Forecasting 2019-20 State Aid

We won't know what Phil Murphy's state aid numbers are until March 7th, and those numbers will be subject to amendment by the legislature anyway, but I wanted to attempt to make a forecast for 2019-20 state aid now and demonstrate the continuing necessity of redistributing Adjustment Aid.

Background:
The 2018-19 Deficit:

For 2018-19 Phil Murphy and the legislature increased K-12 funding by $351.4 million and redistributed $32.1 million of Adjustment Aid, for a grand total increase of $381 million for the underaided districts.

Despite this $381 million increase, the deficit for the 370 underaided districts of New Jersey only fell from $2 billion to $1.75 billion, a fall of $250 million.

The decline in the deficit being so small is due to the fact that SFRA recalculates state aid every year and the deficit grows annually due to the combination of inflation, tax base erosion in certain underaided districts, and enrollment increases in certain underaided districts.

I cannot forecast how much increase will be due to enrollment increases and tax base erosion, but just to keep up with inflation alone, state aid for 2019-20 would have to increase by 2.9% of the $6.24 billion that underaided districts got in 2018-19, or $180 million.

The 2019-20 Revenue Growth Estimate:

K-12 opex  state is is overwhelmingly funded from income taxes, ie, the "Property Tax Relief Fund," but with a small assist from .5¢ of the sales tax.

The NJ Lottery is now owned by the pension funds too (including TPAF) and the lottery money flowing into the pension funds reduces the amount of money that NJ has to contribute to TPAF.

For FY2019, the Treasury's projection was that the income tax would bring in $16 billion, which is a 5.4% increase or $824 million increase over FY2018.

That 5.4% or $824 million increase includes $280 million from increasing the income tax to 10.75% for incomes over $5 million.  Without the top bracket income tax increase to 10.75%, NJ's revenue increase would only be $544 million.

Overall, it would not be reasonable to expect a 5.4% gain in the income tax for FY2020 unless there is another income tax increase.  

Through December 2018 New Jersey's revenue badly lagged projections anyway, but assuming that collections rally in the second half of FY2019 and we do pull in $16 billion anyway (unlikely), we can make the following estimates for what New Jersey's new income tax revenue would be.

FY 2020, NJ Income Tax Growth Scenarios
If the increase is 3%...(this is unlikely)	+ $480 million
If the increase is 4%...	+ $640 million
If the increase is 5%...	+ $800 million
If the increase is 6%...(this is unlikely)	+ $960 million

New Jersey is a Debtors Prison:

As I've said a million times on this blog, the real reason opex state aid is underfunded in New Jersey is because we are disastrously indebted and the bulk of revenue growth must go into the severely underfunded Teachers Pension and Annuity Fund (TPAF), plus other streams of education-related spending which are not K-12 opex aid, such as Post-Retirement Medical Care, Whitman-era Pension Obligation Bond debt servicing, school construction debt servicing, and Teachers Social Security.

For FY2019 New Jersey increased funding for the debt streams by the following amounts:

• Teachers Pension and Annuity Fund  +$392.5 million
• Post Retirement Medical +$51.8 million
• Pension Obligation Bonds +$17.6 million
• School Construction Debt Servicing +$148.3 million
• Teachers Social Security +$16.3 million

Grand Total of Increases for Above Items: $626.5 million

The increases for FY2018 were similar, except there was a much smaller increase for School Construction Debt service that year and modestly larger increases for TPAF and Post-Retirement Medical.

Anyway, as you can see, assuming that New Jersey increases by $600 million the above spending streams and NJ's revenue grows by ~5% there will be very little left over for K-12 opex aid (unless the state also passes additional tax hikes).

Other Discretionary Expenditures of the "Property Tax Relief Fund"

The Property Tax Relief Fund also funds Extraordinary Aid, school construction debt service, direct tax rebates, municipal aid, community college funding, and PreK.

We have no idea what Phil Murphy will want to do budgetarily with those expenditures, but if Murphy does increase their funding, it will reduce the amount of money available for K-12 opex aid since New Jersey's budget is zero-sum.

For FY2019 Phil Murphy increased PreK by $57.6 million and he talks about PreK often, so we should expect another sizable increase for PreK funding.

Since Extraordinary Aid got a $0 increase in FY2019 and municipal aid only got a minuscule $12 million increase, I'd be surprised if we saw such tiny increases again.

New Jersey Must Redistribute Adjustment Aid 

Based on S-2, 13% of 2017-18 Adjustment Aid is supposed to be redistributed.  Since some districts' Adjustment Aid is protected, the amount will be 13% of $600 million, or about $80 million.

Since New Jersey cannot fully fund the underaided districts through new revenue alone due to slow revenue growth and rapid debt-servicing growth, it is critically important that redistribution be implemented or else the underaided districts will get never get near full funding.

---

• "New Jersey = Debtors' Prison: The 2017-18 Budget"
•  New Jersey Underfunds Higher Education
• "Tentative Reaction to Murphy FY2019 Budget Proposal"

Actual Enrollment versus Weighted Enrollment for NJ School Districts

SFRA wonks reading this already know that SFRA is a "weighted aid formula" which sets higher spending targets for districts with more at-risk students than it does for districts with fewer at-risk students.  Thus, a district with more high school students, more students who are Free & Reduced Lunch eligible, and more students who are English Language Learners will have a higher Adequacy Budget than a district where the students are uniformly middle-class and Anglophone.  SFRA wonks know that SFRA also uses "exponential weighting" for at-risk students, which means that there are additional added weights for at-risk students who attend a district that is 40-60% FRL-eligible and a higher weight still if a district is over 60% FRL-eligible.

If you're curious about what the weights actually are, the 2016 Education Adequacy Report provides them.

Background:

SFRA uses its weighting formula to create an "Adequacy Budget" for a district, ie, the amount a district should spend in order to provide a "thorough and efficient education."

Under SFRA, if a district's tax base is insufficient to meet its Adequacy Budget, the district receives Equalization Aid to make up the difference under the formula.  SFRA's term for a district's tax-levy capacity is "Local Fair Share."

Hence, a district like Asbury Park, whose students are  over 90% FRL-eligible, has an actual enrollment of 2,168, but a "weighted enrollment" of 3,563.  Freehold Boro has an actual enrollment of 1,673 and a "weighted enrollment" of 2,503.

On the other hand, a district with middle-class or affluent students will have a much weaker weighting.  North Caldwell, an elementary-only district whose students are very affluent, has an actual enrollment of 651 and a weighted enrollment of 655.   Chesterfield, another elementary-only district, but which is more middle-class than North Caldwell, has an actual enrollment is 770 and its "weighted enrollment" is only 788.

After calculating a district's Adequacy Budget and separately calculating the Local Fair Share, SFRA applies this formula to calculate Equalization Aid, the most important stream of aid:

Equalization Aid = Adequacy Budget - Local Fair Share.

Anyway, if you've ever wondered what your district's weighted enrollment is or how high the weighting can inflate a district's enrollment, this Weighted Enrollment Spreadsheet gives you your answers.

The following districts whose enrollments are inflated the most through the "weighted enrollment" process.

District	Projected Enrollment	Projected Weighted Enrollment	Percentage Difference	Abbott?
ASBURY PARK	2,168	3,563	164.3%	Yes
UNION CITY	12,363	20,118	162.7%	Yes
EAST NEWARK	348	564	162.1%	No
ATLANTIC CITY	6,723	10,876	161.8%	No
PASSAIC CITY	14,235	22,960	161.3%	Yes
PLEASANTVILLE	3,546	5,677	160.1%	Yes
PLAINFIELD	10,252	16,362	159.6%	Yes
TRENTON	15,161	24,168	159.4%	Yes
BRIDGETON	5,923	9,441	159.4%	Yes
LAKEWOOD	5,997	9,558	159.4%	No
LONG BRANCH CITY	5,104	8,111	158.9%	Yes
DOVER TOWN (VICTORY GARDENS)	264	419	158.7%	No
PERTH AMBOY	10,388	16,457	158.4%	Yes
PAULSBORO	1,057	1,674	158.4%	No
ELIZABETH	26,158	41,389	158.2%	Yes
NEW BRUNSWICK	9,962	15,748	158.1%	Yes
MANCHESTER REG.	871	1,375	157.9%	No
CITY OF ORANGE TWP	5,247	8,266	157.5%	Yes
WILDWOOD CITY	717	1,125	156.9%	No
WOODLYNNE BORO	568	891	156.9%	No
NEWARK	51,896	81,253	156.6%	Yes
WEST NEW YORK	7,719	12,084	156.5%	Yes
IRVINGTON	7,739	12,111	156.5%	Yes
CAMDEN CITY	15,512	24,255	156.4%	Yes
PATERSON	28,716	44,855	156.2%	Yes
LINDENWOLD BORO	2,753	4,295	156.0%	No
DOVER TOWN	2,889	4,490	155.4%	No
HARRISON (Hudson)	2,138	3,314	155.0%	Yes
GUTTENBERG	1,333	2,061	154.6%	No
BOUND BROOK	1,765	2,711	153.6%	No

-----

2021 Update:

• Civic Parent lays out the details of Weighted Student Enrollment.
• 2020 Education Adequacy Report Drives Big Changes to State Aid

In Five Years Jersey City Will Be Ineligible for Equalization Aid

Over the last 10-15 years, the only part of New Jersey that has outperformed the national economy has been Hudson County, especially Jersey City.

Jersey City's growth is impressive by whatever metric you want to use, from overall jobs to population growth to income growth to real estate valuation.

When Steve Fulop calls Jersey City New Jersey's "economic powerhouse" he isn't exaggerating.

Jersey City and Adjustment Aid:

Jersey City was already overaided by $111 million in 2008 when the School Funding Reform Act became law, but since then Jersey City's wealth growth has made already substantial overaiding enormous, to the point where despite cuts to Adjustment Aid in 2012-13, 2017-18, and 2018-19, Jersey City's Adjustment Aid grew to $170 million.

This growth in wealth created an embarrassment of riches for Jersey City and eventually led to the passage of S2, which intends to phase-out all of Jersey City's Adjustment Aid at the 2018-19 level.

The Jersey City political establishment originally fought very hard against phasing-out Adjustment Aid by hiring lobbyists, getting Vincent Prieto to block reform, getting the Education Law Center to write a disgracefully out-of-context report about Jersey City's Adjustment Aid, and blatantly playing the Race Card, but eventually Jersey City yielded.  One of Jersey City's State Senators, Sandra Cunningham was actually constructive in the passage of S2 and even was listed briefly as a co-sponsor. For their parts, the other Jersey City reps were passive.

In April 2017 Steve Fulop declared that in the future Jersey City will share PILOT revenue with the school district.  In November 2018 Jersey City City Council passed a 1% payroll tax that is expected to provide $70 million to the Jersey City Public Schools.

Jersey City and Equalization Aid:

Amidst the battle over Jersey City's Adjustment Aid, something that has not been commented on is that Jersey City's tax base growth is strong enough that it is on its way to not even qualifying for Equalization Aid. Jersey City media and political class seem to understand that Jersey City is going to lose Adjustment Aid in five years, but there is no recognition that beyond that Jersey City is going to eventually lose another $191 million.

The reason for this looming loss is that Equalization Aid is a dynamic stream of aid that brings a district's spending up to whatever its Adequacy Budget is under the simple formula:

Adequacy Budget - Local Fair Share = Equalization Aid 

So, if a district's Adequacy Budget grows due to enrollment growth, Equalization Aid grows.  If a district's tax base decreases, then Equalization Aid grows too.

Conversely, if a district's Local Fair Share becomes larger than its Adequacy Budget, its Equalization Aid becomes $0.  260 districts in NJ are already ineligible for Equalization Aid.

For Jersey City, the 2018-19 Equalization Aid arithmetic is:

$590,163,255 - $398,895,043 = $191,268,212 

What these numbers mean is that when Jersey City's Local Fair Share equals $590,163,255, its Equalization Aid becomes $0.

For 2018-19, Jersey City's Adjustment Aid is $170 million.  S2 already establishes a phase-out of this. Assuming Jersey City's tax base grows, Jersey City will have to raise its tax levy by another $191 million after that.

The $191 million in Equalization Aid is down from $277.6 million in 2008-09.   Due to the constant growth of Jersey City's Local Fair Share, this Equalization Aid will soon go to $0.

How Quickly is Jersey City's Local Fair Share Growing?

Local Fair Share is determined by the following formula:

0.7% of Equalized Valuation + 2.3% of Aggregate Income

(note, the multipliers are tweaked annually)

As you can see below, both components of Local Fair Share are showing rapid growth in Jersey City, especially in the last few years.

Unfortunately Aggregate Income is not released publicly. I've gotten Aggregate Income for the 2016-17 to 2018-19 School Years via OPRA requests.
Also, note that a district's Equalized Valuation is from the previous year and Aggregate Income is from two
previous years.  The Local Fair Share for 2018-19 is based on
EV calculations done in 2016-2017 and Tax Year's 2015 Aggregate Income

As you can see, there has been an acceleration of Local Fair Share growth in Jersey City.  From 2008-09 to 2016-17, Jersey City's Local Fair Share only grew from $196 million to $336 million, but in 2017-18 it rocketed to $370 million and in 2018-19 $399 million.

However, growth continues to accelerate.  In the last year Jersey City gained $5.6 billion in Equalized Valuation ($28,418,886,079 to $34,014,551,210).  That $5.6 billion in growth will translate into an an increase of $39 million in Jersey City's Local Fair Share, plus whatever increases comes from growth in Aggregate Income.

Even conservatively projected, Jersey City's Equalized Valuation will reach $50 billion in a few

99 Hudson Street alone may add $1 billion to
Jersey City's Equalized Valuation and $10-$20
million to the Local Fair Share.

years, even disregarding the expiration of PILOTs.

If Jersey City continues to gain an average of $2.7 billion per year in Equalized Valuation and $655 million a year in Aggregate Income, it will translate into a growth of $34 million annually in Local Fair Share, since $2.7 billion in Equalized Valuation equals $19 million in additional Local Fair Share and $655 million equals $15 million a year in additional Local Fair Share.

Combined, that's $34 million a year in additional Local Fair Share, which would be a 5-6 year phase-out of Jersey City's Equalization Aid.

Assuming that there is at least a $20 million gain from the growth of Aggregate Income, Jersey City might be looking at a 3-4 year elimination of its Equalization Aid.

Since Jersey City's 2018-19 Equalization Aid is $190 million and the Adequacy Budget is unlikely to grow faster than inflation (from 2017-18 to 2018-19 Jersey City's only Adequacy Budget grew from $584,758,085 to only to $590,163,255, it will probably take 5 years for the Local Fair Share to equal the Adequacy Budget and for Equalization Aid to be $0.  (See note after the conclusion about the definition of "Adequacy Budget.")

At that point, Jersey City will be in the same club as New Jersey's middle-class & affluent suburbs, as well as Secaucus, Hoboken, and Weehawken.  

The distribution of wealth in the 1980s, where the suburbs were affluent and the cities poor, will be inverted as far as Hudson County goes.

Although the upcoming tax increases will cause Jersey City people some anxiety, the underlying cause is Jersey City's success.  Although Jersey City's tax levy will have to quintuple, the assumption behind these calculations is that Jersey City's Equalized Valuation will soon reach $50-$55 billion.

Once Jersey City's Equalization Aid is $0, there are no further state aid cuts that will occur, and any growth in the Equalized Valuation will  just cause the tax rate to fall further.

When Jersey City's Local Fair Share reaches about $600 million, on a $50-$55 billion Equalized Valuation, it will be a school tax rate of 1.2%-1.1%, which is below NJ's average.

------

Note on Adequacy Budget Definition:

In the context of SFRA, an Adequacy Budget is the amount of money a school district is supposed to have in order to deliver a "thorough and efficient education."

A district's Adequacy Budget depends on its enrollment, the number of FRL eligible students it has, the number of ESL-students it has, and the average costs of its county.

What is confusing is that SFRA actually has two concepts known as an "Adequacy Budget."

The first concept is the "Adequacy Budget for Equalization Aid," which is used in conjunction with Local Fair Share to determine if a district gets Equalization Aid and then how much.

For 2018-19 Jersey City's Adequacy Budget for Equalization Aid is $590 million.

The second concept is "Adequacy Budget for Cap Comparison," which has now become obsolete, but was used in the pre-S2 version of SFRA to determine if an underaided district was eligible for a 10% aid increase or a 20% aid increase.

The "Adequacy Budget for Cap Comparison" includes some spending categories that are not included in the "Adequacy Budget for Equalization Aid."  It is usually 7% higher than the "Adequacy Budget for Equalization Aid."

If you see that JErsey City's Adequacy Budget is $630 million, that is Jersey City's Adequacy Budget for Cap Comparison.

In the context of calculating Equalization Aid, only the Adequacy Budget for Equalization Aid" is relevant.

The Highs and Lows of Local Fair Shares in New Jersey

What do you think should be a "fair" school tax rate for New Jersey school districts?  How about 0.7% of property value?  Or how about 2%?  How about 1.4%?

Well, if you are the School Funding Reform Act (SFRA) your answer is ALL OF THE ABOVE, because Local Fair Shares in New Jersey range from as low as 0.7% to as high as 2%, with a statewide median of 1.42%.

To demonstrate the variation in Local Fair Share another way, how about this real-world scenario?

Secaucus and Lawrence Township (Mercer) both have $4.8 billion in taxable property, so they should have the same ability to fund their schools, right?

Answer: NO.  SFRA assigns a Local Fair Share of $52 million to Secaucus, which would be a 1.1% tax rate, and a Local Fair Share of $69 million to Lawrence Township, which would be a 1.4% tax rate.

And Secaucus compared to Lawrence Township is not extreme either.  Avalon's taxable property is $8.42 billion and Cherry Hill's taxable property is $8.34 billion, but Avalon's Local Fair Share is only $60 million while Cherry Hill's is $136 million.

Why?

The reason SFRA creates such divergent tax rate targets is that the formula for Local Fair Share uses the Aggregate Income of a district's permanent residents in addition to the Equalized Valuation (ie, taxable property), so if a district has little income relative to its Equalized Valuation, it will end up with a Local Fair Share that is a low tax rate.  On the other hand, if a district has a high income relative to Equalized Valuation, it will have a high tax rate.

As for comparing Lawrence Township and Secaucus, Lawrence Township's residents make $1.5 billion, whereas Secaucus' make $808 million, hence Lawrence Township's Local Fair Share is higher despite the two towns having identical amounts of taxable property.  Likewise for Avalon and Cherry Hill.  Avalon's permanent residents only earn $75 million , while Cherry Hill's earn $3.4 billion.  Hence SFRA calculates a higher Local Fair Share for Cherry Hill.

So the divergence comes from the Local Fair Share formula itself!!

(Equalized Valuation x 0.013828828) / 2 + (Aggregate Income x 0.046200477) / 2

Which in simpler terms is:

0.7% of Equalized Valuation + 2.3% of Aggregate Income =

(If you're curious about what your district's Local Fair Share is as a tax rate, see this spreadsheet)

See note at the end of this post for where EV and Aggregate Income come from and what the state does for non-K-12 districts.

To see how the Local Fair Share formula gives divergent tax rates for towns with identical tax bases, consider the following:

If a district is perfectly average in terms of its Equalized Valuation:Income ratio, and has an Equalized Valuation of $1 billion and an Aggregate Income of $300 million (which is near NJ's average ratio of 28.5%), its Local Fair Share will be:

($1,000,000,000*0.013828828+$300,000,000*0.046200477) / 2 =  

$13.8 million per year, which would be a 1.38% school tax rate.  (eg, numerous from Mt Laurel to Paterson to Freehold Regional)

But if another district has an identical $1 billion Equalized Valuation but a lot more non-residential property or second-home property, so that its Aggregate Income is only $200 million, its Local Fair Share will be:

($1,000,000,000*0.013828828+$300,000,000*0.046200477) / 2 =  $11.5 million per year, which would be a 1.15% school tax rate.   (eg, East Hanover, Ocean Township,  Asbury Park, Englewood Cliffs)

On the other hand, if yet another district has the same $1 billion Equalized Valuation, but very little non-residential property and a lot of high-earners, so that its Aggregate Income is $400 million, its Local Fair Share would be $16.2 million, or a 1.62% school tax rate.   (eg, Kingsway Regional, Cherry Hill, Glen Ridge, South Orange-Maplewood)

Every school district in New Jersey must tax all taxable property at the same rate, so the regular homeowners are either hurt by or benefit from the incomes (or lack thereof) of their neighbors.

There are many unintended consequences of using Aggregate Income in the formula for Local Fair Share.  

• If a district is economically diverse, the high-earners will skew Aggregate Income upwards and force middle-income and low-income property owners to have to pay a higher school tax rate.
• If a district has a lot of non-residential property or second-home property, it is already advantaged, but then the SFRA formula adds further advantage to that since non-residential property has no income attached to it and hence a district with a lot of non-residential property will have a lower Local Fair Share.
• Districts that have residents in tax-exempt property or PILOTed property will have higher Local Fair Shares.
• Districts where people live below their means will have higher Local Fair Shares.
• If a district happens to have high-income outliers, it would skew Local Fair Share to an amount unreflective of the average property owner's ability to pay.
• If a district has many people working off-the-books who do not report their income, the Local Fair Share will be lower.

---- The Highest Local Fair Share Tax Targets 

Are Mostly in South Jersey ----

The clearest observation I have of New Jersey's highest Local Fair Share districts is that they are overwhelmingly in South Jersey due to property values there being lower there relative to income than in North Jersey.

Audobon Park and Winfield are owned by tax-exempt mutual housing corporations.
They are not normal towns from the perspective of taxation.

Of the districts in New Jersey whose Local Fair Shares are above the state median (1.42%) and whose Local Fair Share is below Adequacy (meaning that actually the district should pay its full Local Fair Share), there is an overwhelming skew towards South Jersey, specifically the suburbs of Philadelphia.

Lindenwold, Woodlynne, Wenonah, Hi Nella have Aggregate Incomes that are half of Equalized Valuation, and hence their Local Fair Shares are approximately 2%.

County	Number of Districts w/ Above Median Local Fair Shares (and LFSs under Adequacy)	County	Number of Districts w/ Above Median Local Fair Shares (and LFSs under Adequacy)
Camden	34	Mercer	5
Burlington	23	Somerset	4
Gloucester	21	Monmouth	4
Atlantic	12	Passaic	4
Cumberland	9	Morris	4
Warren	8	Sussex	3
Salem	7	Hudson	2
Middlesex	6	Ocean	2
Bergen	6	Hunterdon	2
Union	5

Winfield and Audobon Park are outliers here, but that is because they are highly-unusual mutual housing co-ops that originated as housing for industrial workers in World War II.  Most property in both towns is tax exempt, hence their Equalized Valuations are artificially low.  I do not consider them to be treated unfairly by the Local Fair Share formula.  On the contrary, I think what they are doing is similar to PILOT exploitation and both towns underpay in county taxes.

Winfield, NJ has a 19% all-in tax rate, but
that is
due to it having an exceptional
amount of tax-exempt
property on which people live.

There are also affluent districts among those with the highest Local Fair Share tax rates like Essex Fells, Somerset Hills, and Mountain Lakes, but the full Local Fair Share of an affluent district or high-tax base district is irrelevant because their Local Fair Shares exceeds their Adequacy Budgets anyway.

For instance, Essex Fells' Local Fair Share is $9.2 million, which would be a 1.84% Equalized tax rate, but Essex Fells' Adequacy Budget is only $2.8 million, so Essex Fells would never have to have a $9.2 million tax levy.  Essex Fells' actual tax levy of $4.6 million is thus more than enough for Essex Fells' students and a low tax rate for its residents.

Likewise for Somerset Hills. Somerset Hills' Local Fair Share is legally $62,518,639, but its Adequacy Budget is only $27,095,338, so Somerset Hills' Actual $25.4 tax levy is more than plenty for the district while actually resulting in a low tax rate for Somerset Hills.

It is not only conventionally affluent districts that will never need to tax at full Local Fair Share.  Secaucus' has a lot of non-residential property. 

It is entirely possible that the affluent districts among the highest Local Fair Share tax rates, Saddle River, Essex Fells, Chester, Somerset Hills, and Mendham are on the list due to randomly having ultra-high income outliers living there.

----  The Lowest Local Fair Shares ----

The districts with the lowest Local Fair Share tax rates have an obvious thing in common, which is being at the Jersey Shore.

This tendency is from the fact that residential properties at the Jersey Shore tend to have extremely high valuations, but they are second homes with no permanent income attached to them.  Hence, they only contribute to a district's Local Fair Share through the real estate component of Local Fair Share, not the Aggregate Income component.

The only one of the lowest Local Fair Share tax rate districts that isn't at the Jersey Shore is Carlstadt, which is 74% non-residential.   However, like the Jersey Shore districts on this list, Carlstadt's Local Fair Share is well in excess of its Adequacy Budget and hence it will never need to tax at 100% of Local Fair Share.  Carlstadt's tax levy is only $10 million on a $19 million Local Fair Share.

And this brings me to Brick and Toms River...

Brick and Toms River have aggressively said that SFRA overcalcualtes their wealth and ability to pay

These waterfront
mansions in Brick are worth $2-$5 million,
but if they are second homes, they have no
income attached to them. Hence, Brick's Local Fair Share
is a lower tax rate than what the median town in
NJ's is.

taxes but the OPPOSITE IS TRUE because Brick  and Toms River have second home properties to which no income is attached.

Hence, Brick and Toms River have Local Fair Shares that are below the median.  Brick's Aggregate income is only 22% of its ualized Valuation, so its Local Fair Share tax rate is only a 1.22% tax rate.  Toms Rivers' income is 21% of its Equalized Valuation, so its Local Fair Share would be a 1.18% tax rate.

Neither Brick nor Toms River pays anything near its Local Fair Share anyway.  Both are at approximately 1%, not the 1.2% SFRA recommends.

(See "Property Type Extremes")

---- The Income Crossover Point: Why Having Affluent or Frugal Neighbors Will Raise Your Taxes ----

I do not know why the School Funding Reform Act uses income to calculate Local Fair Share.  County taxes are apportioned strictly by Equalized Valuation.  Taxes in regional school districts are almost always apportioned strictly by Equalized Valuation as well. 

But if New Jersey is going to use income at all, it should use something based on median income, not Aggregate Income, because Aggregate Income is distorted by high-income outliers and there is the unintended consequence of using Aggregate Income is that the more money residents make relative to their housing values, the higher their property taxes are supposed to be.  

In fact, there is an Income Crossover Point where a frugal person or rich person will raise a district's Local Fair Share by an amount greater than his or her taxes.

Based on how Local Fair Share is computed by taking 2.3% of a district's income, the Income Crossover Point is the inverse of 2.3%, which is 43.5x.  

Whenever someone's income is 43.5 times his or her school taxes, he or she will RAISE Local

Note, this only applies if the district is eligible for
Equalization Aid and 240 districts in NJ are not
eligible

Fair Share by a greater amount than what he actually pays in school taxes.  Since Equalization Aid decreases as Local Fair Share increases, frugal and/or rich people can hurt a district financially.  (43.5 = 1 / .023)

Imagine someone pays $10,000 a year in school property taxes and makes over $435,000.  2.3% of $435,000 = $10,000, so for every $1,000 over $435,000 that person earns, his district's state aid is reduced by $23!

Someone doesn't have to be rich to trigger a theoretical loss of state aid, but I'll use Phil Murphy as an example since he is a public figure with a known income and known property taxes, even though Phil Murphy's town of Middletown doesn't receive Equalization Aid.

Phil and Tammy Murphy pay $204,360 in property taxes on their Middletown compound, of which $130,381 is for the schools.  Phil and Tammy Murphy made $7.3 million in tax year 2015, which would increase Middletown's Local Fair Share by $167,900!



Livingston provides the supreme example of Equalization Aid loss since Livingston was the home of David Tepper, New Jersey's richest person whose taxable income was $800 million to $1 billion, which would be 28-34% of Livingston's total.   Although Tepper's house was spacious, it was not extravagant and only had an assessment of $2,155,900, or 0.03% of Livingston's total.

In Tax Year 2014/School Year 2016-17 David Tepper was a New Jersey resident and Livington's Aggregate Income was $3,809,964,019. That $3.8 billion number was used to calculate a Local Fair Share of $139,074,977.

Yet, in 2015 David Tepper moved to Florida and so in 2015/School Year 2017-18 Livingston's Aggregate Income fell to $2,943,567,080, which is actually less income than Livingston had in Tax Year 2013/School Year 2016-17. The departure of one ultra-high-wealth person, David Tepper, thus caused Livingston's Local Fair Share to fall to $123,636,221.

The fall in Livingston's Aggregate Income and Local Fair Share is totally anomalous.  All of the other affluent towns in NJ saw their Aggregate Incomes increase from 2014 to 2015.  We can thus conclude that the fall is entirely attributable to Tepper's departure.

$123 million is still in excess of Livingston's Adequacy Budget, so my point isn't to worry about Livingston itself, but the raise the possibility that if an ultra-high income person happens to live in a small town or a middle-class town, that person will distort the town's Local Fair Share.  What if David Tepper had fallen in love with an historic mansion in a middle-class town and moved there?  What if David Tepper had decided to live in a grand country estate somewhere in rural New Jersey?  Tepper's arrival would have crashed that district's Equalization Aid.  What if David Tepper lived like Warren Buffett in a middle-class house?  

Since a Board of Education cannot tax a rich person's income, it doesn't make sense to use Aggregate Income to calculate Local Fair Share.  

And, If New Jersey ever gets to the point where every district receives 100% of its Uncapped Aid and that principle is followed year to year, New Jersey will develop problems because Aggregate Income & Local Fair Share -- and hence Equalization Aid -- fluctuate year to year.

---- Residential PILOT and Tax-Exempt Property Distortion ----

Another oddity of using Aggregate Income to calculate Local Fair Share is that residents of tax-exempt buildings and PILOTed buildings will have their incomes count towards Local Fair Share, even though their properties are not taxable by a Board of Education.

---- Conclusion ----

New Jersey may not be able to ever have low or moderate property taxes, but at least we should have equitable taxes, in the sense where there is equity between taxpayers in different towns, where people generally pay the same property tax rates, unless one town is paying for extra services that other towns eschew.

SFRA is intended to equalize school spending and create a spending advantage for high-FRL districts, but as we can see here, it does not do as much to equalize school taxes and can actually exacerbate existing disparities.

The distortions from using Aggregate Income in the formula for Local Fair Share have been obscured by the completely off-formula distribution of state aid in New Jersey that existed because of Chris Christie and SFRA's own Adjustment Aid provision, but if New Jersey got to the point in 2024 where every district is funded at 100%, the disparities that result from SFRA's own core formulas will be harder to ignore.  

And since Boards of Education can't tax income, getting rid of income as a component of Local Fair Share (or at least using a median!) would make sense

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See Also:

• Is SFRA Fair to South and Rural New Jersey?
• High Local Fair Shares Correlate with High Municipal Taxes

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Note on Sources of Equalized Valuation & Aggregate Income 

To calculate Local Fair Share, the Department of Education uses Equalized Valuation from previous budget year (so tax year 2017 for 2018-19 state aid and Aggregate Income is from two pre-budget years previous, so 2016 for 2018-19.

Note on Non-K-12 Districts

If a town sends students to two sequential school districts, like a K-8 and then a 9-12, the tax base is split according to a formula where the percentage of taxable property is equal to the percentage of a town's students in a district.  If 75% of the students are in the K-8 district, then that district's Equalized Valuation is equivalent to 75% of the full, real Equalized Valuation.  If 60% of a town's students are in the K-8 district, then the K-8 district's Equalized Valuation and Income are equivalent to 60% of the full, real Equalized Valuation.

To give a real world example, Chesterfield's real Equalized Valuation (used for county taxes) was $793,850,669 for tax year 2017, but the Chesterfield Public Schools' Equalized Valuation is only $472,499,918 because Northern Burlington County Regional also taxes Chesterfield Township. 

This is because 60% of Chesterfield's public school students were at Chesterfield Elementary School and 40% of the students were at Northern Burlington Regional.

If a town has a K-8 district and then has a Send-Receive relationship for its high school-age children, then the state calculates Local Fair Share on the district's full Equalized Valuation.