Monday, October 31, 2016

Phil Murphy Overpromises

As his campaign has developed, Phil Murphy has laid out an expansive
and expensive agenda for New Jersey.

Phil Murphy bases his campaign, in part, on how his work for Goldman Sachs gives him fiscal acumen, but he has not bothered to tabulate how much his spending and tax credit plans would actually cost, let alone how he would pay for his plans.

Nonetheless, there are a few items in the Murphy agenda where an outsider can make an estimate of what the cost would be, since there is a formula that Murphy is trying to fund or a precise target that Murphy is trying to reach.

  • Pensions: fully fund the pensions, estimated cost based on 2017 deficit relative to the Actuarially Recommended Contribution, $3 billion per year.
  • K-12 Education: "implement that formula," ie, fully fund K-12 state aid. estimated cost based on 2017 deficit, $2 billion per year (without redistribution.)
  • Pre-K:  Usually Murphy makes a vague promise to provide "more" Pre-K, but he once criticized Christie for denying Pre-K to 45,000 additional students, in which case I can estimate a cost based on 2016 per student costs, so $608 million per year. 
  • Increasing the Earned Income Tax Credit from 35% of the federal level to 40% of the federal level, $60 million per year.  

However, there are many other items that Phil Murphy has promised to increase spending on, but with very vague or nonexistent targets for what the increase will be to, such as "increase college spending."

It's also difficult to estimate costs because it's not clear to what degree Phil Murphy's own "New Start New Jersey" organization speaks for Murphy and thus we do not know exactly what Murphy wants to do.
When Phil Murphy is asked how he will pay for any of this his answer is usually "you prioritize," but when Tom Moran asked him what he would cut, he had no answer.   He has also claimed economic growth would grow us out of the budget crisis and pointed to California's success under Jerry Brown as evidence that a state can turn itself around.  I don't know what Murphy's plan is if growth fails to accelerate (which is Connecticut's intractable problem).

Murphy's Cuts and Higher Tax Ideas

Since the Tom Moran interview, Phil Murphy has said he would save or raise money by cutting hedge fund investments made by the pensions, cutting corporate tax incentives, raising taxes on millionaires, "closing loopholes for corporations," and legalizing (and taxing) marijuana.  In his 2005 Pension Benefits Task Force recommendations, Murphy also proposed selling off state assets, which would presumably be the NJ Turnpike and other highways, however we don't know if Murphy still favors this.

There's some merit to all of Murphy's ideas, but the sum of the savings would not even be close enough to pay for even the pension payment, let alone the rest of Murphy's agenda.

1.  Cutting hedge fund investments. Maximum Savings = $728.4 million

Based on 2015 Costs, $728.4 million = $400 million in management fees plus $328.4 in performance bonuses.  Not all of that money goes to hedge funds per se.  Some of that money goes into real estate investments and private equity that New Jersey may not want to give up.
2.  Cutting Corporate Tax Incentives.  Maximum Savings = Very Low.
  1. This isn't politically possible.
  2. If implemented, some businesses will leave NJ or decide not to expand here.
Although eliminating corporate subsidies is part of the NJEA playbook and the NJEA is extremely powerful, I do not consider this to be politically feasible since the tax subsidies disproportionately benefit politically powerful cities such as Newark, Jersey City, Paterson, and Camden as well as South Jersey.

Phil Murphy claims that tax incentives have very little to do with corporate expansion and relocation decisions, but I think many legislative Democrats would disagree and not go along with a plan that eliminates NJ's tax incentives program since every other state in the US has its own tax incentive program too.

Even if Murphy got a reduction or elimination of tax incentives through the legislature, the net savings would be very low.
The biggest beneficiaries of NJ's
tax incentive programs are urban areas.
What would Mayor Ras Baraka
(shown above)
think if Governor Murphy
seriously proposed to eliminate the

subsides that Newark redevelopment
depends on?

The problem with estimating savings here is that the tax incentives are often offered to retain or attract businesses to New Jersey and nobody, other than the CEO and his closest confidants, knows what a company would do if it were not offered tax incentives by New Jersey.  Although some companies are bluffing when they threaten to leave, it's implausible to assert that they all are.

If NJ refuses to grant a tax incentive to a business and it stays and pays taxes, the Treasury gains; if NJ refuses to grant a tax incentive and it leaves, the Treasury loses and then there are significant downstream negatives from the loss of spending power.  

Murphy claims that NJ has cumulatively "spent" $7 billion in tax incentives during the Christie administration, but this is a misconception.  $7 billion in incentives have been "approved," but the payout takes place much later.  So far New Jersey has not nearly paid out $7 billion. 

3.  "A Millionaire's Tax."  $615 million, assuming the 8.97% tax rate were increased to 10.75% for earnings above $1 million.

With a 10.75% tax bracket, NJ would have the country's second highest top income-tax top rate, after California.

It's not clear how literal Murphy is being regarding a "millionaire's tax." Someone making $800,000 a year is a millionaire too, although someone whose income is below the milestone $1,000,000 mark would not be subject to a tax levied only on million-dollar+ incomes.

If there is a "half-millionaire's tax," - ie, an increase on income between $500,000 and $999,999 - up to a 10.25% rate, the revenue would be in the ballpark of $155 million.

4.  "Closing Loopholes for Corporations"

Phil Murphy said he would "close loopholes for corporations" in his September 2016 economic policy speech, by which I assume he means implement Combined Reporting.

Many Democrats want to establish Combined Reporting in New Jersey and use a $200 million a year estimate for how much revenue it would bring in, but Andrew Sidamon-Eristoff, a bona fide tax and budget expert, warns that the new revenue would be nowhere near $200 million since New Jersey already has an "addback" provision that "requires corporate taxpayers to disregard or 'addback' specific kinds of transactions (such as rent, interest, or royalty payments) between related entities in computing their taxable income"

5.  Legalizing Marijuana.  Maybe $300 million per year.

Washington State, Marijuana Sales &
There's real money to be made by a state
becoming a drug dealer.
Recently the NJPP estimated revenue would be $300 million per year, assuming marijuana would cost $343 an ounce and there is a 25% excise tax, but not considering higher income taxes from people who would work in a legalized marijuana industry.  The NJPP and assumed that Pennsylvania and New York would sustain their prohibitions and residents of those states would buy marijuana in New Jersey.

The Terrible Budget Forecast for NJ

For the last few years, NJ's revenue has grown by about $1 billion per year, but the three "P.H.D." expenses - Pensions, Health care, and Debt - consume all of the new revenue.

Over the next few years the trend of big increases will continue for Pensions and Health Care.

Annual pension contributions are slated to increase by $500-$700 million per year until reaching $6 billion in 2023.

And health care is projected to increase by about $300 million per year:


However, a fiscal relief that the next governor of NJ will have is that NJ's non-pension debt servicing costs will fall by $780 million through 2021 as old debt is retired.  The drop in debt service for FY019 (the next governor's first budget) is over $400 million.

Yet, the increasing costs for Pensions and Health Care exceed the relief from lower debt payments.

The TTF Tax Cut Pothole

The justification for raising NJ's gas tax is that we had a lot of potholes to fill, but by pairing the gas tax increase with big tax cuts, we created a huge pothole in the State's budget.

As part of the deal to increase NJ's gas tax by 23 cents a gallon, the Democratic leadership agreed to $1.3 billion in tax cuts.  The tax cuts included the elimination the estate tax, tax cuts on retiree income, a $3,000 tax credit for veterans, a cut the sales tax by 3/8th of a percent, and an increase in the EITC from 30% of the federal level to 35%. (Murphy wants a bigger increase of the EITC.)

The costs of the sales tax cut alone are about $600 million per year.  The estate tax elimination will cost $485 million per year when fully phased in.

Phil Murphy has said that the only tax cut he would have supported was the increase in the EITC, but does that mean that he will undo any of the tax cuts the legislature did pass?  I think that cutting the new veterans and retiree benefits tax cuts would be impossible politically and restoring the estate tax to its pre-TTF level would be very difficult too.

In any case, New Jersey is going to to have to find the revenue somehow to make up for the losses from the TTF deal. 

Look to Connecticut

Sum of Savings and New Money Estimates from Cutting Hedge Fund Investments, A Millionaire's Tax, Marijuana Legalization:  $1.6 billion (728.4+615+11).

$1.6 billion is real money, but it's only half of our pension deficit alone.

At this point, I beg Phil Murphy to stop making comparisons to Jerry Brown in California and look to Dannel Malloy in Connecticut, since NJ is more similar to Connecticut than it is to any other state.

CT Gov Dannel Malloy:
Malloy's Billion Dollar Tax Increases
Have Been Followed by Billion Dollar
In 2011, facing a huge deficit, Dannel Malloy increased taxes by $1.5 billion on everything from buying a cremation certificate to yoga classes to cabarets.  

After his reelection in 2014 and faced another large deficit, Malloy proposed a $1.5 billion tax increase.   Businesses were incensed and Malloy reduced the increase to $1.3 billion.  This second round increase still angered the business community and contributed to GE's decision to leave Connecticut.  Unbelievably, despite that tax cut, Connecticut's revenue is lower now than it was in 2013.

By 2016 Malloy, facing yet another deficit, shifted dramatically and announced that the latest budget deficit would be dealt with by cutting spending, not raising taxes.  Malloy's progressive allies were furious, but Malloy said:

“What’s changed is that the money’s not coming in the door. We live in a new dynamic in the United States where most states’ revenue is not growing at a rate to which we became accustomed.” He said he stood by the tax increases that were enacted earlier in his tenure as part of broader budget deals that also fully funded the state pension system for the first time in years. As for the left’s demand that taxes go up even further, he said, “At some point, you simply can’t raise taxes to an extent that you price yourself out of the market.”
Now, for FY2017, despite the cuts Malloy made, Connecticut is in the red again and Connecticut's deficit for next year is estimated at another $1.3 billion.  For FY2019 Connecticut is facing a $1.4 billion deficit.
...the administration of Gov. Dannel P. Malloy is already warning state agencies to start planning for big reductions in discretionary spending in the following two fiscal years. 
“Most agencies will likely face discretionary spending reductions of at least 10 percent below fiscal 2017 levels in fiscal 2018. As a result, we will be significantly challenged to provide all of the services and programs that many have come to expect,” Benjamin Barnes, the Democratic governor’s budget chief wrote all state agency leaders Wednesday. 
“In many cases, I expect agencies may need to further reduce, or perhaps cease delivering altogether, certain programs or services, and additional headcount reductions may be necessary,” Barnes wrote. “Fiscal 2018 will be even more challenging than fiscal 2017. … Your planning and development of reduction options for fiscal 2018 should begin now.”

The deficit is due to “disappointing revenue results.... largely produced by an economy that has yet to reach past recovery growth levels, as well as considerable stock market volatility."

In my opinion, Connecticut's chronic economic malaise belies the claims that New Jersey can tax and "invest" its way out of its budget crisis.

Hollow Promises

Phil Murphy's spending agenda is not affordable even if the state's economy continues to grow.  His proposals are not suited for a state like New Jersey, whose ability to borrow is limited, whose taxes are already excessive, and whose economy is relatively stagnant.

If we have a recession Murphy's promises are even more unaffordable.

In any case, voters who hear Phil Murphy's promises for more education aid, more PreK, higher college aid, new tax credits, and a raft of new spending on various small items and treat such promises with deep skepticism.


See Also:

Monday, October 24, 2016

Vincent Prieto Proposal for SFRA II

For years, the loudest silence on state aid has been from Assembly Speaker Vincent Prieto.

Aside from vocational education, Prieto leaves education legislation to other people.  His references to state aid fairness have been nonexistent.

Although most of the legislature, frankly, ignores state aid, Prieto's indifference to state aid is hard to accept because his own District 32 in Hudson and Bergen counties is savagely underaided.

Red indicates Abbott.

So Vincent Prieto's entry into the state aid battle is welcome after years of neglect, but that doesn't mean that Prieto's ideas actually are good ones.

As Prieto wrote with Assemblywoman Marlene Caride in the Star-Ledger on October 24th:
We also recognize New Jersey has not properly funded its schools. It's a longstanding problem that should have been resolved years ago, but remains festering due to economic struggles and political ideology. 
The status quo is unacceptable, but the ideas proposed by Gov. Chris Christie and another approved by the Senate are unacceptable options. 
That brings us to the Joint Legislative Committee on Public School Funding Reform, our proposal to fairly fund schools in our state free of politics and ideology.
Free from politics and ideology?  Excuse me?  How is that possible? There isn't a single person in the edusphere who isn't ideological and the subject of state aid is no exception to that tendency.  Some people worry more about taxes than others; some people worry more about inequity; some people want teachers to be much higher paid.  Everyone with an opinion on state aid is ideological to some degree.  

Anyway, here is the proposal for "SFRA II"
This commission would be modeled after the [PJP - Professional Judgment Panel] 2006 committee that devised the current school funding formula, the first school funding plan deemed constitutional by the New Jersey Supreme Court in nearly 30 years.
The main problem has been the state's failure to fund it. The provisions have been ignored and overridden.

We believe this is still the model, but it's been 10 years, so we can now take a look back at what was right and wrong with that formula....
The committee will review the School Funding Reform Act of 2008 and formulate proposals that address problems and issues that have arisen since the enactment of the law, including issues associated with changes in the demographics and fiscal conditions of districts that have impacted the ability of local communities to support the education of their students.
The 2006 committee availed itself of the expertise of numerous stakeholders. We would expect this committee to do no less. The legislation would create a public school funding reform working group comprised of 12 members from expert education organizations across the state. This working group would serve in an advisory capacity and as a resource for committee deliberations.
No part of the school funding formula or the processes associated with the formula would be off limits. We expect the committee to look at all problems and issues that have arisen in the past 10 years, as well as demographic changes and changes in the fiscal conditions of school districts.
We want a realistic proposal that can be fairly funded annually.
One particular area that we hope will get special attention is preschool opportunities — a proven indicator of future educational success. We also hope the committee will focus attention on funding for special education.

Ok. I'm not enamored of the SFRA PJP committee>legislative amendment process.  According to Chris Cerf, the legislature arbitrarily increased the Professional Judgment Panels' recommendation for weights for at-risk students and created "Adjustment Aid" out of nowhere.

Although Prieto doesn't rule out cutting or eliminating Adjustment Aid, any formula that Prieto's "Joint Legislative Committee on Public School Funding Reform" comes up with will primarily rely on new money for K-12 education and if the next governor decides to prioritize things other than K-12 education or there is a recession, Prieto's "SFRA II" will fail just like the original SFRA did.

Prieto's suggestion that the state put more money into Pre-K education may or may not have merit, but budgeting is a zero-sum game and putting more money into Pre-K would subtract from money for K-12, higher ed, pensions, senior tax rebates etc etc etc.  If Pre-K is provided by public schools themselves, in the long run, Pre-K even increases the state's pension liabilities since Pre-K teachers are pension-eligible public employees.

Pre-K itself is incredibly expensive, around $13,500 per student.  To provide Pre-K to the 50,000 students who are statutorily eligible for it under SFRA would cost nearly $700 million.

Although Vincent Prieto has said he would "love a millionaire's tax," increasing rates on high incomes is enough. In 2014, raising the 8.97% top rate to 10.75% on income over $1 million would only have brought in $565 million.  A 2015 version that would also have raised business taxes by 15% would only have brought in $1.1 billion.

$565 million isn't enough.  $1.1 billion would be a good deal more helpful, but it would make our corporate taxes the country's second highest (after Iowa's 12% top rate).  Since New Jersey's other taxes are the highest in the country or among the highest, making our corporate taxes #2 is insane.

The state's debt and pension payments alone increase by nearly $1 billion a year, in some years increasing faster than the state's revenue growth, so the hope we might "grow our way" out of the budget mess is far-fetched.

Prieto is also wrong about why Congress hasn't reopened the base closing process.  Congress hasn't reopened that because it doesn't like the idea of an empowered committee, it hasn't reopened that because it doesn't want to close any more based. Period.

Anyway, I'm glad that Prieto is finally talking about state aid and not ruling out redistribution, but I wish it were something that put redistribution front and center and addressing other problems, such as the state aid growth limits and PILOTing.


See Also:

Wednesday, October 19, 2016

Biggest Real Estate Gains, Losses, in NJ

This post looks at what towns in New Jersey have seen the biggest gains and losses in their real estate markets in the past four years.

The measurement of real estate value used here is "Equalized Valuation." Equalized Valuation is simply the market value of all taxable real estate in a town.  Equalized Valuation is calculated annually and is used to apportion county taxes and regional school districts.  If one town has 15% of a county's total Equalized Valuation, it pays 15% of county taxes.  If one town has 60% of a regional district's total Equalized Valuation, it (usually) pays 60% of the school levy.

Equalized Valuation is supposed to be used to distribute state school aid, but New Jersey's school funding law (SFRA) is non-operating, so from the point of view of state aid, Equalized Valuation has no bearing.

Equalized Valuation is calculated by taking the average ratio of sales prices to properties' official, assessed price.  If, on average, properties sell for 15% above their assessments, the town's Equalized Valuation is 115% of its official aggregate assessment.  If, on average, properties sell for 90% of assessment, the town's Equalized Valuation is 90% of its aggregate, official assessment.

(In terms of county taxes and state aid, PILOTed properties are the same as tax exempt property because they don't contribute to Equalized Valuation.)

As usual, I've made the data (obtained via an OPRA request to the Treasury Department), available online.

Overall NJ Real Estate is a Stalled Asset

The total value NJ's real estate is barely moving.   In the last four years, the median town's market valuation has only increased by 2.1%.  This lags inflation, which was 3.64% from 2013 to 2016.

The weighted average, however, is an increase of 4.3%, as NJ's total Equalized Valuation increased from $1,159,890,947,281 to $1,209,186,432,406.  That is powered by the gains in the mega-Valuation cities of Jersey City and Hoboken, both of whom are in the top five for total Equalized Valuation and thus have "heavier" weights than 99% of other NJ towns.

South Jersey is Hurting

As always, the average masks great diversity.

Atlantic City and its environs have collapsed, pulling down the state's total. Atlantic County alone has lost $9 billion in Equalized Valuation, from falling from $45.1 billion to $34.9 billion.   Salem, Sussex, Sussex, Cumberland, and Gloucester have also lost Valuation.  Warren's growth has been trivial.

The towns that have lost the most are mostly in South Jersey, although Paterson, Irvington, East Orange and a few other northern cities also appear among the biggest losers.

