Thursday, September 19, 2019

Is SFRA Fair to South Jersey and Rural New Jersey?

One chronic political dynamic in New Jersey is the friction between South Jersey and the rest of New Jersey, where South Jersey persistently feels that it is disrespected by North Jersey and disadvantaged in lawmaking and budgeting, ie, it is the "Rodney Dangerfield" of the State.

There's some credible research to back this claim up:

“There has long been a popular belief among South Jersey residents that the region gets the short end of the stick when it comes to the allocation of public goods in the state,” explains Walter Rand Institute Faculty Fellow Shauna Shames, an assistant professor of political science at Rutgers–Camden. “We found that this difference in resource allocation does in fact exist and is not explained by the lower population or incomes of residents of South Jersey counties.”
Shames, who co-authored the study, “Is South Jersey Getting Its ‘Fair Share’ of Public Goods?,” with Spencer Clayton, a Rutgers–Camden Ph.D. student in public affairs, detailed data-supported answers to the question that has challenged South Jersey residents for decades, in a special presentation today on the Rutgers–Camden campus.
According to the Rutgers–Camden researchers, previous studies show that South Jersey is a distinctive region from North and Central Jersey in terms of identity and socioeconomic indicators. South Jersey residents lags behind its northern and central neighbors statistically in terms of public-health factors, such as obesity and teen birth rates; economic issues, such as unemployment and college education attainment levels; and geographic factors, such as rural versus urban areas. On average, South Jersey residents also have lower incomes and are more likely to be living in poverty and receiving government assistance.
Studies have also revealed that North and Central Jersey residents believe that the state’s resources are fairly evenly divided, while South Jersey residents believe that North and Central Jersey get a greater share of these resources. Moreover, they maintain, this attitude of being slighted – as the “Rodney Dangerfield of the state” (Monmouth University Poll) – is part of the collective identity of South Jersey residents.
Using data collected from various state and county print and web resources, Shames and Clayton found that there is merit to these assumptions. For instance, per-county budget figures show significantly lower total revenue, local revenue, state aid, and state assumption in South Jersey, with North and Central Jersey counties receiving – on average – double the state aid and state assumption that South Jersey counties receive. 

I can't speak to transportation spending, municipal aid, college spending, or hospital beds, but as an obsessive New Jersey state aid researcher, I agree that SFRA does have an unjustified tilt against South Jersey.

The bias comes from how SFRA uses Aggregate Income to calculate Local Fair Share, which disadvantages several categories of school districts, but especially places where people happen to live in more affordable real estate, and that is much more true of South Jersey than North Jersey. SFRA's method of calculating Local Fair Share combined with SFRA's new Geographic Cost Adjustments means that even if every district received 100% of its recommended state aid under SFRA, South Jersey districts and rural districts everywhere would have to pay higher tax rates than their North Jersey and suburban or urban equivalents.

This is the second blog post I've written about the problems of New Jersey's bizarre Local Fair Share sub-formula. My previous post, "The Highs and Lows of Local Fair Share" examined how other categories of school districts are also hurt by Local Fair Share's use of Aggregate Income:

  • Ones with relatively little non-residential property or relatively little vacation property.
  • Ones with a high percentage of their Aggregate Income originating from people in rental housing, since rental apartments have lower assessments than owner-occupied housing per residential income.
  • Ones with senior citizens living in tax-exempt non-profit housing.
  • Ones with high-income outliers.
  • Districts with a large percentage of their income coming from residents of PILOTed buildings.

To see exactly which districts are advantaged or disadvantaged by SFRA's use of Aggregate Income to calculate Local Fair Share, check out this Local Fair Share as a tax rate spreadsheet here.

This post will examine the history of New Jersey's Local Fair Share formula and show that it was intentionally written in 1990 to give less money to South Jersey, and then copied & pasted into CEIFA and SFRA.   This post will show how the writers of SFRA in 2007-08 ignored CEIFA's existing disadvantage for South Jersey and made it even worse by writing explicit Geographic Cost Adjustments that would further reduce the amount of state aid going to South Jersey and rural districts.

This post will also look at how strong the Local Fair Share skew is and how nearly all of the districts with above-median Local Fair Shares and extremely high Local Fair Shares are concentrated in South Jersey.  

Note: the disadvantage from the Local Fair Share sub-formula is not to "South Jersey" writ large, but 
to parts of South Jersey that are not on the Jersey Shore.  Jersey Shore districts are actually highly advantaged by the Local Fair Share formula because they have expensive vacation homes which have no residential income attached to them.

Even Cape May, New Jersey's southernmost county, is not part of "South Jersey" for the purpose of Local Fair Share's problems, since all Cape May districts have low Local Fair Shares.  Cape May is the "Jersey Shore" in the context of Local Fair Share.

The problem might really be conceptualized on a West Jersey/East Jersey axis, but since the terms "West Jersey" and "East Jersey" don't exist, I've used "South Jersey."

Also, there are middle-class and low-income districts in North Jersey and Central, including in the New York City suburbs, who are disadvantaged by the Local Fair Share calculation too and who are expected to pay high Local Fair Shares.  Irvington, whose municipal tax rate is 3.6%, is expected to pay a 1.8% school tax rate.

So high Local Fair Shares is a South Jersey problem, but not only a South Jersey problem.

Finally, in asserting that South Jersey is disadvantaged by SFRA, I am not saying that South Jersey receives less state aid in dollars-per-student than North Jersey, but that South Jersey receives less state aid per its needs.

SFRA does recognize that South Jersey districts are lower-wealth and higher-need than North Jersey districts. In dollars per student or as a percentage of a district's school budget, the average South Jersey district receives more state aid than the average North Jersey district, but the average South Jersey district isn't as wealthy either.

Equalization Aid and Taxes

The core state aid formula in SFRA is that for Equalization Aid, which attempts to "equalize" budgetary capacity between wealthy and poor districts.

The Equalization Aid formula is:

Equalization Aid = Adequacy Budget - Local Fair Share 

The state is supposed to provide district whatever the difference is between the Adequacy Budget and the Local Fair Share.  If a district's Local Fair Share exceeds the Adequacy Budget by 1% or 1000%, the district is ineligible for Equalization Aid.

Districts with Local Fair Shares in excess of their Adequacy Budgets have Local Fair Shares that are just theoretical and they are excluded from the analysis in this blog post.

To give an example of why it is appropriate to exclude districts that are ineligble for Equalization Aid, consider Millburn. 

Millburn's Local Fair Share is $190 million which is a 1.8% tax rate (!), but its Adequacy Budget is only $71 million. Millburn's actual 2019-20 tax levy is only $88 million, which is a 0.8% tax rate.  The $190 million Local Fair Share is the product of the same calculation that the DOE uses for all districts, but it doesn't mean anything.

Most districts that are ineligible for Equalization Aid are not as rich as Millburn.  A decent number of districts that are ineligible for Equalization Aid do exceed their Local Fair Shares (eg, Rockaway, Flemington-Raritan, Wayne, Fredon, Blairstown, Lower Alloway's Creek, Freehold Township, South Orange-Maplewood etc) but I have chosen to exclude them because SFRA sees them as "rich districts" and their high taxes are due to 1) underaiding by the state and/or 2) a voluntary desire to have higher spending. 

New Jersey's Local Fair Share Calculation is Highly Unusual

Both Adequacy Budget and Local Fair Share have their own sub-formulas and both of those sub-formulas present issues for South Jersey and rural northwestern New Jersey.

The Local Fair Share formula is tweaked (upwards) annually, but for 2019-20 the formula is:

0.73% of Equalized Valuation plus 2.49% of Aggregate Income

The statewide math works out to a 1.5% average, but because SFRA uses Aggregate Income to calculate Local Fair Share, Local Fair Share varies from a 0.7% tax rate for some Cape May districts that are dominated by vacation homes all the up to 2.1% for Lindenwold and Hi Nella in Camden County.  This means that New Jersey considers it "fair" for some districts to pay triple what other districts pay.

New Jersey is, along with Connecticut, Massachusetts, Maryland, New York, Virginia, Pennsylvania, New Jersey one of only six states to use a district's income to calculate Local Fair Share.  Other states base local share on property values, sometimes combined with miscellaneous taxes like sales taxes and car taxes.

New Jersey's use of Aggregate Income is especially unusual because at least in Maryland and Pennsylvania, localities have some power to tax income, whereas in New Jersey they don't.  Also, Pennsylvania uses median income, not Aggregate Income.  Connecticut also uses aggregate income, but it gives income half the weight as it does property values, whereas in New Jersey Equalized Valuation and Aggregate Income are weighted equally.

New York State and Massachusetts are the only states to weigh Aggregate Income and property values equally, like New Jersey.   Virginia's weighting is similar, although technically it is 50% property values, 40% aggregate income, and 10% sales taxes. 

Given how unusual using Aggregate Income is and the problems it leads towhy base Local Fair Share on Aggregate Income?

Answer: because SFRA's predecessors did, going back to Jim Florio's Quality Education Act of 1990.

So why did the Quality Education Act use income?

Answer: To Give Less Money to South Jersey:

According to Deborah Yaffe's book about the Abbott cases "Other People's Children," the decision to use income as a basis for a district's local tax capacity was intentionally made to give less money to South Jersey because South Jersey was more affordable. 

"[Florio] team members considered how best to assess each district's wealth, which would in turn decide how much of the foundation amount local property taxes would cover. Using property values as the sole gauge of district wealth, it turned out, skewed [sic] state aid toward the low-cost towns of South Jersey and away from the big, impoverished northern cities. One night, Florio's team huddled around a tiny globe, trying to determine which line of latitude passed through central New Jersey; perhaps using a different wealth formula on either side of the line would skirt the South Jersey problem. Instead, the team found another solution: a district's local tax contribution, they decided, would turn not only on its property values but also on its residents' average [sic] income."   
(page 181) 
Florio's team knew what they were doing and the use of Aggregate Income indeed does prevent a "skew" of state aid towards low-cost towns of South Jersey (although it hurts plenty of "impoverished northern cities" and rural towns too.)

Given that the non-Shore counties of South Jersey are more affordable and people spend less income on real estate, SFRA does require them to pay higher tax rates.

Equalized Valuation of Equalization Aid-eligible districtsAggregate Income of Equalization Aid-eligible districtsEqualized Valuation:Income RatioWeighted Average Local Fair Share Tax Rate (Equalization Aid-eligible districts only)
Cape May$8,535,791,030$1,301,321,1286.561.11%

No matter how you parse it, South Jersey districts are expected to pay higher tax rates than districts elsewhere.

Average Expected Local Fair Share
DFGCentral JerseyJersey ShoreNorth JerseyNorthwest NJSouth Jersey
A + B1.52%1.28%1.41%1.54%1.61%
This information is in the chart at the beginning of this post, but it is now presented in table format.

Another way to look at how Local Fair Share creates an unequal tax landscape is how many districts are expected to pay above-median and top-fifth tax rates.

Of the districts who have Local Fair Shares at or over a 1.5% tax rate, 33 are in Camden County, 21 are in Gloucester County, 11 are in Cumberland, 9 are in Salem, 24 are in Burlington.

Number of Districts with a LFS ≥ 1.5%Number of Districts with a LFS <1.5%Number of Districts which are Equalization Aid Ineligible
Cape May0511
The counties are ranked by the percentage of Equalization Aid-eligible districts that have LFSs over 1.5%.

Of the districts who have extreme Local Fair Shares at or over 1.7%, 23 are in Camden

Lindenwold Might Look like an ordinary NJ town, but its s
expected to pay a 2.1% school tax rate, NJ's highest.
County, 13 are in Gloucester, two are in Cumberland, two are in Salem County, and five are in Burlington.

If you look at how much in dollars-per-student high-Local Fair Share districts lose in Equalization Aid, the unfairness against South Jersey districts is even worse, since South Jersey has virtually all districts with the highest Local Fair Shares.

Although Lindenwold has NJ's highest Local Fair Share at 2.1% ($12.5 million on an Equalized Valuation of $599 million), since Lindenwold's Local Fair Share is still very low in dollars-per-student, it is with Woodbury Heights losing $531,550 for its 220 students, or $2507 per student.

CountyDistrictEqualized Valuation2019-20 Official Local Fair ShareLFS as a Percentage of Equalized ValuationLocal Fair Share at a 1.5% Tax RateAmount of Equalization Aid Owed at Official Local Fair ShareAmount of Equalization Aid if Local Fair Share were a 1.45% Tax RateDifference between 1.5% Tax Rate and Actual
GLOUCESTERWOODBURY HEIGHTS $137,906,806$2,600,1521.89%$2,068,602$566,234$1,097,784-$531,550
MIDDLESEXHIGHLAND PARK $1,388,950,017$24,132,7011.74%$20,834,250$3,108,946$6,407,397-$3,298,451
CAMDENEASTERN CAMDEN COUNTY REG$1,480,019,143$26,182,5641.77%$22,200,287$5,345,217$9,327,494-$3,982,277
GLOUCESTERHARRISON TWP$822,781,727$15,053,6781.83%$12,341,726$3,536,269$6,248,221-$2,711,952
CAMDENCHERRY HILL TWP$8,609,940,019$148,703,3741.73%$129,149,100$12,116,346$31,670,620-$19,554,274
HUNTERDONCLINTON TOWN (GLEN GARDNER)$107,751,816$1,843,2921.71%$1,616,277$95,508$322,523-$227,015
GLOUCESTERPITMAN BORO$604,959,879$11,350,7421.88%$9,074,398$6,584,738$8,861,082-$2,276,344
CAMDENOAKLYN BORO$279,984,808$4,982,2701.78%$4,199,772$1,852,255$2,634,753-$782,498
BURLINGTONSHAMONG TWP$457,755,098$8,164,3961.78%$6,866,326$1,947,949$3,246,019-$1,298,070
CAMDENCOLLINGSWOOD BORO$1,080,269,145$19,293,4951.79%$16,204,037$8,378,167$11,467,625-$3,089,458
GLOUCESTERCLEARVIEW REGIONAL$1,426,535,842$25,351,3701.78%$21,398,038$9,040,091$12,993,423-$3,953,332
CAMDENBARRINGTON BORO$535,581,822$9,301,4581.74%$8,033,727$2,748,935$4,016,666-$1,267,731
CAMDENLAUREL SPRINGS BORO$121,403,590$2,346,7961.93%$1,821,054$2,472,487$2,998,229-$525,742
CAMDENMOUNT EPHRAIM BORO$287,230,725$5,223,2501.82%$4,308,461$3,349,883$4,264,672-$914,789
SUSSEXSTANHOPE BORO$213,804,420$3,647,1191.71%$3,207,066$594,818$1,034,871-$440,053
CAMDENMERCHANTVILLE BORO$253,543,155$4,748,4011.87%$3,803,147$4,529,362$5,474,616-$945,254
GLOUCESTERGATEWAY REGIONAL$410,162,677$7,554,6921.84%$6,152,440$7,134,884$8,537,136-$1,402,252
CUMBERLANDHOPEWELL TWP (SHILOH BORO)$27,386,477$484,9401.77%$410,797$204,962$279,105-$74,143
BURLINGTONPALMYRA BORO$512,976,726$8,896,0471.73%$7,694,651$4,439,525$5,640,921-$1,201,396
HUNTERDONHIGH BRIDGE BORO$256,389,871$4,358,7651.70%$3,845,848$943,865$1,456,782-$512,917
ESSEXWEST ORANGE TOWN$6,373,773,006$104,223,3691.64%$95,606,595$13,096,095$21,712,869-$8,616,774
WARRENWASHINGTON TWP$336,728,021$5,594,1611.66%$5,050,920$240,519$783,760-$543,241
GLOUCESTERMANTUA TWP$744,269,386$12,803,9061.72%$11,164,041$3,801,373$5,441,238-$1,639,865
GLOUCESTERWASHINGTON TWP$4,649,949,012$79,755,6921.72%$69,749,235$27,156,652$37,163,109-$10,006,457
GLOUCESTERSOUTH HARRISON TWP$245,546,976$4,159,8571.69%$3,683,205$837,801$1,314,453-$476,652
BURLINGTONLENAPE REGIONAL$6,063,266,738$99,564,0081.64%$90,949,001$10,304,726$18,919,733-$8,615,007
CAMDENSTRATFORD BORO$304,963,741$5,628,4691.85%$4,574,456$5,665,771$6,719,784-$1,054,013
SUSSEXOGDENSBURG BORO$139,240,291$2,361,7091.70%$2,088,604$893,780$1,166,885-$273,105
BURLINGTONMEDFORD LAKES BORO$315,580,936$5,405,8481.71%$4,733,714$1,645,410$2,317,544-$672,134
CAMDENHADDON TWP$1,386,536,155$23,339,6731.68%$20,798,042$5,886,743$8,428,374-$2,541,631

SFRA's Forerunners Didn't Have Geographic Cost Adjustments

Jim Florio's administration wrote the Local Fair Share formula to give less state aid to South Jersey and more state aid to cities in North Jersey, but that was the only thing they did to adapt to New Jersey's regional cost reality. 

Neither the Quality Education Act of 1990 nor 1996's CEIFA contained an equivalent to the Geographic Cost Adjustments.  The Geographic Cost Adjustments were not created until the Corzine-era SFRA of 2008. 

The Geographic Cost Adjustment is a multiplier that either reduces or increases a district's Adequacy Budget.  The GCA decreases Equalization Aid for low-cost counties and increases Equalization Aid for high-cost counties, with the calculation of the GCA based on average salaries in a county.

The sub-formula for a district's Adequacy Budget is:


So having a GCA higher than one increases Equalization Aid (if eligible) or reduces it. 

Since 2014, the Geographic Cost Adjustments have been:

CountyRevised GCA Index (FY14)CountyRevised GCA Index (FY14)
Monmouth0.9953Cape May0.9429

So, as you can see, all South Jersey counties have multipliers below 1.0, meaning their Adequacy Budgets and Equalization Aid (if eligible) are reduced.

Woodbine, in Cape May, loses the most money as a result of the GCAs.  If the GCAs didn't exist, Woodbine would get another $1102 per student in Equalization Aid.

 Camden County (average LFS = 1.7%), Gloucester (1.66%), Hunterdon (1.63%), Cumberland (1.6%), Burlington (1.59%), Mercer (1.59%), Salem (1.59%), Warren (1.55%) have both high Local Fair Shares AND low-GCAs, meaning those eight counties are disadvantaged by both the Local Fair Share and Adequacy Budget sub-formulas. 

There has always been controversy around the Geographic Cost Adjustments.  Senator Steve Oroho has been a longtime critic of the Geographic Cost Adjustments, arguing along these lines:

“Our school district costs are roughly equal to or more than school districts throughout the state, yet the School Funding Reform Act (SFRA) of 2008 adopted by the Corzine Administration penalizes us for a bogus assumption that it is significantly cheaper to educate a child in rural areas,” Oroho said. “As a result, our residents are faced with making up the cost differential via local property taxes. ZIP codes should not factor in the cost or quality of education in this state.”
Oroho detailed several examples of why the geographic aid adjustment is not fair to rural school districts, including: Special education costs and out-of-district placement costs are not dissimilar for all counties; state health benefits must be accounted for; the costs of energy, textbooks, supplies and food service are the same or similar across counties; and transportation costs are exponentially more expensive than for suburban/urban school districts.
“The expectation that it is less expensive to operate a school district in rural communities is a farce, as approximately 90 percent of our budgets are comprised of steady expenses,” Oroho noted. “Just as children should not be penalized if they live in a failing school district, students should not suffer from a reduction in state aid because of a nonsensical geographic stipulation in a flawed school funding formula.”
It was partly due to Steve Oroho's effort that the GCAs were made less-unfavorable to rural New Jersey in 2014.  Oroho has now joined forces with Sen. Bob Andrzejczak to reset every county's GCA to at least 1.0%.

Does Having a Lower Cost of Living Justify Higher School Taxes?

Again, there is some necessity to recognizing that costs vary by region, hence something like the Geographic Cost Adjustments is appropriate.  

As mentioned above, the problem of high Local Fair Shares is a real South Jersey problem, but it is not only a South Jersey problem.

In a future post I will examine how another problem of Local Fair Share calculation is that there is a correlation between having a high Local Fair Share and having high municipal taxes too.


See Also: