Saturday, January 19, 2019

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.
, 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.

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