Click to Enlarge

The Hudson River Shore is Booming

Click to Enlarge

On the other hand, Hudson County has boomed, from $57 billion to $71 billion.  Jersey City alone gained $7 billion, which is 15% of the state's total gain.  Jersey City's $25.7 billion in Equalized Valuation is almost equal to the total Equalized Valuations of Sussex and Warren counties.
Over 14% of NJ's Growth in Equalized Valuation ($7.1 billion
out of $49.3 billion) has been in
Jersey City alone.

The booms in Hoboken, Jersey City, and Weehawken are old news though.  What's interesting about this cycle is that North Bergen, West New York, Harrison, Guttenberg, and Union City have had extremely strong gains.  Would I call North Bergen, West New York, Harrison, Guttenberg, and Union City extensions of the "Gold Coast"?

No.  But they are getting there.   

Kearny and North Arlington did well too, although that could be from increases from non-residential property, such as logistics.

Atlantic City has lost $15 billion
in Equalized Valuation.

Bergen County also gained $9 billion, from $161 billion to $170 billion, with its southern section doing well, including Fairview. Monmouth has gained $7 billion.  

Implications for State Aid

The formula for Local Fair Share in NJ for 2016-17 is

(Equalized Valuation x 0.013156218 + Aggregate Income x 0.046185507)/2

So, for every $100 million in Equalized Valuation a district gains, its Local Fair Share would be increased by $657,810.  Since Equalized Valuation and Aggregate Income usually move in tandem, the actual increase to Local Fair Share would probably be greater than this.

Looking at the towns that have lost the most Equalized Valuation, it's easy to understand why state aid redistribution is so important to Senate President Steve Sweeney.

Sweeney's own District 3 is suffering.  Greenwich, Paulsboro, West Deptford, Penns Grove, and Carney's point are all represented by Sweeney and experiencing increases in their school tax rates caused by declining real estate value combined with increasing taxes.

Chris Christie has kept state aid frozen since 2013-14.  It's unclear what he is going to do in his last budget for FY2018, but regardless, New Jersey's next governor is going to have a lot of mess to clean up as our budgetary crisis and inflexible state aid meet the reality that many districts have gotten poorer and/or larger and need resources currently given to districts that have gotten richer and/or smaller.

Redistribution is Needed Now!!


See Also 2016 Equalized Valuations Out

Saturday, October 15, 2016

The Long Wait for Full Funding under Capped Aid

When SFRA was passed in January 2008 the designers of the law realized that they were essentially Abbottizing all poor and working class districts in New Jersey, and thus setting extremely ambitious targets for school funding that the State of New Jersey would not be able to reach in a single year.  

Thus, the framers of SFRA created "state aid growth limits," or "caps," for how much new aid a district could gain in a year.  The caps allowed the State to gradually ramp up aid for districts that were hitherto fiscally neglected.  The caps meant that SFRA could be sold to the public as something that could be paid for with new revenue and would not require a tax increase.

The legislative text describing the State Aid Growth Limits is below:

For the 2009-2010 school year and thereafter, total stabilized aid shall include Equalization aid, Special Education categorical aid, Security Aid, and Transportation aid.
d. For the purposes of this section, “State aid growth limit” means 10% in the case of a district spending above adequacy and 20% in the case of a district spending below adequacy.

SFRA also contains a section here ordering the Commissioner to "adjust" (ie, cut) a district's aid if it somehow exceeded the State Aid Growth Limit.

a. Notwithstanding any provision of this Act to the contrary, the total stabilized aid for each district shall not be increased by more than the district’s State aid growth limit. In the event that total stabilized aid exceeds the prebudget year total by a rate greater than the State aid growth limit, the commissioner shall adjust the components of total stabilized aid so that they total exactly the prebudget year total increased by the State aid growth limit.

The problem with the State Aid Growth Limits is twofold:

1.  The caps are set in terms of percentages, not dollars per student.

2.   Getting a 10% aid increase of a 20% aid increase is dependent on a district being above or below Adequacy, when spending relative to Adequacy is determined in part by local tax effort, not just state aid.

1.  The Percentage Problem

Since the caps are defined in terms of percentages and not dollars per student, a low-aid, severely underaided district would get less new aid than a high-aid, moderately underaided district.  In other words, if districts are getting 10% increases, a deeply underaided district already getting $1,000 per student would only gain is $100; whereas a slightly underaided district already getting $5,000 per student would gain $500 per student.

For instance, if SFRA were funded at its statutory level and the aid caps are followed, Newark's aid would jump by $116 million ($2,300 per student), to $858 million. By contrast Atlantic City, would only gain $2.5 million, or $370 per student.

Newark would get much more than Atlantic City because Newark already gets a lot of aid and Atlantic City gets very little ($19 million in regular aid).

That's not fair but that's SFRA.

2.  The Adequacy Budget Problem

This is SFRA's definition of Adequacy.

(1) For purposes of determining if a school district or county vocational school district is spending above or below adequacy and its applicable State aid growth limit, the district’s spending shall equal the sum for the prebudget year of its equalization aid calculated pursuant to section 11 of this act, special education categorical aid calculated pursuant to section 13 of this act, security categorical aid calculated pursuant to section 14 of this act, and general fund local levy.   [my emphasis]

Since the "general fund local levy" is included in the Adequacy Budget, a district that overtaxes itself and is thus above Adequacy is therefore penalized.

SFRA's caps were a problem in the first place, but since Christie cut aid in 2010 and has flat-funded districts since 2013, SFRA's aid caps even more unfair than they were back in 2007-2008 when they were devised, since districts are even deeper below their uncapped aid levels now than they were.

Let's look at two large, badly underaided, but above Adequacy suburbs, Cherry Hill and West Orange.

For 2016-17 Cherry Hill will get $13,110,005 in state aid, but its uncapped aid is $39,946,051.

Necessitated by underaiding, Cherry Hill's Local Tax Levy exceeds its Local Fair Share by $34 million ($159 million versus $125 million.)

It's unclear to me what Cherry Hill's Capped Aid is. Data I got last February directly from the DOE gave it at $14.2 million, but newer data on the DOE's website in "Additional School Funding Scenarios" gives Cherry Hill's capped aid at $16.5 million, a figure that I believe is based on Cherry Hill's 2008-09 aid.

Let's use the higher $16.5 million amount.  

Again, Cherry Hill's taxes are so high that it actually is above Adequacy, so its increases would be only 10% per year.

10% of $16.5 million is $1.65 million.  That's not even 1% of Cherry Hill's $191 million Total Operating Budget.  Cherry Hill already increases its taxes by $4-$5 million per year, so increases in the $1.65 million ballpark are nice, but only small offsets of Cherry Hill's steadily increasing tax burden.

But what's significant is that assuming Cherry Hill raises its taxes enough to stay above Adequacy, it would take Cherry Hill 11 years to get to what its 2016-17 full funding should have been.

And since inflation will erode the value of money and Cherry Hill's Uncapped Aid target will rise, the wait for true, full funding will be even longer, perhaps 20 years.

But Cherry Hill does much better than West Orange, another overtaxed, yet badly underaided district who is nevertheless above Adequacy.  West Orange would have a 14 year wait to full funding (again neglecting inflation).

For a district that is below Adequacy the annual boosts would be 20%, but for some severely underaided districts such as Bayonne, Red Bank, and Clifton, the wait to full funding is still 6-7 years.

By contrast, a high-aid district that gets more than 80% of its uncapped aid, like Newark, would reach full funding in a single year since Newark would qualify for a 20% increase and 20% would be more than enough to bring Newark up to its full, uncapped aid.  At that point, Newark would be fully funded and theoretically flat-funded for several years.

According to the DOE's "Additional School Funding Scenarios," other already high-aid, but modestly underaided districts, would have the biggest gains. Paterson's aid would jump by $57 million ($2,050 per student), to $458 million in a single year. Trenton's aid would increase by $33 million in a single year ($2,350 per student).

As I mentioned before, even a district as underaided as Atlantic City would gain little under capped. Atlantic City would only gain $2.5 million, or $371 per student. Red Bank Boro would gain $538,000 or $380 per student.

Bound Brook, NJ's most underaided district in terms of its dollars per student deficit, would only gain $1.54 million for 1,744 students, or $883 per student.

Freehold Boro would gain $1.8 million, or $1,100 per student. Bayonne would also gain $1,100 per student. Manchester Regional would only get $1,300 per student.

Bayonne, Bound Brook, Atlantic City would get gradually larger boosts as 10% or 20% is calculated based on larger previous-year aid totals, but if New Jersey cannot escape its chronic fiscal problems, the larger aid boosts are doubtful.


Given New Jersey's chronic budgetary crisis, some aid growth caps are necessary, but it would make
Steve Sweeney Understands
The Problem Here
more sense if the caps were a flat amount in dollars per student and not based on what the previous year's aid was.

If there has to be some prioritization and some districts are given bigger increases than others, let the prioritization be based on the severity of underaiding, not being above or below Adequacy, since spending relative to Adequacy depends on local tax effort, not just state aid.

As depressing as the state's dire fiscal situation is and the aid caps are, Steve Sweeney's state aid reform commission bill always included a clause on evaluating the fairness of the state aid growth caps.  As long as there is one powerful legislator who understands the unfairness of the growth caps there is some hope, but those of us who care about aid fairness have to speak up and support.


See Also:

Thursday, October 6, 2016

Dear Phil Murphy, Massachusetts Doesn't Have High Taxes

Pop Quiz:

When it comes to Massachusetts, what do George H.W. Bush and Phil Murphy have in common?
  1. They were born there.
  2. They want voters to think that Massachusetts is a high-tax state.
Although both Bush and Murphy want you to think that the Bay State is "Taxachusetts," their motivations are different.  Bush unleashed the "Taxachusetts" goblin to scare voters away from Massachusetts governor Michael Dukakis.  Murphy presents "Taxachusetts," not as a bogeyman at all, but as a counterexample to those who say that NJ's high tax burden stifles business growth and intensifies outmigration.

Murphy uses the Massachusetts argument constantly in his town halls and interviews.  Here's one example of Murphy making this argument about Massachusetts taxes written-up by the Asbury Park Press:
“When General Electric made the decision to relocate to Boston -- believe me, I know this -- it wasn’t because their taxes were lower, it was because the infrastructure was better, the synergies with top-notch education and research facilities were exciting, and the quality of life was inviting,’’ Murphy said. “New Jersey can be that and more but we need leadership, vision, and a work plan that looks to the future.’’
Ok.  I'm not going to assess the accuracy of George H.W. Bush's claims about Massachusetts back in 1988 because what interests me is Massachusetts' taxes today and the inaccuracy of Murphy's claims because

Taxachusetts is dead.

Liberalish Massachusetts people say so:

Despite the gripes and stereotypes, taxes in Massachusetts just aren’t that high. Not compared to other states, anyway.
Across New England, only New Hampshire has lower state and local taxes. And compared to the United States as a whole, Massachusetts taxes are below average.
Conservativish Massachusetts people say so too:

MASSACHUSETTS IS not, in fact, “Taxachusetts.” Rather, the Bay State is right in the middle, neither high nor low, imposing less of a burden on its citizens than certain other states filled with anti-tax braggadocio (ahem, that would be you, New Hampshire). But “Taxachusetts” is also less about reality than it is a state of mind. We may not tax heavily now, but we used to — and if certain folks had their druthers, we would once again.
The financial website WalletHub just released its ranking of the best and worst states to be a taxpayer. On top was Wyoming (with average annual taxes of $2,365) while Massachusetts ($6,884) came in at 21. Some states with greater tax burdens defy stereotypes. South Carolina, for example, was 23rd, Georgia 26th, and the aforementioned Granite State was 28th ($7,419).  [ed, New Jersey was 42nd in the WalletHub survey]

Using five taxes (Sales Tax, Corporate Income Tax, Property Tax, and Unemployment Insurance Tax) the Tax Foundation ranks Massachusetts in 27th place for best (ie, lowest) tax climate.  

New Jersey is ranked 50th place.  (LAST)

When it comes to taxes, the comparison between Massachustts and New Jersey is devastating for the Garden State, especially for income taxes and property taxes.

Note: Massachusetts' income tax is a flat tax.  A New Jerseyan would have to make less than $35,000 a year to pay a lower income tax than a Massachusetts resident.
Massachusetts' unemployment insurance taxes are higher than NJ's, but it is a complex

Low Property Taxes

Massachustts actually has the seventh highest median property taxes in the US (at $3,794) it's half of NJ's, which are the highest in the nation at $8,353, but the Massachusetts property tax rate is actually below the national average and way, way below New Jersey's.

Finally, taxes can be compared by looking at taxes as a percentage of the median person's income or overall state income.

If you look at an average person earning $50,000 a year, New Jersey's taxes are the second worst in the United States, after New York.  Massachusetts taxes are high, at the 10th worst, but again, they are lower than New Jersey's, Connecticut's, Rhode Island's, or Vermont's.

If you look at taxes as a percentage of total state income, New Jersey does a little better and is only the 10th worst.  Massachusetts' relative taxation actually drops to below average, to 10.12% of state income.   The national average is 10.35%.

So Phil Murphy's implication about GE's relocation to Boston disproves the notion that taxes hurt economic growth is an argument based on an outdated, false belief about Massachusetts.

Businesses that are attracted to Massachusetts probably don't have taxes as their primary motivation - or certainly not costs since housing prices and office and lab rents there are still high - but neither are taxes a deterrent and neither would as many businesses want to leave Massachusetts due to taxes as want to leave New Jersey (and Connecticut)

Murphy is Mostly Right about Education, Cities and the Massachusetts Economy

Phil Murphy has recently started talking about Massachusetts as a "high cost" state, not a "high tax" state," but there is a difference to businesses between a location being high-cost due to it being a premium business location or being high-cost due to taxes and regulation.  If a place is expensive because of demand, that means, by definition, it is thriving and demand is outpacing supply.  If businesses want to be somewhere, it must be due to the profit opportunities there being high, usually through some kind of networking or costumer access advantage.

On the other hand, if a place is expensive due to taxes, as New Jersey is, there is no such profit-premium that makes location there attractive.

Murphy is likely right about how Boston and Massachusetts' academic network are powerful creators of business and attractions to existing businesses.

Murphy said that he will also generate additional revenue in New Jersey by eliminating tax cuts for millionaires and closing loop-holes for corporations based in New Jersey. The candidate said that arguments that such changes encourage companies to flee the state are flawed. He supported that claim by citing GE’s move from New Jersey to the Boston, Mass. area, another high-cost region of the country. He said that the real reason businesses are fleeing New Jersey is the lack of cities that take advantage of things like proximity to New York and Philadelphia, lack of urban centers and transportation holes that leave much of the state disconnected. According to Murphy, if such issues are addressed in the state through investments to areas like Trenton, Newark and Camden, businesses will flock to N.J. despite lack of tax exemptions.
[Michael] Aron: You talk about the ecosystem. The business community has done a decent job of presenting the idea that we are taxed to the gills in New Jersey. That the business climate is not that attractive, and yet you’re a liberal and we think you want to maybe hike the gas tax, or ultimately the millionaire’s tax. How do you balance that?

Murphy: I think you can balance that. I think the argument that you’re one or the other is last century’s argument. I look at the decision for instance, Michael, that General Electric made to move their world headquarters to Boston. Now I know Boston. They didn’t go there because it’s cheaper to do business in Boston than it was where they were in Connecticut. They went there for the totality. For the all of those pieces of the puzzle. The communities in which their workers and customers want to live in. The infrastructure. The public schools. The emphasis on research and development and institutions of higher education. That whole nexus. And remember we were Silicon Valley, New Jersey was Silicon Valley, before Silicon Valley was Silicon Valley.
Again, I agree with some of what Murphy is saying, but what is missing from Murphy's version of events is that GE first began to threaten to leave Connecticut after Gov. Dannel Malloy floated in the summer of 2015 another $1.5 billion round of tax increases, including the imposition of Combined Reporting, so taxes were a push-factor in GE's departure from Connecticut.

Yet the urban-powered argument that Murphy makes is also incomplete because Massachusetts also has a large suburban pharma hub 30 miles west of Boston by I-495 around Marlborough where GE Healthcare, Boston Scientific, Quest Diagnostics, and Hologic plus many more are all located, so there is more to Massachusetts' success than Boston-coolness.

Murphy is right that GE could have relocated to a Sunbelt state even cheaper than Boston, so GE's final decision to relocate to Boston was perhaps primarily motivated by the educated, urban ecosystem.  However the GE-relocation cannot be used as fodder for the "taxes don't matter" argument that Murphy is making since the claim is based on a false premise of Massachusetts having high taxes

The Murphy Campaign Strategy:
Say Tech-y, Modern-Economy
Sounding Stuff,
Hope No One Realizes
It Doesn't Make Sense.
I suppose Hudson County could eventually become a thriving (if much smaller) city like Boston, but I do not think that New Jersey will ever match Massachusetts' academic milieu, nor do I think that Newark, Trenton, and Camden can substantially revive.

The Boston area has seven universities in the US News top fifty. (Harvard, MIT, Tufts, Boston College, Brandeis, Boston University, Northeastern)  

New Jersey has one, Princeton.

Moreover, the Boston-area universities are each much larger than Princeton.  Princeton has 8,100 students total.  Harvard has 29,000.  MIT has 11,330.  Tufts has 10,900.  Boston College 14,000.  Boston University has 32,600.  Northeastern has 19,800.  Only Brandeis is smaller than Princeton, with about 5,900 students. 

The top 50 US News ranking cutoff is arbitrary and Rutgers is a great university (it is ranked 70th), but still, New Jersey's universities cannot compete with the Boston-area's universities in the volume of research being done.

Massachusetts' academic advantages have been present for a long time, but that wasn't enough to make Massachusetts the nation's leader in biotech research.  Massachusetts began seriously investing public money in building a biotech industry in 2008.

The Newark Whole Foods is built thanks to
tax incentives to the developer and Panasonic
and the Prudential, who are located nearby.
The Whole Foods would be an attractor to
"creative class" professionals, but Phil
Murphy opposes tax incentives.
There is nothing wrong with New Jersey attempting to build its tech and biotech industries, but any governor should realize that we are disadvantaged relative to many other places and the factors that led to our becoming the "nation's medicine cabinet" and telecom research giant were historical accidents that are difficult to recreate.

But Murphy is at his most incoherent on urban policy.  Murphy says "if such issues are addressed in the state through investments to areas like Trenton, Newark and Camden, businesses will flock to N.J. despite lack of tax exemptions," but he opposes the tax exemptions that are the only things that induce businesses to locate in Trenton, Newark, and Camden as it is.

John Bury of Bury Pensions said it best about the Murphy strategy:

Present an idea that sounds good to anyone who won’t think about it in any depth to people who are not going to think about it in any depth.

And what about the rest of the New Jersey and People Who Don't Work in Tech?  

Murphy is right that state and local taxes often aren't always a major factor in location decisions, but it really depends on the industry and the specific business.  Goldman Sachs, despite making $7 billion in profit per year, has put thousands of employees in Utah because of Utah's low taxes and willingness to grant tax incentives that cut the low-taxes even more.

Moreover, there are scores of businesses in trade, services, or manufacturing that don't need a specialized workforce, have lower profit margins, and don't need to be near New York City.  For these businesses, let alone mom & pop businesses, taxes matter and New Jersey looks worse and worse.

The basic point here is this:

>New Jersey is a high-tax state.  Massachusetts is an average-tax state.

>>>Massachusetts hasn't become a major biotech hub just because it has moderate-taxes, but the moderate nature of Massachusetts' taxes means that taxes are not a deterrent to growth either.

>>>>>If you want to make an argument that a high-tax state can thrive, use an example other than Massachustts.


December 2016 Update:

Connecticut's governor Dannel Malloy did admit that GE was concerned about Connecticut's unfunded pension system and the prospect of higher tax increases in the future.

The governor acknowledged that when he tried to convince General Electric officials to keep their headquarters in Connecticut, company leaders expressed concern over the rapidly escalating pension bill. 


See Also:

GE HealthCare Had been in Piscataway until it
moved to Marlboro, Massachusetts.
Extra Note:

 Massachusetts' economic success is highly relevant to New Jersey, since it partly comes at the expense of New Jersey.

Many high-profile New Jersey biotech businesses have relocated there or expanded in Massachusetts.  Sanofi Aventis reduced its Bridgewater presence in favor of Cambridge (it has bought a company called Genzyme). Bristol-Meyers Squibb also moved from New Jersey to CambridgeGE moved GE Life Sciences from Piscataway to Marlborough, Massachusetts.  Other New Jersey pharmaceuticals companies like Johnson & Johnson, Novartis, and Pfizer have passed up opportunities to open new centers in New Jersey in favor of Massachusetts.

The pace of new biotech business creation is faster in Massachusetts than New Jersey.

Wednesday, October 5, 2016

2016 Equalized Valuations Out

The Division of Taxation has come out with new Equalized Valuations for all towns in NJ.  These Equalized Valuations are for use in FY 2017, though are calculated in 2016.

("Equalized Valuation" is the market value of a town. It is computed annually and is used to apportion county taxes. It is supposed to be used to distribute state aid, but NJ's school funding law (SFRA) is non-operating.)

The state's total Equalized Valuation increased by 3.7%, from $1.166 trillion to $1.2 trillion, but, as usual, the increases in Equalized Valuation were very uneven.

Of that $43 billion increase, $11 billion (more than 25%) was in Hudson County alone.

As usual, Jersey City and Hoboken continued their stratospheric appreciations.

Jersey City's Equalized Valuation rose from $21.7 billion to $25.7 billion.  Jersey City's Equalized Valuation is now more than 2% of NJ's total.

Hoboken's Equalized Valuation rose from $13.3 billion to $15.13 billion. Last year Hoboken was in a tie for the fourth highest in NJ with Newark, but now Hoboken is in undisputed fourth place and is within $100 million of Toms River, the current third place occupant.

Hoboken's school tax rate will surely fall even farther below the 0.3% it has now.

Jersey City's school tax rate will fall below 0.5%.  If NJ distributed Equalization Aid under a formula, Jersey City would lose at least $30 million due to its increase in tax base.

Newark, Trenton, Elizabeth, Paterson, and Camden were more or less stable this year.

Atlantic City continues its collapse.  AC's EV was once the highest in NJ, but it is down another $2 billion and is now only $6.4 billion.  When new state aid figures come out in February 2017 Atlantic City will be ranked as even more exceptionally underaided.  Atlantic County as a whole lost over $5 billion in Equalized Valuation, so the whole region is hurting.


If Jersey City's PILOTed property were an independent city, it would be in the top ten for New Jersey.

Here are the top EVs in NJ for tax year 2017.
1. Jersey City (taxable) $25.7 bil
2. Edison $15.8 billion
3. Toms River $15.167 billion
4. Hoboken $15.128 billion
5. Newark $13.8 billion
6. Ocean City $12 bil
7.  Jersey City PILOTed $11.6 billion
8. Middletown $10.6 billion
9. Woodbridge $10.5 billion


See Also:
Divergent Fates of NJ's Big Cities

Two Cheers for County Taxes

Tuesday, October 4, 2016

What Pre-K Our Way Doesn't Say

Pre-K Our Way, an organization committed to expanding state-funded Pre-K in New Jersey, has been covering NJ-policy and news websites with ads for the last year asking New Jerseyans to ask their legislators to put money into expanding Pre-K access to another 50,000 children.

Pre-K Our Way's goal of another 50,000 students in Pre-K is based on the Pre-K component of SFRA, which calls for two years of universal state-funded Pre-K in any district where FRL-eligibility exceeds 40% and means-tested Pre-K for FRL-eligible children living in all other school districts.

Pre-K Our Way has heavy hitters on its side.  Jim Florio and Tom Kean are its co-chairman.  Brian Maher, the former CEO of port colossus Maher Terminals, is a generous contributor.  The organization doesn't lack for powerful friends and money.

As noble as Pre-K Our Way's goal is, the problem with their effort and organization is that they almost never admit how much expanding Pre-K would cost or explain where New Jersey should get the money.

In the above ad, Pre-K Our Way says "for more information," go to their website, but one critical piece of information that isn't on that website is how much Pre-K for another 50,000 kids would cost!

On the contrary.  The Pre-K Our Way FAQs says that Pre-K doesn't cost anything:

From their FAQs:

Yes. The existing state-funded high-quality preschool programs are available to the public in these fewer than 40 communities at no cost.
No cost?  Since when is the $653 million NJ is spending now for operating expenses alone "no cost"?

Haha, what Pre-K Our Way means is "at no cost (to parents)."  There's no such thing as a free lunch and New Jersey taxpayers pay for our existing Pre-K.  

What Pre-K Our Way is afraid to reveal in their publicity is that their plan for another 50,000 Pre-K would cost nearly $700 million.

Here's the math behind the estimate:

New Jersey provides Pre-K in the Abbott districts through school districts and through private providers, with a majority of children in private centers.
(It's a de facto voucher system.  The private providers can be for-profits and even religiously affiliated. (Yes, there have been scandals.))

Our costs pefor 2017 are:

  • $12,788 per child in a district-run program.
  • $14,375 per child in a private provider-run program.
The math is simple if NJ's 50,000 Pre-K-eligible students went 50:50 private Pre-K:public Pre-K, 25,000 x $12,788 + 25,000 x $14,375 =


$679,075,000 is huge amount of money.  It exceeds of 2% of the state's total budget and 8% of our K-12 aid.  However, the actual amount would likely be higher due to the tendency of students to choose the more expensive private providers.

(New Jersey's Pre-K costs (and possibly quality) per student are the highest in the country.  By contrast, even New York City only spends $10,200 per student on Pre-K and the national average is only $4,125.)

Talking about 50,000 Kids Sounds Better than
"Spend $679 million!"
New Jersey can (and must) increase taxes to better fund education, but money is finite and zero-sum and more money for Pre-K will come at the expense of some other discretionary program, quite likely K-12 aid and/or higher education.

Higher education is particularly vulnerable since the constituency is smaller than for K-12. Already, NJ's support for public colleges has been eroding.  In 2014, for instance, NJ spent $2.32 billion on higher ed.  For 2017, we will spend $2.2 billion.  (And the per student distribution of aid for colleges is totally irrational too.)

Pre-K Our Way answer to worries about the rest of the budget is that Pre-K saves money in the long-run since students who have it are less likely to be held back and require special services. Extrapolating into students' adulthoods, claims are made that for every $1 spent on Pre-K, $7 is saved.

There's some evidence backing up claims of academic success (though not savings for school districts) in New Jersey from the APPLES study (Abbott Preschool Program Longitudinal Effects Study), which claimed, by 5th grade, that kids who had two years of Abbott Pre-K had a 31% lower rate of sped placement 40% lower rate of grade-retention, and higher scores than students who had had no Pre-K.

However, the APPLES project did not have random selection.  Parents who would not take advantage of a "free" Pre-K program that purports academic benefits may not have the same attitude towards education as parents who do enroll their kids.  Indeed, the APPLES study disclosed that the non-enrolees were poorer, less likely to work, and less likely to speak English at home.

The APPLES researh also found that the gap for special education placement between students who had had one one year of Pre-K versus two was very small.

 A "beautifully designed" Vanderbilt University study that did use random selection found that indeed, at the beginning of kindergarten, poor kids who had had high-quality Pre-K outperformed those who hadn't, but by second grade the positioning was reversed, and the kids who hadn't had Pre-K outperformed on behaviorial and academic measures those who had.

Anyway, when it comes to spending, effectiveness IS IRRELEVANT because there is a difference between savings for a district and savings for the state.

The financial irrelevance of Pre-K spending is that the Education Law Center and Abbott districts have adamantly opposed any reductions in money for K-12.  SFRA only lowered payments to Abbott districts slightly.  If a district is over 60% FRL-eligible and 10% LEP, its Adequacy Budget will be $22,000-$23,000 per student.

MOREOVER, SFRA does not factor in special education placement rates in its formulas for state aid.  All else being equal, a district with a 10% special education rate and one with a 25% special education rate would get the same state aid.  So no matter how effective Pre-K is at lowering special education placements, the state saves no money.  All that happens is that the recipient districts keep more state aid to spend on non-special ed items or offset their taxes.

The ELC and Abbotts want to have it both ways:

  1. They justify Pre-K, in part, by saying it reduces costs later on.
  2. They oppose any reductions in state aid, even though Pre-K is supposed to reduce costs later on.
Perhaps it is cost effective in the long-run for New Jersey to spend another $700 million on Pre-K than K-12, but if so, Pre-K Our Way needs to be honest about where that money is going to come from.  If Pre-K really does save money, then where is the state's "Pre-K Dividend"?  If there is a dividend, it only comes in the adulthood of kids who had Pre-K, who plausibly might need less in transfer payments and have less involvement with the justice system.

New Jersey is Broke

Even if one accepts that Pre-K saves money in the long run and should be considered an investment, there is the dilemma of how a state as broke as New Jersey can find the money for that investment in the first place.

How soon will the meltdown happen?  For FY2016, NJ's pension funds paid out $10 billion, had $800 million in expenses, and only took in $5.4 billion from localities, the state, and active employees.

The most recent projections for when separate funds will go broke are:

  • The Judges' system will go broke in 2022.  
  • State-PERS will go broke in 2024.  
  • TPAF will go broke in 2027.  

The pension funds' unfunded liability is $43 billion.  The math is again simple, unless there is a miraculous bull market or federal bailout, New Jersey's pension funds will be depleted before any "Pre-K Dividend" arrives.

When the meltdown arrives before the Pre-K dividend arrives, how long-term can we afford to be?

Pre-K Our Way also disregards how just three expenses, Pensions, Health Benefits, and Debt Service ("PHD"), consume more or all of New Jersey's new revenue.


There is no new available revenue to expand Pre-K with.  The only ways Pre-K could be expanded are through:
  1. increasing taxes
  2. cutting other expenses.
  3. getting federal aid.

Should New Jersey raise taxes when it already has the highest taxes in the country?   Given the irrevocable nature of pension benefits, shouldn't we put all new money into pension funds?

What about cutting other spending?  Education spending has risen to 38% of the budget from 31% of the budget since 2000, and despite that, K-12 education is severely underfunded.  New Jersey's property taxes are double the national average, and taking money away from state aid means that our property tax crisis will not let up.

Expanding Pre-K might sound noble, but it's an expense that New Jersey can't afford unless there is federal help.  Any money that would go towards Pre-K would have to be taken away from our deteriorating pension funds and/or programs that benefit other sectors of the New Jersey population.

Eight years ago (when SFRA was passed) middle class and working class towns were promised state aid and tax relief.  Today, 140 districts get not even 50% of the K-12 aid SFRA recommends.  20% of New Jersey districts don't even offer full-day kindergarten, let alone Pre-K.  The most underaided towns are in downward spirals exacerbated by inferior services and excess taxes.

Eight years later they're still waiting too.

As Pre-K Our Way would say:

That's not right.


See Also: