Don't even think of cutting taxes!"

Whiten closes his argument with a warning against tax decreases.

The bottom line: Despite the drumbeat of anti-tax groups and politicians, there is a long list of factors – like location, workforce, quality of life and more – that are far more important to most businesses than low taxes. And in a cruel and ironic twist, the more our elected leaders travel down the tax-cutting path, the less money there is to ensure the state is nurturing these far more important assets.

There's a lot to unpack here, but a state can have a good location, good workforce, and a good quality of life without having high taxes.

Location is completely independent from taxes, since states are immobile parts of the North American continent. Raising taxes would not "nurture this important asset" since New Jersey is immoveable.

Contra Whiten, what is mobile is a workforce.  Hence the thousands of New Jerseyans, Illinoisians, Upstate New Yorkers, and Connecticutians who leave every year to get jobs or retire elsewhere.

Of course quality of life counts, but for many workers, quality of life includes the ability to save money for retirement and children's educations, which are better met in lower-taxed states.

The thing that Whiten doesn't like to explain is how New Jersey can already have good schools, already have a good location, already have a highly-educated workforce and yet still have decades of economic underperformance behind it.  

Whiten would probably blame our problems on Christie's neglect of NJTransit, but the parts of New Jersey that are doing the worst - like South Jersey and northwestern New Jersey - don't have train service into New York as it is and New Jersey's economy lagged the nation in the McGreevey-Codey-Corzine years too. 

I agree that NJ is hurt by a high non-tax cost of living and I think Pennsylvania's own stagnation is evidence that taxes aren't the end-all-be-all of business climate, but I find it hard to believe based on NJ's recent economy history, polls of business owners about taxes, and my own anger at our sky-high taxes, that taxes aren't stifling economic growth in this state.

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See Also:

• NJ Lags the Nation in Every Economic Sector
• New Jersey and Its Neighbors's Job Growth, County by County
• The Economy and Abbott, What the NJPP Missed in New Jersey's Fiscal Disaster