Saturday, December 28, 2019

Brick, Toms River, and the Local Fair Share Formula

Since the passage of S2, many districts have protested against the redistribution of state aid.

While aid-losing districts exist throughout New Jersey and opposition to redistribution is found in all geographic regions of New Jersey, a cluster of districts in South Jersey -- Jackson, Manalapan-Englishtown, Toms River, Lacey, Freehold Regional, Weymouth, Ocean (Monmouth County), and Brick -- have been the most intensely against cuts to Adjustment Aid, particular Brick, Toms River, and Freehold Regional.

The most frequent argument that these districts make against SFRA is that their Local Fair Shares have risen considerably since the passage of SFRA and the Department of Education's refusal to release the formula for Local Fair Share multipliers makes the SFRA's state aid targets for them illegitimate.  Brick, Toms River, and their allies have a twitter hashtag campaign #releasetheformula and constantly use the opacity of the derivation of the Local Fair Share formula to denounce SFRA as a whole.

The Local Fair Share formula isn't an anti-Ocean County conspiracy,
and it is highly advantageous to Brick and Toms River due to the use
of Aggregate Income to calculate Local Fair Share
and that Brick and TR have no income attached to their vacation
homes.


While I believe that New Jersey has no pathway to fair funding without state aid redistribution, I do think that Brick and Toms River have raised at least an important issue regarding the increase in the Local Fair Share.  However, as this post will show, despite these districts' loss of Adjustment Aid, the Local Fair Share formula is actually highly advantageous to these districts and they have little validity to their case.

Where Does the Local Fair Share Formula Come From?

Yes, the formula for Local Fair Share does have strange multipliers in it:

2019-20:

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

To make matters more frustrating, the Department of Education has not publicly explained how those numbers are derived, let alone released a "formula" for their calculation.

However, the DOE's lack of candor doesn't mean that they aren't obeying the law.

The roots of where the Property multiplier and Income multiplier come from is SFRA itself, but no one could read this an infer how Local Fair Share multipliers are calculated or why they steadily increase.

Frome pages 14 and 15 of SFRA:

c. For the 2008-2009 school year, the property value rate shall be set at 0.0092690802and the income value rate shall be set at 0.04546684. For subsequent school years the values for the property value rate and the income value rate shall be annually determined by the commissioner as follows: 
the property value rate shall be determined such that Equalization Aid equals the Statewide available Equalization Aid for all districts determined according to this act had each school district's local share equaled the product of the property value rate and the district's equalized valuation and each county vocational school district’s local share equaled the product of the county vocational school district’s adequacy budget and the average local share, expressed as a percent, of the school districts located in the county; and

the income rate shall be determined such that equalization aid equals the Statewide available equalization aid for all districts determined according to this act had each school district's local share equaled the product of the income rate and the district's income and each county vocational school district’s local share equaled the product of the county vocational school district’s adequacy budget and the average local share, expressed as a percent, of the school districts located in the county.

In the event that these rates, when used in accordance with the provisions of this section and assuming that each district's general fund levy is equal to its local share, do not result in Equalization Aid for all districts equal to the Statewide available Equalization Eid, commissioner shall adjust these rates appropriately, giving equal  weight to each.  [My emphasis, my capitalization]

The reason the DOE has not released the "formula" for the calculation of the multipliers is that there isn't a 'formula' per se, so much as an iterative computer program that runs numerous iterations that eliminate districts from eligibility for Equalization Aid and calculates the Property and Income multipliers so that Local Fair Share is based 50% on income and 50% on Equalized Valuation for Equalization Aid-eligible districts.   (following the statutory command to "give equal weight to each.")

The key point in the SFRA statute that governs the Local Fair Share multipliers is final paragraph because New Jersey has been "in the event" that statewide available Equalization Aid is insufficient to work with the original Local Fair Share multipliers since SFRA's 2009, ie "when used in accordance with the provisions of this section ...do not result in equalization aid for all districts equal to the Statewide available equalization aid."

Despite the opacity of the Local Fair Share statute and the multipliers themselves, the Department of Education's computer program gets everything correct.

If you plug in the total Equalized Valuation of Equalization Aid-eligible districts into the LFS formula and the total Aggregate Income of Equalization Aid-eligible districts, you get the same number for each.

For 2019-20:

($575,731,874,737*0.014523812)/2  = $4.18 billion = ($167,965,596,863*0.049819447)/2 = $4.18 billion  

Anyway, Brick, Toms River, and Freehold Regional have asked for a "formula," but there isn't per se.  It's a computer program.

Why the Increase? Are Brick and Toms River Disproportionately Hurt?

Since the growth in the statewide Adequacy Budget combined with tax base erosion means that the state has never had enough Equalization Aid and has hence triggered this section of the Local Fair Share statute:

In the event that these rates, when used in accordance with the provisions of this section and assuming that each district's general fund levy is equal to its local share, do not result in Equalization Aid for all districts equal to the Statewide available Equalization Aid, the commissioner shall adjust these rates appropriately, giving equal  weight to each.

So really what happens with Local Fair Share is that it floats on the state's Adequacy Budget and available Equalization Aid.  As NJSBA officier Chris Jones explained in 2014:

Theoretically, the Equalization Aid is the difference between a district’s Adequacy Budget and its Local Cost Share. However, it is more accurate to say that Local Cost Share is the difference between a district’s Adequacy Budget and Equalization Aid.
The difference is subtle but important. A misconception is the state derives what is an Adequate Budget; then determines what a district can afford to pay and provides the difference in Equalization Aid. In reality, the state derives what is an Adequate Budget; then determines how much Equalization Aid can be provided. The difference is left to the school district to address through the Local Cost Share. The state can do this because it determines the wealth rate multipliers for property values and incomes.
Local Fair Share increases by small amounts most years due to enrollment growth and/or tax base erosion, but undergoes a much larger increase every time the Department of Education writes a new Education Adequacy Report and makes the inflationary increases to the Adequacy Budget.  (See "Education Adequacy Report Drives Big Changes to State Aid")

As Brick, Toms River, and Freehold Regional have stated, the Local Fair Share multipliers have increased since 2008-09 (more analysis will be below).

In 2008-09 the Local Fair Share formula was:

= (Equalized Valuation x 0.0092690802)/2 + (Aggregate Income x 0.04546684)/2 =

And in 2019-20 it is:

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


Due to the increase in the Local Fair Share multipliers, Brick and Toms Rivers' Local Fair Shares have risen despite the decreases in their Equalized Valuations.  Brick and Toms River say that this is unfair, but the same unfairness applies to all districts, and tax-base gaining districts have seen even larger increases to their Local Fair Shares.  If a problem applies to all districts, is it really "unfair"?



In tax rates, the two districts have gone from having Local Fair Share tax rates of 0.8% to 1.25%.  (Note, neither district pays its full Local Fair Share).

Brick and Toms River are right that having their Local Fair Shares increase despite erosion of their tax bases is illogical, although the illogic of SFRA isn't aimed at them in particular and its underlying cause is New Jersey's fiscal crisis.  The increase in Local Fair Share has been disproportionate to tax base growth statewide, for both districts with growing and shrinking tax bases.

So, Brick and Toms River, have misrepresented when they say the increase in Local Fair Share affects only them, or disproportionately affects them:

Under the formula that the Department of Education refuses to reveal, Toms River's property value multiplier has risen by 48 percent since 2008. That's despite the $2 billion in ratables that were destroyed by Superstorm Sandy in 2012, of which more than $500 million still have not returned to the tax rolls, [Business Administrator] Doering has said.  [my emphasis)




Again, the increase in the Property Value multiplier has been statewide, not just for Freehold Regional, Toms River, and Brick.  Statewide, the increase has been from an average 1.15% tax rate to a 1.45% tax rate.  Brick, Toms River, and Freehold Regional are being treated exactly the way all other districts have been treated.

Unfortunately, Brick and Toms River are not unique in losing Equalized Valuation.  Real estate in most towns of New Jersey is increasing by less than inflation and in many places is eroding in absolute terms.  Notice in the list below that Newark, Paterson, Elizabeth, Trenton, Woodbridge, Hamilton Township, Clifton, Cherry Hill, Perth Amboy, and Plainfield have also lost Equalized Valuation.


2008-09 Equalized Valuation2008-09 Local Fair Share2008-09 Local Fair Share Tax Rate2019-20 Equalized Valuation2019-20 Local Fair Share2019-20 Local Fair Share Tax Rate
NEWARK $17,171,044,396$139,946,9180.82%$14,945,106,090$199,685,5991.34%
JERSEY CITY$21,830,688,572$196,262,5270.90%$34,014,551,210$474,039,4681.39%
PATERSON$8,449,017,781$73,949,7230.88%$7,437,865,364$106,241,4401.43%
ELIZABETH $9,212,942,198$76,747,9150.83%$8,209,148,920$113,002,3661.38%
EDISON $15,385,939,240$137,929,3360.90%$17,369,327,293$238,023,8991.37%
CAMDEN CITY$1,276,806,619$17,941,6901.41%$1,718,104,905$29,757,3631.73%
TRENTON$3,145,808,409$33,302,9321.06%$2,441,950,609$44,135,3581.81%
PASSAIC CITY$3,630,949,879$34,010,0170.94%$3,799,236,282$55,274,7471.45%
WOODBRIDGE $13,464,599,563$114,159,5700.85%$11,409,315,649$165,718,1421.45%
UNION CITY$3,692,454,277$32,972,6850.89%$4,074,202,239$58,086,1251.43%
HAMILTON TWP$9,953,326,876$97,437,2280.98%$8,928,283,025$138,358,3841.55%
CLIFTON CITY$11,121,668,444$94,637,7990.85%$9,959,099,377$139,811,9491.40%
CHERRY HILL$9,954,618,292$106,762,9721.07%$8,609,940,019$148,703,3741.73%
PERTH AMBOY CITY$3,730,246,923$30,586,5920.82%$3,357,060,702$46,671,3911.39%
PLAINFIELD CITY$3,480,060,844$32,854,0400.94%$2,780,303,039$44,185,6691.59%
TOMS RIVER REG.$18,759,470,184$150,577,2430.80%$17,268,239,486$214,052,1851.24%
BRICK$12,889,743,222$103,203,2910.80%$11,187,561,088$142,191,3741.27%
FREEHOLD REG.$10,130,613,071$99,175,9210.98%$11,282,956,255$166,377,8761.47%

PLEASE NOTICE THAT BRICK AND TOMS RIVER HAVE VERY LOW LOCAL FAIR SHARE TAX RATES AND THAT FREEHOLD REGIONAL IS AVERAGE.

Charles Sampson's complaints about "certain communities" being disproportionately affected are erroneous and unfounded.


Increase in LFSIncrease in Tax Rate
WOODBRIDGE 45.2%71%
TRENTON32.5%71%
PERTH AMBOY CITY52.6%70%
PLAINFIELD CITY34.5%68%
ELIZABETH 47.2%66%
CLIFTON CITY47.7%65%
NEWARK 42.7%64%
PATERSON43.7%63%
CHERRY HILL39.3%61%
UNION CITY76.2%60%
BRICK37.8%59%
HAMILTON TWP42.0%58%
PASSAIC CITY62.5%55%
JERSEY CITY141.5%55%
TOMS RIVER REG.42.2%54%
EDISON 72.6%53%
FREEHOLD REG.67.8%50%
CAMDEN CITY65.9%23%



So, as you can see, Brick and Toms River have seen increases in their Local Fair Shares that are larger than their growth in Equalized Valuation AND their tax rates have increased, but those increases are easily in line with the rest of New Jersey.

Brick and Toms River Have Low Local Fair Share Tax Rates

All New Jersey tax-watchers should understand that Local Fair Share is not a constant tax rate because it is 50% based on Aggregate Income, in contradistinction to most states' local share formulas which only base local share on taxable property.  Indeed, Local Fair Share ranges from 0.8% for some Jersey Shore resort districts to 2.1% for Lindenwold.  (See "The Highs of Lows of Local Fair Share")

If a district has a low ratio of Aggregate Income to Equalized Valuation, like towns with
vacation property and non-residential property tend to have, it will have a low Local Fair Share.  If it has a high ratio of Aggregate Income to Equalized Valuation, like towns near Philadelphia, towns without non-residential property, and towns with high-income outliers have, it will have a high Local Fair Share tax rate.

So Brick and Toms River are vilifying the Local Fair Share formula because the DOE hasn't fully explained it, but the formula is highly advantageous to them anyway.  Toms River has a lot of non-residential property, and both Brick and Toms River have a lot of vacation homes which are fully taxable, and yet have zero income attached to them.

Brick's Local Fair Share ($142.2 million for 2019-20) actually exceeds its Adequacy Budget ($133.2 million, so if Brick got "only" 100% of its recommended state aid, it still wouldn't have to pay its full Local Fair Share anyway. A $133.2 million tax levy for Brick would only be a 1.19% tax levy

(Exact calculation = $133,151,624/$11,187,561,088 = 1.19 %)

Freehold Regional, as an inland district without vacation homes, has a Local Fair Share which is at NJ's average.

This is a Red Herring

The real motivation behind Brick, Toms River, and Freehold Regional's fight for Adjustment Aid is to keep their taxes low.  If they were really so concerned about budgetary stability, they would fight for a liberalized tax cap so they can tax their tax bases more easily.  The fact that they have zero interest in this shows that they want to maintain their 1% tax rates at the expense of students and taxpayers elsewhere in New Jersey.

Although the Department of Education's lack of public candor about the method of deriving the Local Fair Share multipliers is disappointing, there is no fraud involved, no violation of the law, and no disproportionate impact on Monmouth and Ocean County districts.

By purporting that their fight is really just to pry open the exact "formula" (really a computer program) used to calculate the Local Fair Share multipliers, Brick, Toms River, and Freehold Regional are distracting from their considerable enrollment losses.

Brick's enrollment is down by 24% since its peak in 2003-04. Toms River's enrollment is down by 15% since its peak in the same year.  Freehold Regional's enrollment is down by 11% since its peak in 2010-11.





And the enrollment losses that will inexorably continue into the future if you compare how many children are in their younger grades to their older grades.


Number of Students Toms RiverNumber of Students BrickNumber of Students Freehold Regional (and sending districts)
Kindergarten Full Day9755551851
Grade 110255871877
Grade 29945532197
Grade 310415532127
Grade 410195352272
Grade 511276382432
Grade 611595552586
Grade 711946242604
Grade 811596402621
Grade 9*11596412578
Grade 10*11666602519
Grade 11*11046352611
Grade 12*11226332535

*Note, Freehold Reg has students from Colts Neck, Farmingdale, Freehold Borough, Freehold Township, Howell Township, Englishtown-Manalapan and Marlboro. I've added up the K-8 enrollments.

The affected districts prefer to attribute the enrollment losses to Sandy, but the larger cause is a decline in fertility.

Number of Births to Resident Women
Brick
1994-19984,644
2014-20183,238
Toms River
1994-19984,728
2014-20184,389

Conclusion:

I agree that it is a legitimate problem that the Local Fair Share formula demands higher and higher taxes out of Brick, Toms River, and Freehold Regional, but that demand is statewide, not just for them.

I see SFRA's larger problem that it demands uneven tax rates out of NJ school districts due to the use of Aggregate Income to calculate Local Fair Share, but Brick and Toms River are advantaged by that provision of SFRA due to their income-free-but-taxable vacation property, and Freehold Regional is merely at New Jersey's average.

If any categories of districts in New Jersey have grounds to complain about SFRA, it is the following who are hurt by the use of Aggregate Income to calculate Local Fair Share:
  • districts where people live in houses that are inexpensive relative to the average resident's income, ie rural NJ and the Philly suburbs.
  • districts with high-income outliers whose incomes are a sizeable percentage of the district's income, but whose taxable property is minuscule.
  • districts lacking non-residential property.

Brick, Toms River, and Freehold Regional fall into none of the above categories, hence, they have low or average Local Fair Shares.


Brick, Toms River, and Freehold Regional have also not acknowledged that the underlying reason for the increase in Local Fair Share since 2008-09 is state's budget crisis and its inability to put more money into K-12 opex aid due to slow revenue growth and the need to prioritize the Teachers Pension & Annuity Fund,and SDA debt service.   Ironically, by rebalancing Adjustment Aid into Equalization Aid, state aid redistribution lowers Local Fair Share statewide, but aid-losing districts cannot understand that since the loss of aid requires them to raise taxes anyway.

In conclusion, I would agree with a criticism that New Jersey's fiscal order is detrimental to the middle class; this means that that rich towns and rich individuals should pay more in taxes, but also that Abbott rulings were overcompensation.

However, if SFRA is an unfair law to the middle class, let it be equally unfair to all, and not allow special privileges based on random amounts of state aid that districts got in 2008.

In fact, SFRA is not unfair to Brick, Toms River, and Freehold Regional.  Brick and Toms River are especially advantaged by the use of Aggregate Income to calculate Local Fair Share and should think more of the many underaided districts in New Jersey who will probably never be at 100% funding.

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