Tuesday, March 23, 2021

Anticipated NJ Enrollment Loss


New Jersey's public schools have projected an enrollment loss of 26,114 for 2021-22, comparing the pre-Covid enrollment estimate made in February 2020 to the post-Covid enrollment estimate made in February 2021.

I take that number as a guess about an unknowable future quantity, but it is based on current year (2020-21) enrollment, so it does reflect a reality of thousands of students switching to homeschooling and private schools.  

It is also the largest enrollment loss we've seen in a generation.  Although NJ's enrollment peaked in 2005-06, K-12 enrollment had been stable in the last few years.



If you would like to see where your district stands in enrollment change, I've put the data online here.

Question:  Will My District Lose State Aid?

Answer: If your district is underaided your district will still gain state aid.

Three quarters of NJ districts anticipate enrollment loss.  So if your district is underaided, its share of the state's total deficit (on which new state aid is based) likely has not changed as much as its enrollment has.

Wednesday, March 17, 2021

Good and Bad in the Lakewood State Aid Case

One of the most significant state aid news events of the past month is the decision by an Administrative Law Judge, Susan M. Scarola, that the School Funding Reform Act is not necessarily unconstitutional for Lakewood, but that the Commissioner of Education could decide on a special budgetary remedy for Lakewood.


An administrative law judge has determined the public school district cannot fulfill its constitutional mandate to provide students a "thorough and efficient education," but stopped short of determining that the state funding formula is unconstitutional. 

In a non-binding decision Judge Susan Scarola recommended that the New Jersey Commissioner of Education conduct a needs assessment of the school district's ability to meet its obligations and make "appropriate recommendations to the district."
 
The decision scarcely binds the Acting Education Commissioner Dr. Angelica Allen-McMillan to do anything; the recommendation may be adopted, modified or rejected by Allen-McMillan. But the harsh assessment — that the school district cannot meet its constitutional mandate — puts fresh focus on the troubled school district and pressure on the state's top education official to intervene.

The situation in Lakewood is complex, and I agree and disagree with the ALJ's decision.  I agree with the ALJ that Lakewood has the capacity to increase its local taxes, but I disagree that SFRA might produce an adequate state aid amount for Lakewood even if Lakewood paid 100% of its Local Fair Share.  If you look at Lakewood's unique demographics, there is no possibility of that. (See "The Origins of Lakewood's Budget Disaster")

Background

The School Funding Reform Act bases Lakewood's Adequacy Budget, and hence its Equalization Aid, on the number of students who are enrolled in the public schools, which is 5,896 for 2020-21.

If you look at the number of Lakewood students who are Out Of District special ed placement compared to the Lakewood Public Schools, it is wildly disproportionate, but if you look at the number who are in Out Of District placement compared to the whole Lakewood population, it is merely average.  

Equalization Aid is meant to be a district's "all purpose state aid."  Equalization Aid, along with the local tax levy, that is is supposed to be used for everything from teacher salaries to basketballs to furnace repairs to reading coaches, to most relevant for Lakewood, Out of District tuition and private school transportation.

Year2011-20122012-20132013-20142014-20152015-20162016-20172017-20182018-20192019-20202020-2021
OOD Tuition$18,089,987$19,587,230$20,979,587$18,325,244$17,972,788$24,777,814$27,648,082$30,052,929$31,865,269$33,922,516
Transportation Spending$14,978,022$15,978,039$22,989,657$25,449,467$28,093,613$31,780,583$31,963,75337,638,604 443,252,944 5$51,100,775

Transportation Aid covers about a third of (mandated) private school bussing, but the other two-thirds are meant to be paid for with the local tax levy and (if eligible) Equalization Aid.   Extraordinary Aid covers a fifth of Out Of District tuition, but the rest of the spending is supposed to come from the local tax levy and (if eligible) Equalization Aid.  




So Lakewood's Equalization Aid would be inadequate in any case, but Lakewood's sub-problem is that its Equalization Aid is $0.  (It is not clear that the ALJ realized this)


In a normal district, private school transportation is a tiny expense and Out of District tuition falls in a range where the local tax levy, Extraordinary Aid, and, if relevant, Equalization Aid cover it.  

But not Lakewood, because Lakewood's public school population is only a sixth of the total population.  Lakewood's 362 students in special ed private schools out of ~35,000 are at New Jersey's 1% average, but they are over 6% of the public school enrollment of 5,896.

I believe the logic of the Lakewood situation indicates that SFRA doesn't work for Lakewood, but something worrisome about the ALJ's decision is that it is unclear if she realized Lakewood was already ineligible for Equalization Aid.

Adequacy Budget (for Equalization Aid)Local Fair Share
Equalization Aid
2017-18$109,857,390$102,034,106$7,823,284
2018-19$123,904,450$111,534,172$12,370,278
2019-20$123,598,294$123,904,450$0
2020-21$121,724,164$134,643,568$0


For instance:

The challenge is that when taxes were raised, they covered public schools and State aid was increased. But now, in Lakewood Township, the number of public school students stays about the same, while the non-public school student population goes up about 10% per year. This affects the budget in transportation, because Lakewood has to pay the LSTA $1,000 per student per year, which actually comes to about $710 per student after State aid is factored in. Usually taxes and State aid are sufficient for most communities to cover this expense, but in Lakewood, even with categorical aid and equalization aid, it is not enough because the equalization aid and the categorical aid are frozen. It is not enough because increased taxes do not cover the costs.

She does quote a witness who predicted Lakewood's Equalization Aid would go to zero, without realizing it already had.

The largest calculation in State aid is equalization aid, which is based on property value and income. Lakewood’s equalization aid is disappearing because of its increase in property value, and Wyns predicts that it will soon be zero. This is a consequence of recent amendments to the SFRA: adjustment aid and equalization aid will be gone, and only categorical aid of special education and security aid will be left.

And

The district has a revenue problem. The State-aid funding formula works well for 99% of the state. It does not work for Lakewood because the district cannot contribute to its adequacy budget because wealth and ratables are taken into account when calculating aid. The district gets some equalization aid. Lakewood has a base of 36,000 students, where one-sixth of the students are in public school and five-sixths are not. 

Also, Lakewood never was listed as getting Adjustment Aid.  It is among the small number of districts who flipped from being underaided to overaided in 2018-19, but it never had a sustained stream of Adjustment Aid like most overaided districts did.  

The ALJ also conflates Lakewood's loss of Equalization Aid with the loss of Adjustment Aid, when they are separate phenomena.  

Based on recent legislation, Lakewood’s equalization aid will disappear next year or the year after and will not be offset by any State-aid advances.

The disappearance of Lakewood's Equalization Aid has nothing to do with S2.  S2 phases out Adjustment Aid aid which causes Lakewood to lose state aid, but the disappearance of Equalization Aid is because of growth in the Local Fair Share and stability in the Adequacy Budget, and those predate S2.  S2 causes Lakewood to lose state aid, but it does not cause Lakewood to lose Equalization Aid per se.  


The judge is correct here:

The tax levy is not determined just by the 6,000 attending the public schools, but by Lakewood Township’s population and ratables. There is a bigger pot of money in Lakewood Township. The tax levy generated $96.9 million this year based on property taxes.

In 2020-21, Lakewood's Tax Levy-LFS gap is $28.7 million.   If Lakewood received an exemption from the tax cap, it could considerably mitigate its budget problems, although even an additional $28.7 million would not be sufficient, hence, Lakewood merits additional state aid.

(Lakewood's Local Fair Share would be only a 1.1% if it had to pay it.  This is below NJ's 2021-22 average ($131 million out of $12 billion)).

Tax LevyLocal Fair ShareLevy, LFS Gap
2015-16$91,024,977$96,735,200$5,710,223
2016-17$94,823,327$92,974,112-$1,849,215
2017-18$98,699,341$102,034,106$3,334,765
2018-19$100,827,483$111,534,172$10,706,689
2019-20$102,844,033$123,904,450$21,060,417
2020-21$105,870,754$134,643,568$28,772,814
2021-22
----$131,866,083

(The cause of the fall in LFS is reductions in LFS multipliers.)

Conclusion:

I think the Administrative Law Judge is right to look at Lakewood's strong tax base and recommend a more comprehensive solution than simply ordering more state aid, but in not knowing that Lakewood was already ineligible for Equalization Aid and conflating the disappearance of Lakewood's Equalization Aid with the phase-out of Adjustment Aid, Judge Scalora reveals gaps in state aid knowledge that are not fitting to a major state aid decision maker.  

Lakewood, uniquely, can make a strong case that SFRA does not give it sufficient state aid although by not appealing for tax cap liberalization in addition to state aid it weakens its case for either.


Sunday, March 7, 2021

2021-22 Brings $1.7 Billion to Education, More State Aid Equity

In his budget for FY2022, Phil Murphy has proposed an increase in education spending of $1.7 billion, of which $578 million is for new K-12 operating aid.  


More than just a very large increase in state education support, Phil Murphy has followed a principle I originally thought he would ignore -- making state aid equality a goal in-and-of itself and recognizing the budgetary necessity of redistribution.  He has also targeted new state aid for the most severely underaided districts by using the deficit-based allocation of new aid Steve Sweeney devised for S2.

By making a $578 million increase in K-12 operating aid plus redistributing $192.5 million in Adjustment Aid, Phil Murphy has brought the state aid deficit from $1.9 billion in FY2020-21 to only $1.2 billion.

This is tremendous progress.  In the last Christie budget of 2017-18, there were 377 underaided districts with a total deficit of $1.96 billion and 200 overaided districts with a surplus of $634 million. 

In the fourth Murphy budget of 2021-21, there will still be 380 underaided districts, but with a total deficit of only $1,230,989,213.  They will be balanced by 212 overaided districts, but with a total surplus of $361,728,172.

A $1,230,989,213 deficit is large, but it is the smallest deficit SFRA has had since its first year of 2008-09, under Jon Corzine.
 
The $361,728,172 surplus is the smallest SFRA has ever had. 

As usual, I've put all the 2021-22 State Aid Disparities data online.

Sketch of the Underaided

Atlantic City has the largest deficit in NJ, at $7,110 per student, but there are only six districts with deficits over $4,000 per student. This is a huge contrast to 2016-17, when there were 58. There are only 64 districts that are underaided by more than $2,000 per student, compared to 118 in 2017-18.

Atlantic City is sui generis because of the rapidity of its tax base collapse, including the PILOTing of its casinos in 2015, which makes them "invisible" to the formula for Equalization Aid, although a large percentage of the PILOT money goes to the school district.  A $7,110 per student deficit is very large, but it's much better than $10,939 per student deficit of 2020-21.  Finally, Atlantic City also receives $20 million in Commercial Valuation Stabilization Aid, which is outside the SFRA formula and not included in the DOE's data.  If that $20 million were include, Atlantic City's per student deficit would only be $4,011 per student.

In percentage terms, the most underaided district is Loch Arbour at 48% (a microdistrict whose enrollment anomalously went from one to eight students in a single year). Of normal-size districts, Cumberland County Vocational is the most underaided, but it still gets 58% of its state aid. This is also a massive improvement.  In 2012-13, 157 districts got less than 50% of their state aid.

Looking at the most exceptionally underaided districts of Christie's second term also demonstrates the great increase in equality over the last four years.

  • in 2016-17 Chesterfield was the most underaided district in percentage terms, only getting 9% of its recommended state aid. Now it gets 78%.
  • in 2016-17 Bound Brook was the most underaided district in dollars per student, with a deficit of $9,836 per student.  Now its deficit is only $4,053 per student. 
  • Freehold Boro, where 1,700 children were housed in a school built for 1,200 and which had become a symbol of the grossness of NJ's state aid inequalities, has gone from a deficit of $8,243 per student to deficit of $3,437 per student.

WOODLYNNE-$3,143NORTH PLAINFIELD BORO-$3,712
TRENTON-$3,218ATLANTIC CO VOCATIONAL-$3,805
PENNS GRV-CARNEY'S PT REG-$3,266BOUND BROOK BORO-$4,053
WOODBURY CITY-$3,328FAIRVIEW BORO-$4,236
MANCHESTER REG-$3,365PASSAIC COUNTY VOCATIONAL-$4,239
FREEHOLD BORO-$3,437LINDENWOLD BORO-$4,801
PLAINFIELD CITY-$3,459CUMBERLAND CO VOCATIONAL-$6,453
DOVER TOWN (VICTORY GARDENS)-$3,487ATLANTIC CITY*-$7,110
(Would be $4,110 pp if CVSA)

A $1.2 billion deficit is still large and these are the districts with the largest deficits.

Approximately half of the deficit is in only eighteen districts (enrollment = 257,168 students). Newark's deficit, at $146 million, is by far the largest in absolute terms, although at $2689 per student it is only the 28th largest.




Sketch of the Overaided:




Asbury Park's surplus is the largest in New Jersey in dollars per student, at $5,509 pp ($11.3 million). This is a tremendous decrease from prior to 2017-18, when Asbury Park's surplus was nearly $12,000 per student ($24 million).   Given that Asbury Park was frequently used as a representative of Abbottist excesses and ineffectiveness, the reduction in Asbury Park's state aid could become politically significant.  (See the "Asbury Park, Overaiding at its Most Extreme.")

There are now only 29 districts with surpluses over $2,000 per student, compared to 80 back in 2016-17.

Jersey City has $121 million in excess state aid, or 34% of the total. Jersey City and the five other districts with the largest surpluses, with an enrollment of 68,715, account for half the total surplus.
That amount is not a complete picture of how much state aid will come out of Jersey City, due to Jersey City's astronomical growth in tax base, which converts Jersey City's Equalization Aid to Adjustment Aid, which is then phased-out per the stipulations of S2.  (see a 2019 post by me "In Five Years, Jersey City will be Ineligible for Equalization Aid.")

In 2021-22, Jersey City is still eligible for $84 million in Equalization Aid, but Jersey City's tax base growth combined with the increases to Local Fair Share from next year's Education Adequacy Report should eliminate or nearly-eliminate that.

Hence, Jersey City will eventually lose $200 million in state aid by the time S2 runs its course, but thereafter not see any further losses.

The most overaided, with surpluses in dollars per student.

ASBURY PARK$5,509KNOWLTON TWP$3,446
PEMBERTON TWP (PEMBERTON BORO)$5,454PLUMSTED TWP$3,210
CAPE MAY POINT$5,348KEANSBURG BORO$2,980
WEYMOUTH TWP$5,282OCEAN COUNTY VOCATIONAL$2,961
BASS RIVER TWP$4,764MONMOUTH CO VOCATIONAL$2,796
JERSEY CITY$3,990DENNIS TWP$2,775
PEMBERTON TWP$3,498HOPATCONG$2,553
WASHINGTON (Burlington)$3,474OCEAN TWP (Ocean)$2,499


Overaided districts vary greatly in their tax base capacity and what their spending is relative to Adequacy.  S2 eliminated the tax cap for Abbotts, but non-Abbotts are still constrained by it.  Non-Abbotts like Toms River and Brick who are below Adequacy and losing state aid are in a budget crisis whose only solution is tax cap liberalization.  They have failed to fight for liberalization in favor of fighting for permanent Adjustment Aid.  Hence,  in 2020 after the legislature sent Phil Murphy a bill loosening the tax cap for under-Adequacy, overaided districts, Murphy had no political cover andvetoed it, keeping these districts in a severe vise.

Outlook for the Near-Term

New Jersey has almost never fully-funded its state aid law, going back over forty years to Governor Brendan Byrne.  With the deficit significantly reduced, it's possible to talk about state aid being fully-funded sometime in the near-future.

The possibility can be seriously entertained that SFRA will be fully funded, but there are still large challenges.

To make an optimistic case:

  1. FY2022 marks New Jersey fully meeting its pension obligations, which means that there should not be large increases required for TPAF.  In FY2022, New Jersey is putting $3 billion into TPAF, which should be basically constant from here on out.

  2. NJ's enrollment continues to shrink.  This means that the growth in the Adequacy Budget is lower than it would otherwise be.  If thousands of students leave the public schools because of this year's school closings (the estimate for 2021-22 is for 26,000 fewer K-12 students) and up to 10,000 fewer babies are born in 2021, it would mean hundreds of millions in lower spending targets.
However, there as many reasons to be pessimistic.  
  1. SFRA's spending target continually grows (Despite enrollment loss!).
  2. Phil Murphy has used $4.2 billion in borrowed money for the FY2022 budget and the Education Law Center is demanding billions in additional borrowing for Abbott construction.
  3. New Jersey's revenue growth is low.
1.  The Spending Target Grows
Despite NJ's shrinking enrollment, the full-funding of SFRA is a moving target that grows by an average of $130 million a year.  Although the state's enrollment is slowly declining, inflationary adjustments increase the funding target every three years when the state runs an Education Adequacy Report, and 2022-23 with be an Education Adequacy Report year.  (see "Education Adequacy Report Drives Big Changes to State Aid")

Illustrated by the chart below, to fully fund SFRA (without Adjustment Aid) would have required $9.3 billion in 2015-16, but $10.1 billion in 2021-22.  The growth to $10.071 billion to fully fund SFRA is smaller than in previous years, but note it occurred despite a record-setting loss in enrollment.



2.  DEBT:  Phil Murphy Borrowed $4 billion (and NJ might have to borrow more)

New Jersey borrowed more than $4 billion for the FY2022 budget, which Charlie Stile called a sequel to Christie Whitman's notorious Pension Obligation Bonds and Tom Moran has condemned as well.

I hate to be a spoiler, but there is a sizable caveat [to this budget]: It was made possible by the $4.3 billion the governor borrowed last summer when the economy was in a free fall, and everyone expected tax revenues to plummet. The governor warned that the shortfall could amount to $20 billion to $30 billion over two years.

Not close. As is happens, the economy recovered much faster than expected, and revenues are now rising. In this budget, the governor anticipates revenue growth of 2.4 percent.  [sic, see more context below]

Thanks to those rising revenues, most of the borrowed money was not spent. It was put into the state surplus and rainy day fund, which swelled to more than $6 billion, about twice as big as planned. In this budget, Murphy is tapping $4.4 billion of that to support spending, including on the pensions.

Like former Gov. Christie Whitman, he’s using borrowed money to help shore up the pension funds, a move that has an old-fashion Jersey whiff to it.


In FY2023, when NJ won't have $4 billion in borrowed money to spend, there will be budget stress.

The bonds are scheduled to be repaid over 12 years, with principal payment beginning in Year 3.  The repayment of this debt will crowd-out future spending capability.  

On top of the debt being used to increase spending in FY2022, the Education Law Center


is demanding billions for Abbott construction.  Education Law Center debt servicing will also cut into future spending latitude.  

 (See "ELC Demand for More Abbott Construction Debt Can Only Cut K-12 Operating Aid")




3.  New Jersey's Revenue Growth is Low

Lost amidst the celebration from categories seeing spending increases is that New Jersey's revenue is only projected to increase by $952 million, or +2.4%.  

Part of the reason revenue growth is a one-time only delay of tax payments due to a SALTcap workaround called the "Pass-Through Business Alternative Income Tax."  If this workaround were not created, NJ's revenue would actually increase by 4%, which is still not better than Christie's second term, and much lower than the revenue growth NJ had in the 1980s-1990s.

Although income tax growth from FY2021 to FY2022 is projected to be +6.4%, looking back another year previous, from FY2020 to FY2022, there is practically no increase despite FY2022 having a broader bracket for the 10.75% tax bracket.

Should New Jersey Try to Fully Fund SFRA?

The FY2022 budget delivers a staggering amount to education compared to what most states spend.

NJ's state education spending in FY2022 will be $18.1 billion, of which $17.2 billion is for K-12. That is $13,060 per K-12 student, an amount HIGHER than the national average for local+state+federal education spending, combined.  

Although education gets a stable 40.6% of the budget, its share of the Property Tax Relief Fund has continued to grow at the expense of Municipal Aid, Direct Tax Rebates, and a category "Other Local Aid."

Since Education also gets money from borrowing, the half-cent sales tax diversion, and the lottery, education actually gets more than 100% of income tax revenues ($18.1 billion, out of $16.3 projected in income taxes).


So, bottom line, I have mixed feelings about the 2021-22 budget.  I'm glad that education is getting an increase and that principles of equality are being followed in the distribution, although I worry about the sustainability of this level of spending and the condition of non-education items in the NJbudget.



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