Tuesday, October 8, 2019

2020 Equalized Valuations Show Continued Rise of Hudson County

New Jersey's Equalized Valuations are out for Tax Year 2020, thereby allowing us to make an informed guess about FY2021 state aid deficits and surpluses, plus infer some key trends about New Jersey's economic churn.  

In case you are new to this blog, "Equalized Valuation" the value of all the taxable property in a town.  It is used to apportion county taxes and, theoretically, K-12 school aid.

The state's weighted increase for Equalized Valuation was +2.7% (+$35 billion, from $1,288,305,163,962 to $1,323,232,621,731).  

However, that gain was concentrated in a relatively small number of towns (20 towns had half the statewide gain), and the median town's Equalized Valuation increase was only 2.18%.

Continuing a trend of recent years, Hudson County had, by far, the biggest gain in Equalized Valuation.  

Much of that gain is Jersey City's alone.  Jersey City's $6.1 billion gain in Equalized Valuation is 17% of the state total gain.

Because you shouldn't infer anything based on one year's worth of data, here's the five year look, with the counties listed in the same order as the one-year look above. 

As you can see, for most of New Jersey, real estate is a poor investment, lagging inflation or barely beating it.   Much of the gain that does occur is from new construction too, not appreciation of the existing housing stock.

Gentrification, Where are you?

One of many erroneously reported trends in American life today is gentrification, which is often used as a synonym for the displacement of low-income residents.

Yes, gentrification and displacement are real and worthy of attention, but it's a geographically concentrated phenomenon and most American post-industrial cities aren't touched by it.

Aside from Jersey City, most of New Jersey's other post industrial cities, including Newark, Paterson, Elizabeth, and Trenton, have very little gentrification to speak of.  

Newark, which had had a $2 billion gain in Equalized Valuation for Tax Year 2019, strangely lost $2 billion, and is now back to its 2018 Equalized Valuation.

Implications for State Aid

Equalized Valuation, along with Aggregate Income, is used to determine a district's Local Fair Share and thus its eligibility for Equalization Aid.

The formula for Local Fair Share is tweaked annually, but this is the 2019-20 version:

= (Equalized Valuation x 0.014523812)/2 + (Aggregate Income x 0.049819447)/2 =

Which is really:
0.73% of Equalized Valuation + 2.49% of Aggregate Income


Jersey City merits special attention because it is NJ's second largest school district and is getting $182 million in Adjustment Aid in 2019-20 ($5,936 per student).
Jersey City's Equalized Valuation grew from $34 billion to $40.1 billion between 2019 and 2020 alone (+18%).  Based on the 2019-20 formula for Local Fair Share, that $6.1 billion increase would cause a $44 million increase in Jersey City's Local Fair Share.

That $44 million increase from the growth of the Equalized Valuation, with tens of millions in increase from Aggregate Income growth too, should be enough to increase Jersey City's Local Fair Share to approximately $550 million for the first time.  

The short-term importance of this is that Jersey City should lose much more state aid for 2020-21 than the $27 million it lost for 2019-20. The $60-70 million increase in Jersey City's Local Fair Share, combined with the increased pace of Adjustment Aid redistribution laid out in S2 (23% for 2020-21 versus only 13% for 2019-20), means a bigger loss for 2020-21 and the necessity of the Jersey City Board of Education to get real about raising its tax levy.
The longer-term importance is that since Jersey City's K-12 enrollment is very steady and its Adequacy Budget grows due to inflation only, in only 3-4 years, Jersey City's Local Fair Share will exceed its Adequacy Budget ($623 million for 2019-20) and Jersey City will join "wealthy" suburban districts as ineligible for Equalization Aid.

Other Hudson County towns like Bayonne, West New York, Union City, and Guttenberg also had large gains in Equalized Valuation, although there are nowhere near being overaided, let alone ineligible for Equalization Aid.

Other Districts to Note:
  • Edison also had a big year, gaining $1.6 billion to reach $19 billion, the second most in NJ (+9%).  
    Edison was eligible for $21 million in Equalization Aid for 2019-20, which it didn't get because it was coincidentally underaided by the same amount.  It is possible that Edison's increase in Local Fair Share will be sufficient to erase Edison's theoretical Equalization Aid and its state aid deficit.
  • Despite a lot of PILOTing, Asbury Park gained $137 million (+8%). 

    That $137 million increase should be enough to reduce Asbury Park's Equalization Aid by $1 million.
  • Lakewood also gained $980 million (+9%), but since Lakewood is already ineligible for Equalization Aid, it is hard to say what the consequence of this will be.  On one hand, it should make it politically easier for the Lakewood BOE to raise the tax levy, but the increase in tax base also might make it harder for Lakewood to argue that it needs more state aid. 
  • Harrison, in Hudson County, grew by only $37 million, or 2.6%.  This tiny increase might be due to the fact that Harrison has PILOTed much of its new development.



How is Equalized Valuation determined?
Equalized Valuation is determined by calculating the ratio of sales prices to a town's official assessment for its own local taxes.  If sale prices are, on average, 110% of properties's official assessments, then Equalized Valuation would equal 110% of a town's total official assessment.  If sale prices are 93% of official assessment, then Equalized Valuation would equal 93% of a town's total official assessment.

Because Equalized Valuation based on a ratio of sale prices to official assessment, a town's refusal to do a reval does not affect Equalized Valuation.  

Contrary to assertions from Sen. Mike Doherty and the Toms River Board of Education, Jersey City's decades-long refusal to do a reval did not distort its state aid since JC's Equalized Valuation constantly grew along with its real estate market.  Jersey City's state aid was distorted by Adjustment Aid and PILOTing, not the lack of a reval.  

If a town's Local Fair Share exceeds its Adequacy Budget, a change in Equalized Valuation has no theoretical impact on state aid at all, since it doesn't matter if a Local Fair Share exceeds Adequacy Budget by 5% or 150%.  Equalization Aid is $0 in either case.

Note: Equalized Valuation is not the same thing as the aggregate assessed value, which is the sum of all the individual assessments on properties and will not reflect real market value if the reval was not done recently.  Assessed values are only used for a town's internal tax apportionment.

Thursday, October 3, 2019

High Local Fairs Correlate with High Municipal Taxes

This is Part 2 of my series on the problems that arise from how the School Funding Reform Act uses a district's Aggregate Income to calculate Local Fair Share.

Part 1 was about how the districts with the highest Local Fair Shares are concentrated in South Jersey and how the Local Fair Share formula was written in 1991 to tilt state aid against South Jersey.

Part 2 will look at how having a high expected Local Fair Share correlates with having high municipal taxes.

Again, I've created a spreadsheet of Local Fair Share as a tax rate here.


The core formula of SFRA is the formula for Equalization Aid, which is 

Equalization Aid = Adequacy Budget - Local Fair Share

So that if a district is incapable of raising enough money locally, the state steps in with "Equalization Aid" to, theoretically, create budgetary parity with middle-class districts.

Adequacy Budget and Local Fair Share calculated through their own sub-formulas.  The 2019-20 sub-formula for Local Fair Share is:

0.73% of Equalized Valuation plus 2.49% of Aggregate Income

Statewide, Local Fair Share ranges from a low of 0.73% for some districts at the Jersey Shore whose income is minute compared to their property bases, up to 2.1% for Lindenwold.

Since a district's Local Fair Share depends partly on its Aggregate Income, the following categories of districts are disadvantaged:

  • districts that lack non-residential property
  • districts where people live in housing that is affordable relative to their incomes.
  • districts with residents in PILOTed buildings.
  • districts with residents in tax-exempt buildings.
  • districts with high-income outliers.

Local Fair Share Inequality

Although making people with less expensive  housing pay more in taxes could be defended since (all else being equal), they have more discretionary income, but Local Fair Share is based on Aggregate Income, not median income, so it therefore harms districts that are heavily non-vacation home residential,  since residential property has income attached to it.

Under Local Fair Share's formula, a $500,000 house with people living there contributes as much to a district's Local Fair Share as $1 million non-residential property or a $1 million vacation home.

And since districts that are heavily residential also have higher municipal taxes, it means that SFRA forces districts with high municipal taxes to pay high school taxes on top of that.  

Of the 60 districts in New Jersey that have the Local Fair Shares above 1.7%, 58 have higher-than-average municipal+county taxes too.

The same skew continues for all the above-median Local Fair Share districts.

Click to Enlarge:
These are the Districts Whose Local Fair Share Tax Rate is 1.7% or above.
PS  The reason I am using county+muni taxes is because the balance of responsibility between muni
and county services differs from county to county, and thus an intercounty comparison of solely municipal tax rates would not be an apples-to-apples comparison.
Notes: This Includes Only Districts that are Eligible for Equalization Aid.
Regional districts are factored out, but if they were factored in, the r would be only trivially lower.
I also excluded Winfield and Audobon Park, since they are outliers with tons of tax-exempt property.

Unfortunately I can't examine only municipal tax rates because municipalities have different functions in different counties and so it would be an apples-to-oranges comparison to compare municipal taxes in Bergen and Salem counties.  For instance, in the average municipal tax rate is 2.86x the county tax rate, but in Salem County, the situation is the inverted, with the average municipal tax rate at only 46% of the county tax rate.

For Salem County and Cumberland counties, "municipal overburden" is a misnomer, since their municipal taxes are quite low, but their county taxes are over 1% and so quite high.

The necessity of my including county taxes dulls the effect of municipal tax overburden since county taxes are distributed so broadly.

The above scatterplot of Local Fair Share versus municipal+county taxes may not look like that strong a correlation, but at the extremes there is a huge difference in tax rates, with high-Local Fair Share districts having MUCH higher municipal+county taxes.

"Municipal Overburden" is a misnomer. It's really "municipal plus county" overburden.

The reality that high Local Fair Shares and high municipal taxes means that for scores of New Jersey school districts reaching Adequacy is difficult or impossible, since they suffer from Municipal Overburden.

Why Do High Local Fair Share Distrcts Have High Non-School Taxes Too?

I cannot say exactly why some districts have high Local Fair Shares, but there is a correlation between a high Local Fair Share and lacking non-residential property and/or having apartment buildings represent a large share of the tax base.  (See "Property Value Classifications") 

DistrictEqualized Valuation 2018Aggregate Income 2016Local Fair ShareLocal Fair Share as a Tax RateApartment % of Total ValueNon-Residential, Non-Apartment
LINDENWOLD BORO$599,223,097$325,065,809$12,448,8012.08%22.80%9.60%
HI NELLA$36,960,216$19,519,842$754,6362.04%40.50%9.30%
WOODLYNNE BORO$68,075,955$36,019,982$1,391,6092.04%0.90%7.80%
PINE HILL BORO$450,575,267$225,005,334$8,876,8561.97%11.20%3.80%
LAUREL SPRINGS BORO$121,403,590$58,819,407$2,346,7961.93%3.00%7.60%
WOODBURY HEIGHTS BORO$137,906,806$64,179,184$2,600,1521.89%0.10%21.40%
BRIDGETON CITY$536,314,422$249,327,200$10,105,3371.88%5.80%27.30%
PITMAN BORO$604,959,879$279,311,800$11,350,7421.88%2.80%8.30%
MERCHANTVILLE BORO$253,543,155$116,709,203$4,748,4011.87%4.80%10.10%
STRATFORD BORO$304,963,741$137,048,946$5,628,4691.85%4.60%14.10%
HARRISON TWP$822,781,727$364,464,673$15,053,6781.83%0.00%7.30%
MOUNT EPHRAIM BORO$287,230,725$125,951,094$5,223,2501.82%2.20%12.40%
TRENTON CITY$2,441,950,609$1,059,913,102$44,135,3581.81%3.80%37.30%
IRVINGTON TOWNSHIP$2,031,582,658$875,656,140$36,565,5141.80%15.10%24.20%
NATIONAL PARK BORO$86,683,628$37,415,113$1,561,4881.80%0.40%3.90%
COLLINGSWOOD BORO$1,080,269,145$459,606,954$19,293,4951.79%3.60%10.00%
SHAMONG TWP$457,755,098$194,310,545$8,164,3961.78%0.00%3.20%
OAKLYN BORO$279,984,808$118,389,396$4,982,2701.78%5.20%8.90%
GLOUCESTER TWP$3,104,839,729$1,301,479,444$54,966,5471.77%3.60%9.80%
HOPEWELL TWP (SHILOH BORO)$27,386,477$11,483,950$484,9401.77%0.00%5.80%
PITTSGROVE TWP$654,660,514$270,435,585$11,490,5591.76%0.00%8.10%
BEVERLY CITY$123,635,005$50,864,076$2,164,8361.75%0.80%8.30%
SALEM CITY$140,152,704$57,543,257$2,451,1631.75%4.90%35.80%
BARRINGTON BORO$535,581,822$217,269,108$9,301,4581.74%7.90%13.10%
CLAYTON BORO$487,658,122$197,962,896$8,472,5281.74%2.70%8.30%
HIGHLAND PARK BORO$1,388,950,017$563,887,291$24,132,7011.74%13.50%9.00%
PALMYRA BORO$512,976,726$207,583,933$8,896,0471.73%4.40%9.00%
WATERFORD TWP$768,729,462$310,723,239$13,322,4711.73%0.50%6.80%
CHERRY HILL TWP$8,609,940,019$3,459,644,961$148,703,3741.73%3.60%26.00%
CAMDEN CITY$1,718,104,905$693,731,004$29,757,3631.73%4.80%27.20%
EAST GREENWICH TWP$718,158,654$290,173,218$12,443,3361.73%0.20%5.60%
BELVIDERE TOWN$184,221,085$74,350,840$3,189,8551.73%2.20%17.00%
BROOKLAWN BORO$123,186,144$49,205,483$2,120,2611.72%2.40%30.90%
MANTUA TWP$744,269,386$297,036,308$12,803,9061.72%0.20%13.20%
WASHINGTON TWP$4,649,949,012$1,846,194,679$79,755,6921.72%1.40%17.40%
MEDFORD LAKES BORO$315,580,936$125,016,587$5,405,8481.71%0.00%1.90%
RUNNEMEDE BORO$364,302,924$144,261,587$6,239,0501.71%5.30%18.00%
GLOUCESTER CITY$539,094,958$213,510,392$9,233,3421.71%1.30%21.10%
CLINTON TOWN (GLEN GARDNER)$107,751,816$42,586,114$1,843,2921.71%0.90%3.80%
STANHOPE BORO$213,804,420$84,083,250$3,647,1191.71%1.10%9.10%
OXFORD TWP$178,138,252$70,461,300$3,048,7951.71%0.60%5.50%
EASTAMPTON TWP$318,485,908$124,889,003$5,423,7661.70%7.90%5.70%
AUDUBON BORO$731,944,695$285,886,678$12,436,6721.70%2.00%12.80%
WOODBURY CITY$584,129,012$228,371,302$9,930,5561.70%4.20%24.00%
HIGH BRIDGE BORO$256,389,871$100,237,416$4,358,7651.70%0.30%6.70%
OGDENSBURG BORO$139,240,291$54,218,140$2,361,7091.70%1.00%7.10%
1.51% (weighted avg, only Equalization Aid-eligible districts)3.50%17.80%
STATE MEDIAN1.50%1.30%13.50%

Although there are some high-Local Fair Share districts for whom the reasons for the high Local Fair Share are difficult to pinpoint (other than that residents have low housing cost:income ratios), there is a tendency of high-Local Fair Share districts to have very little non-residential property and/or many apartments.

New Jersey Needs Countization of School Taxes:

New Jersey's school funding law must be complex to try to accommodate the many different kinds of school districts that exist here.  Simplicity itself should not itself be a goal if the complexity serves a useful purpose.

However, when it comes to calculating Local Fair Share, the complexity added by using Aggregate Income counteracts common sense by requiring districts with high municipal and county taxes to pay higher school taxes on top of that.  Moreover, using Aggregate Income irrationally punishes districts that have high-income outliers and people living in tax-exempt property.  Using Aggregate Income also causes districts with a lot of PILOTed property to have high Local Fair Shares too, since the income of residents of PILOTed buildings counts towards a district's Local Fair Share, but PILOTed buildings don't pay school taxes.

Since the districts with the highest Local Fair Shares in New Jersey tend to have high municipal taxes as well, the Local Fair Share formula itself (which has been untouched since 1990) makes it unlikely that New Jersey would ever see every district at 100% of Adequacy, even if all districts were at 100% of their recommended state aid.  

In conclusion, since Boards of Education only have the power to tax property, Local Fair Share should just be based on a district's taxable property. Period.  


See Also: