The Transformation of State Aid Since 1990

This post is about the transformation of the state aid distribution in New Jersey from the 1989-90 school year up to the present and how the Abbott II decision of 1990 has upended the state's relationship with middle-class school districts.

This is a lengthy post, so I will begin with a few bullet points.

1. Prior to the Abbott II decision, NJ already had a progressive aid distribution where poor districts got more aid.
2. Among poor districts, NJ already had a bias in favor of poor urban districts (the future Abbotts) over poor rural and poor suburban districts.
3. NJ's aid increase has doubled the rate of inflation even though student population growth since 1989-90 has only been about one-third.
4. From 1990 to 2002 NJ's pension contributions fell from $750 million to $0.  During that time state aid increased by $3 billion, from $2.5 billion to $5.5 billion. 
5. In per student and inflation-adjusted terms, most New Jersey districts get less aid than they did before Abbott. 
6. The districts who have lost the most state aid per student are not wealthy districts who could easily fund education with local money; the biggest "losers" are districts who have gained the most population.

Chris Christie was wrong to propose that every district get equal state aid per student, but he is 100% correct that the Abbott System is a major cause of New Jersey's property tax crisis.  ("Major" does not mean "sole").

The Education Law Center says that any attempt to link Abbott to New Jersey's property tax crisis is "scapegoating" the Abbotts, but this is just the Education Law Center insulting the intelligence of the state.

The word "scapegoat," as a verb, means to cast blame onto something that is blameless. People may believe that Abbott funding still has educational merit, but to deny that Abbott funding is a major cause of high property taxes is preposterous because the enormous money given to the Abbotts has been diverted from middle-class, working class, and poor non-Abbotts.

The early 1990s state aid data in this post have not been available online previously.  I got the state aid and enrollment data from the Department of Education via an OPRA request.  I've put everything online here.  See the conclusion of this post for more information about the data.

State Aid in 1989-1990

In 1990, when the landmark Abbott II decision came out, New Jersey's K-12 state aid total was $2,536,074,465, divided amongst 1,076,005 students, so $2,356 per student.

This amount would be $4,330 per student adjusted for inflation.

In terms of a per student average, K-12 state aid in 1989-90 was thus significantly less than it is today.  For 2016-17, $8,031,337,334 in K-12 aid is divided amongst 1.3 million K-12 students, or $6,177 per student.
 
The increase in state aid from 1989-90 to today has vastly exceeded inflation and student population growth.

As you can see, as New Jersey increased state aid in the 1990s we first diminished and then completely eliminated pension contributions.  Thus, in discussing the origins of the Pension Crisis, the surge in state aid must be cited in addition to the sales tax cut of 1992 and Whitman's income tax cut of 1994.

Although the Education Law Center implicitly demands that New Jersey continue the pace state aid increases that occurred in the 1990s and 2000s, the pace of increase was not sustainable.

A Flatter Distribution, but Still Progressive

Aside from being a significantly lower "aid effort," state aid before the Abbott II decision had a flatter distribution than today, meaning poor towns got less and middle-class towns got more.

Yet, contrary to what is sometimes said, the pre-Abbott distribution was clearly progressive and there was already a bias in favor of "urban" districts due to the Kean Administration's attempt to give more aid to districts on the Department of Community Affairs' list of "urban municipalities."

For instance, even before the Abbott II decision came out, Newark got $263.8 million, which was more than all of Bergen County and all of non-Newark Essex combined.  Most future Abbotts got significantly less than Newark did, but they got more money than towns you might call working class and more than non-urban DFG A and B districts.

For example, in 1989-90, Millburn got $476 per student ($875 per student with inflation).  Newark got $5,519 per student ($10,155 per student with inflation), so the ratio of Millburn:Newark state aid was 1:11.  Today Millburn gets $416 per student and Newark gets $14,647, so a ratio of 1:35.

A reasonable person might consider the 1989-90 distribution to be unfair since affluent districts had vastly superior tax bases and could more than compensate for inferior state aid, but the state was still trying to give more to poor districts.

The same pattern exists for Mercer County, where state aid was progressive but flatter than it is now.



What I have never seen discussed before is that there was already a bias in favor of districts the state considered urban.

Amounts are adjusted for inflation.

The Abbotts and Everyone Else

The future Abbott districts got $1,024,840,106 in 1989-90, or 40% of the total.  At the time the Abbotts had about 24% of NJ's students.

In crafting the Abbott decisions, the NJ Supreme Court disregarded analternative aid approach to raise spending in the Abbotts up to a threshold considered "adequate."  Instead, the NJ Supreme Court said that whatever the level of the spending in the DFG I and J districts was, the Abbotts had to be at or above that level.

Since Abbott aid was tied to spending in the DFG I and J districts, the state tried to restrain spending in DFGs I and J.  Jim Florio's original Quality Education Aid of 1990 "shot the suburbs in the kneecaps" by making them pay for pensions, post-retirement health care, and deeply slashed their aid, but suburban pension assumption was reversed and the aid cuts did not (initially) go as deep as what Florio had planned.

Although DFG I and J districts gained virtually no aid, since they were not restrained from spending their own tax dollars, they were still able to increase their budgets and Abbott aid increased more than Jim Florio had wanted.

Thus, Abbott spending more than quadrupled.

First Abbott Aid doubled from $1,024,840,106 in 1989-90 to $2,291,696,951 in 1997-1998, when the Abbotts reached parity with DFG I and J districts.  During those eight years, inflation had only been 29%.

Over the next two decades to 2016-17, Abbott funding would again more than double again, to $5.1 billion (counting Pre-K).  Whereas in 1989-90, the Abbotts got 40% of the state aid total, in the 2010s they get 60% of a much larger total.

The Abbotts got the lion's share of the increase, but poor non-Abbotts did reasonably well during the 1990s.  However, after 2001-02, non-Abbott aid began a multiyear stagnation.

Aid by '90 DFG	1989-90 Aid	2016-17 Aid (counts Pre-K)	Percentage Increase
Abbott	$1,024,840,106	$5,097,138,421	397.36%
DFG A Non-Abbott	$33,026,612	$90,616,671	174.37%
DFG B Non-Abbot	$193,413,331	$651,367,836	236.78%
DFG CD	$206,432,630	$588,105,998	184.89%
DFG DE	$305,697,001	$793,285,540	159.50%
DFG FG	$220,873,914	$488,171,679	121.02%
INFLATION			94%
DFG GH	$232,498,986	$431,780,101	85.71%
DFG I	$196,401,926	$273,268,931	39.14%
DFG J	$9,054,787	$12,979,326	43.34%

It's critical to remember that these totals conceal great variation.  Even though DFGs A through FG appear to have gained, there are districts who have lost aid in each of those DFGs, even DFGs A and B. Lawrence Township in Cumberland County was DFG A, but it has lost aid in per pupil and inflation adjusted terms.  Lakewood was in DFG B, but it has also lost aid.

In per pupil terms and inflation-adjusted terms, a majority of NJ districts have lost aid.

Of the state's $5.54 billion increase in K-12 opex aid, the Abbotts have gotten over $4 billion, or nearly two-thirds. Counting construction aid and Pre-K aid, the Abbott increase easily exceeds two-thirds.

The Biggest Losers

I hate to use the word "loser" in the context of any district, but I can't think of another antonym for "gainer" that fits.

The biggest losers in aid per student are NOT wealthy districts like Millburn, Princeton, and Mountain Lakes.  The largest losers in state aid are districts for whom aid has been flat or negative and population growth has been dramatic.

Chesterfield is NJ's biggest loser, since its population has quintupled and its aid has actually dropped. In 1989-90, Chesterfield got $523,570 for 228 students.  For 2016-17, Chesterfield will get $419,983 for 801 students.  

 Adjusted for inflation, Chesterfield has lost 87% of its state aid ($4,225 per student in '89-90, $501 per student for '16-'17)

It's possible that Chesterfield was overaided in 1989-90, but a drop of this magnitude is unacceptable unless there has been a tremendous increase in wealth.

There are in fact about 100 districts in New Jersey that have lost aid in nominal terms and these districts are not all wealthy. Cherry Hill, is the state's biggest loser in nominal dollars. It got $18,222,828 in 1989-90. Now it gets $13,110,005.

Conclusion:

The trend of state aid increases outpacing inflation was never going to be sustainable and New Jersey has to get used to a "new normal" where state aid increases are modest and often lag inflation and student population growth.

The huge surge for the Abbotts is particularly unsustainable.  Given the ineffectiveness of Abbott spending, Abbott aid should be be redistributed to other needy districts.

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Data Note:

The state aid amounts I got from the DOE were in a very easy to use Excel format, but the enrollment data had to be scanned in manually. Since the enrollment data is formatted in a way that is not machine-readable, I have had to hand copy the data myself. Please excuse any data entry errors and try to focus on the big picture.

Also, the state has changed how it calculates enrollment for districts that have sending-receiving relationships with high schools.  The 1989-90 enrollment numbers I got did not include send-receive kids for whom the district pays tuition, although these students counted towards state aid.  The 2016-17 enrollment figures I have do include send-receive kids.  Because the 1989-90 and 2016-17 enrollment figures for send-receive districts are calculated differently I exclude them from 1989-90/2015-16 per pupil comparisons.

The Abbott List Has Always Been Unfair

This post has been moved to

http://njeducationaid.blogspot.com/2016/05/the-abbott-list-has-always-been-unfair_25.html

The Effects and Non-Effects of NJ's Tax Cap Law

On July 13, 2010, Chris Christie signed a law that capped municipal and school tax increases at 2%.

The law in a sense expands and restricts a Board of Education's ability to increase taxes.

The expansion is a BOE new power to increase taxes by 2% (or more) without getting a vote from its electorate.  On the other hand, the tax cap is a restriction of a BOE's ability to raise taxes because now if a BOE needs to go above a 2% increase it needs to get an affirmative vote from its public (or Board of School Estimate) the following November, when there is a larger, more representative electorate.*

The tax cap law contains several adjustments that give a Board of Education the automatic power to increase taxes above 2.0%.  So "2% isn't always 2%."

These adjustments are:

• Health benefits
• Emergencies
• Debt service
• Enrollment Growth

There is also an adjustment for pension benefits, but that applies to counties and municipal governments.

If a district does not use its tax cap adjustments in one year, the adjustments can be saved for three years as "Banked Cap," ie, saved additional taxing authority.  The possibility of saving tax authority as "Banked Cap" means that several years of 2.0% increases might be followed by a larger increase as a BOE then uses its "banked cap" taxing authority.

There are some major upsides and downsides of the tax cap law.

The tax cap law, combined with the recession, has indeed restricted property tax increases in New Jersey.

According to a 2015 Star-Ledger analysis:

NJ Advance Media analyzed municipal tax figures going back 15 years and found that, when adjusted for inflation, the impact of property tax relief relief measures enacted during Gov. Chris Christie's first term — including strict caps on local spending and public worker arbitration rewards — is clear.

Property taxes rose 1 percent when adjusted for inflation from 2010 to 2015 after soaring 35 percent, after inflation was taken into account, from 2000 to 2010, the analysis found....

Michael Darcy, executive director of the New Jersey League of Municipalities said the 2 percent spending cap enacted by Christie helped, but reforms to public worker benefits and the arbitration cap made it possible for local officials to rein in some costs. 

"I think it is safe to say that overall the escalation of property taxes has been significantly curtailed compared to historic trends," said Darcy.

The downside of the tax cap is that lower tax increases translate into budget cuts for school districts, since most school districts have structural increases above 2% that are outside the law's automatic adjustments, such as increases in teacher salaries and Out of District tuition for children with special needs.

The tax cap law does save taxpayers money, but it is blatantly flawed from the perspective of aid-dependent districts.  In passing such a badly designed law, the legislature must have been under the belief that state aid would always increase.

The Theoretical Problem for Aid-Dependent Districts

Let's say there is a low-income district with a $100 million budget, $80 million of which is state aid and $20 million of which is local taxes.

Let's conservatively say the district budget increases by 2%, or $2 million. There is no realistic way for the BOE to make up the money with local taxes.  2% of a $20 million tax levy is only $400,000.

2% of the budget would be $2 million, but a $2 million tax increase for a district whose tax levy is only $20 million is 10%!  A 10% tax increase is politically impossible increase for all districts and for most (not all) poor districts, an economically impossible amount too.

By contrast, a district that is 80% locally funded, 20% state aid funded is a little better off.  2% of 80% is 1.6%, or $1.6 million for our idealized $100 million budget district.  This better-off district will still have to make cuts, but the cuts will not be as deep.

The tax cap law's biggest flaw is that it gives no automatic adjustment if a district loses state aid.  In 2010 the legislature failed to foresee that this was a possibility, but subsequent budget history has shown that districts can lose state aid.  With David Hespe and Steven Sweeney finally talking about redistribution it appears that there will be a round of cuts for certain districts again.

By the end of six years, the wealthier district has a budget that is $2.1 million smaller than it would be otherwise if the budgetary costs increased by 2%, but the poorer district has a budget that is $8.3 million smaller than it would be otherwise.

However, this is just a theoretical problem since so many Boards of Education in New Jersey are not increasing taxes by the maximum amount allowed by the tax cap law anyway.

The Real Problem is that Many Districts Don't Increase the Tax Levy by 2% Anyway

These sub-maximum increases are more common in the poorest districts in New Jersey.  Even the Abbott districts, whose tax levies are almost always well below Local Fair Share, are very reluctant to increase taxes by even 2.0%.

• New Brunswick kept its tax levy at $27.3 million from 2009-10 to 2014-15 when it finally accepted at 2% increase.
• Paterson has kept its tax levy at $39 million since 2009-10.
• Passaic has kept its tax levy at $16.8 million since 2010-11.
• Perth Amboy has had a $21.7 million tax levy since 2010-11.
• Salem City has been at $2.4 million since 2009-10.
• Trenton kept its tax levy at $21.1 million.

The combination of frozen state aid and very small, even non-existent, tax increases, means that affluent districts that spent less money than the Abbotts in the prime of the Abbott Era (about 1997-2006) are now catching up to the Abbotts.  The "Parity Plus" Era is dead.  

The trend is clear: the structure of the tax cap law combined with flat state aid is undoing the Abbott decisions.

Even Jersey City, a booming city that is significantly below Local Fair Share, has refused to raise its taxes above 2.0%.

The Tax Cap is a Huge Obstacle to Redistribution

Given how weak NJ's economy is and how enormous our pension debts are, I see redistributing Adjustment Aid as the only hope for poor and severely underaided districts.

The problem with this is that even though  overaided districts are often well below their Local Fair Shares and have the economic capacity to make up for lost aid, the tax cap effectively prevents this.

Let's look at Hoboken, the district that is rightfully first in line for aid losses in any redistribution.

Hoboken has $146 million in unused Local Fair Share, so Hoboken could afford to lose state aid more easily than any other district in NJ.

However, Hoboken's BOE has no leeway to tap that excess taxing capacity due to the tax cap.  

Conclusion:

The tax cap is a gift to taxpayers and a problem for school district budgets.  If the tax cap were combined with increasing state aid it would mean that we would become less reliant on property taxes to fund local government and there would eventually be equity in the state aid distribution.

However, numerous districts in NJ are overaided as it is and therefore they are not supposed to gain money even if SFRA were followed.  Thus, the tax cap thus means automatic, unavoidable cuts for many districts.

When the legislature passed the tax cap it did not envision that NJ would have to cut aid again for any district.  Now that we are finally at the point where we are talking about redistribution and cutting aid for districts the tax cap is a problem since it will not allow an overaided district to make up for the loss.

I think the solution is simple: add a loss of state aid to the automatic adjustments to taxing authority.  If a district loses $5 million in state aid, give its BOE the authority to increase taxes by that amount without a vote from its electorate.

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*There are some school districts that still have non-November budget votes.

The Role of Abbott Funding in NJ’s Pension Crisis

When people in New Jersey talk about the pensions crisis the focus is always on who underfunded the pensions, never why. Surprisingly few people wonder about the paradox of how New Jersey, whose credit rating was once AAA, whose income is the second highest in the country, whose taxes are high, and whose pension generosity is average, could become so hopelessly indebted.

 When New Jerseyans look for whom to blame the state’s gigantic indebtedness on the villains are always our governors, as if the governors were the only people who controlled New Jersey’s fiscal policy. The explanation for the crisis is rarely deeper than “the governors raided the pension funds.”

The political series of events in the early 1990s that created the pension crisis is very complex, but at the same time the problem was simple: the pension system had fundamental problems that grew into disaster as the state taxed too little and spent too much.

This essay focuses on where New Jersey spent too much.  The Abbott decision is not the primary cause of pension underfunding, but neither is it unrelated.  Without pension underfunding, the massive Abbott spending rampup would have required tax increases that the public would not have tolerated.  The Republican tax cuts of 1992-1996 removed more money that could have gone to pensions than the Abbott mandate did, but those tax cuts did not last as long as the Abbott regime has lasted. Of items on the spending side of the ledger, the Supreme Court’s mandate for “Parity Plus Funding” in the Abbott districts plus two years of Pre-K and 100% state construction responsibility were and remain major contributors to pension underfunding.


1990

There may not have been any good time for New Jersey to embark on as expensive a program as Abbott, but 1990 was a particularly bad time to do it in New Jersey. New Jersey’s economy was already in recession, a federal Social Security tax increase had kicked in, the state had a $600 million deficit that year and a forecast of a $1 billion deficit for the next year.

The deficit was mostly due to the recession, but there was a structural deficit due to pension costs.

Source
https://tinyurl.com/yc9obxdr

The pension system at the time was fully funded, but costs were increasing by 10% a year.  Analysts even then were calling the pension system a "ticking time bomb."  During the previous eight years state government costs in Jersey had doubled, but pension costs had tripled, and COLA costs had quadrupled. Policy makers had realized that in creating a teacher pension system paid by the state but determined by salaries agreed to by local school districts the state had given local districts a blank check.  The locally determined/state funded hybrid pension system incentivized school districts and unions to agree to salary guides that backloaded pay because high pay at the end of a career would translate into salary savings for the school district, but a high pension paid for by state taxpayers.


New Jersey’s governor in 1990 was a former Congressman named Jim Florio. In Congress he had distinguished himself on environmental issues as the author of the Superfund law, but one thing that helped him win the governorship was an oft-repeated statement that the saw “no need for new taxes.”

But in addition to the recession, New Jersey's budget problems were exacerbated by the Abbott II decision of June 5th, 1990. In lofty language, Chief Justice Robert Wilentz said of urban poor students:

The students of Newark and Trenton are no less citizens than their friends in Millburn and Princeton. They are entitled to be treated equally, to begin at the same starting line. Today the disadvantaged are doubly mistreated: first, by the accident of their environment and, second, by the disadvantage added by an inadequate education. The State has compounded the wrong and must right it.

The urban districts were indeed less well-funded than the richest suburban districts, but contrary to popular belief, the future Abbott districts were actually only slightly below the state's average.   Nonetheless, many expected (and wanted) the New Jersey Supreme Court to order more money for urban poor districts, hopefully bringing them up to the 60th percentile in spending.

But the New Jersey Supreme Court went farther than most anticipated with the “Parity Plus Doctrine;”

Obviously, we are no more able to identify what these disadvantaged students need in concrete educational terms than are the experts. What they don't need is more disadvantage, in the form of a school district that does not even approach the funding level that supports advantaged students. They need more, and the law entitles them to more.

Wilentz’ Parity Plus Doctrine meant that the children of the low-resource urban districts (and only low-resource urban districts) had a Constitutional right to the same school spending that children in the richest 108 suburbs got, plus additional money for supplemental programs. The consequence of the “Parity Plus” doctrine was that the state had to find at least $440 million to the Abbott districts within four years at a time when the state’s budget was only $12 billion and the recession was deepening.

Jim Florio praised the Abbott decision as "a clear cut victory for the children of our state," but he knew that it would be politically impossible (and unfair) to give new money to only the Abbott districts, so he thus crafted a proposal to direct over $1 billion in new state aid to the Abbotts plus another 330 districts. The Abbott districts and the other districts to gain aid represented a 75% majority of New Jersey students and, critically, their Assemblymen and Senators represented a majority of the New Jersey legislature.

Despite his statements about seeing “no need” for a tax increase, Florio persuaded the legislature to pass a $2.8 billion tax increase for Abbott plus other programs, the largest proportional tax increase in American state history. Florio and the legislature doubled the top tax rate to 7.0%, increased other rates, added a penny to the sales tax, and created new taxes on everything from trucks to telephone bills to toilet paper.

But new money from taxes wasn’t enough.

If the “Parity Plus Doctrine” was ever going to be affordable the state not only had to give more money to the Abbotts, but it had to reduce and restrain spending in the suburbs whose spending the state now had to match in the Abbotts. Two more mechanisms to both free up money for the Abbotts and restrain suburban spending were necessary.

• Require all school districts to now pay for the pensions, retiree health care, and Social Security costs of their employees, but give new state aid to compensate for those costs to all but “wealthy” school districts. 150 “affluent” school districts would be completely on their own for retiree benefits while another 70 would be partially on their own. 
• Eliminate almost all state aid from the 220 “affluent” districts and give it to the poorer districts. 

Florio passed this far-reaching and expensive reforms and tax increases in a legislative blitz of less than one month.

The State Says "No"

The result of these unprecedented tax and education finance changes was the most ferocious tax and interest group rebellion in New Jersey’s or even any state’s modern history.

Taxpayers were incensed. A group “Hands Across New Jersey” sprung up to protest the tax hikes and change New Jersey’s constitution to allow recalls and voter-initiated referenda. The leader of the “Hands Across New Jersey,” John Budzash of Howell Township, said he was personally unaffected by Florio’s income tax hikes, but his opposition to them was on principle: “It’s ridiculous to try to take money away from people that work and earn their money and give it to people that don’t.”

No less furious was the NJEA. The teachers were adamantly against making local school districts

One Chart Says It All.
Source, Dept of Education

assume responsibility for retiree benefits because they knew that school districts would harden their opposition to raises if they later had to pay pensions on them. As the president of the NJEA said, "If you have to pay the pensions and you want to keep the cost of pensions down, you keep down the salaries." The NJEA did not believe the Florio administration’s assurances that their pensions would be protected if school districts were unable to make their contributions.

Finally, suburban school districts were irate at the near-complete loss of state aid and the new pension mandate, realizing that taxes would double in five years. Faced with inevitable cuts, one superintendent warned “Excellent school systems in the state will become mediocre.” Another said ''Anything that makes our district unique will be put on the chopping block.” When the Florio administration promised to set up a “blue ribbon panel” to help suburban districts deal with their losses of aid Livingston's superintendent said "It's like shooting someone in the kneecap and then appointing a committee to help that person learn to walk with crutches." Since pension costs were increasing by 10% a year, suburban residents felt like Jim Florio was thrusting a ticking time bomb into their arms.

Additionally, Florio’s list of “wealthy” districts slated to lose aid included many districts and many individuals that had never been considered “wealthy” before. Working class towns like Belleville, Hackensack, and Clifton were even slated to lose at least some aid.

As one South Orange resident wrote in the local newspaper:

Yes, I am for equal education, but how many people must I be responsible for? I happen to be a single parent who resides in the so-called “wealthy” village of South Orange. But, we moved into South Orange before the divorce and my family and I are still here because of lots of hard work. Now, as it might happen, when the taxes go up, we might have to move. You ask, how do I feel? I am furious. Furious enough to write. 

...Yes, we will be destroyed. We are being destroyed very slowly but it is happening. Maybe not the wealthy, but we, the blue collar workers won’t be around…. I know where I fit in. I work too hard, I am tired and I am scared. I don’t want to lose my home, uproot my family and have them change schools and friends. I don’t want to change my lifestyle because I must be responsible for other people.

To the residents of many middle class New Jerseyans whose communities faced huge tax increases or cuts, the transformation in state aid and pensions was no “clear cut victory” for their children. The advocates for Abbott may have seen themselves as Robin Hoods, but Robin Hood stole from the rich and in the eyes of the state Jim Florio stole from the middle class.

Jim Florio’s approval rating plummeted to 18%. “Florio Free in ‘93” bumper stickers appeared everywhere. Despite near-immediate backpedaling from the Democratic party, hundreds of Democrats who had nothing to do with Abbott or Florio were voted out of office. Bill Bradley barely won reelection to the Senate in 1990 against an underfinanced and obscure county freeholder named Christine Todd Whitman. The NJEA endorsed scores of Republican candidates in the legislative elections.

The Democrats and Jim Florio went into a rapid retreat before 1990 even ended. $360 million originally intended for education was redirected to tax relief. The aid cuts to suburban schools were suspended. The plan to have local school districts pay for retiree benefits was suspended. The suspension and later cancellation of aid cuts to the suburbs and offloading pension responsibility was doubly costly in the long-run. First, the state lost the offset it needed to pay for Abbott; second, by removing a constraint from suburban spending the suburbs could spend more than they would have otherwise. Since the funding for the Abbott districts was judicially tied to spending in the suburbs, when wealthy districts approved large budget increases it automatically meant large percentage increases in the Abbotts.

All of Florio's retreat wasn't enough to save the legislative Democrats and hundreds of Democratic office holders at the county and local level.  In 1991 Republicans won veto-proof control of the legislature.

Pension Responsibility Dropped

Despite the tax rebellion and the reversal of his plans to financially support the “Parity Plus Doctrine,” Florio, the Education Law Center, and the NJ Supreme Court were still determined to increase state aid for the Abbotts. Florio had become notorious for his “$2.8 billion tax increase” but the tax increase hadn’t created that much revenue and the state still had a deficit. The Republicans, for their part, were still determined to undo Jim Florio’s sales tax increase, a $600 million annual loss. For a solution to the budget crunch and to avert severe cuts to middle-income school districts, Florio and the legislature turned to reducing the state's annual pension contribution.

The New York Times wrote simply:

The protests [from middle income districts over lost aid] quickly dissipated when education officials announced plans for the extra infusion of $341 million, which would be made possible by reducing the state's contribution to public employee pension funds.

The reduction of state contributions was made legal by the Pension Reevaluation Act of 1992. The Pension Reevaluation Act changed the actuarial valuation of NJ's pension assets and increased the expected rate of return from 7.0% to 8.75%. Overnight, the value of NJ’s pension funds rose from $24 billion to $29 billion. Due to PRA, New Jersey could legally spend $770 million less in FY1993 and FY1994 (combined) on pensions and $570 million less thereafter, much of which could go to schools.

It should be noted that pension reevaluation had been considered before and many states reevaluated their pensions in the same way. The Pension Reevaluation Act’s reassessments turned out to be correct given that they preceded the booming 1990s stock market and economy.

Most of the public sector unions accepted pension reevaluation, however, there was one group from the AFL-CIO that sued the state and denounced pension reevaluation "They'll want to balance the budget with our pension monies."

It was under Christine Todd Whitman that the state totally committed to "buy now, pay later."   Whitman kicked the last leg out of Florio’s strategy to pay for Abbott and the rest of government by cutting income taxes by 30%.

The top two brackets remained higher than they were pre-Florio, but the tax cuts cost NJ hundreds of millions of dollars a year and that could have gone into the pensions. Whitman also stopped pre-funding retiree health costs too in the "Pension Reform Act of 1994."

Despite the tax rebellion and the absence of any offsets to fund Abbott, over the next decade the New Jersey Supreme Court repeatedly overruled the legislature on state aid laws, ignored warnings about pensions being underfunded, and added new mandates for Abbott funding, such as two years of “free” Pre-K and 100% facilities funding (which eventually cost $8.9 billion). Flush with money from the booming 1990s economy, Whitman sent a tidal wave of money to the Abbotts. From 1989-90 to 1995-96, state aid for the Abbotts increased from $1 billion to $1.8 billion. By 1997 the Supreme Court’s Parity Plus mandate was reached and the Abbotts equaled or exceeded spending in NJ’s richest districts.

Source, DOE Public Data for 1996-97 onward, OPRA request data from 1989-1996. http://pension360.org/chart-a-history-of-new-jerseys-pension-payments/ and WSJ for pension data.

From 1996-1997 to 2000-2001 the state increased Abbott aid from $1.8 to $2.5 billion. Even the early 2000s recession put no dent in Abbott funding, with funding increasing even more rapidly as the Pre-K mandate kicked in, reaching $4.1 billion a year 2004-2005 and $5 billion now. From the early 1990s to 2010, the percentage of state education aid going to the Abbotts rose from 28% to 61% even as their share of the state student population fell from 25% to 20%.

And in 2000 the legislature authorized $8.6 in bonding for (mostly) Abbott construction, the largest bond offering in NJ history.  ($8.6 billion = $11.83 billion in 2015 dollars)

As the state put more and more money into the Abbotts it put less and less into pension system. In 1990 New Jersey had put $750 million into the pension system. From 1994-1996 the state only put in $200-250 million. The PRA’s assumptions turned out to be correct, so even the lower funding should not have been fatal to the pension system, but then in 1997 and 1998 the state started to ignore actuarial recommendations and put in less than $100 million per year.  Even after the stock market bubble burst in 2001, Gov. Donald Di Francesco increased pension generosity by 9% (retroactively to retirees). Starting in 2001 the state began a multiyear streak of contributing nothing while it massively increased Abbott funding.  It is not a coincidence that the big rampup of Abbott spending in the early 2000s were the worst years for pension contributions.

Ultimately, when the state couldn’t offload pension obligations onto local districts it dropped them altogether. 

 

The Impossible Compromise

Abbott was implemented after a four-way compromise between the taxpayers, suburban districts, the NJEA, and the Education Law Center. 

The compromise was supposed to be that taxes stayed moderate, the suburbs kept their aid, pension costs remained a state responsibility, and the Abbotts saw massive increases in aid. But the state drastically reduced its pension contributions and then abandoned contributions altogether.

Policy makers have been slow to realize that a tidal wave of pension debt is hitting New Jersey. The full actuarial contribution NJ should be making for pensions is at least $5 billion and the unfunded liability is $83 billion. Annual payouts are $9.65 billion and rising. Even if the funds meet their investment benchmarks, the pension funds will “zero out” starting in 2021 and the teachers’ own fund will zero-out in 2027. No version of a “Millionaire’s Tax” brings in anywhere near enough money even for the actuarial payment. The debts are on the verge of unpayable.

The Abbott decision represented as far as any American state has come in attempting to give (some) poor children opportunity equal to wealthier children. NJ’s urban districts did need more aid than they were getting in 1990 and Jim Florio tried honestly to deal with the costs of Abbott funding and preexisting issues in pensions, but the fierce counterreaction showed that the state was not ready to accept higher taxes and the teachers were not willing to give up future wage growth in order to have a sustainable pension system.

Arguing over the relative roles of the Whitman tax cuts and Abbott funding in creating the pension disaster is a moot argument because the Whitman tax cuts have already been reversed and income tax rates in New Jersey are higher now than they were under Florio. The high funding levels of the Abbott districts do still exist and the Supreme Court remains blind to the state’s fiscal reality as well as the non-results of Abbott funding. In 2011, even after revenues had fallen by billions and the ticking of the pension time bomb was audible again, the Supreme Court blocked the cuts to the Abbotts, while allowing cuts to all other districts. Christie accepted the decision and the state reverted to making negligible pension contributions.

Implementation of the Abbott decision is not the sole reason New Jersey has pension problems, nor even the primary reason, but it is a major reason. The Abbott decisions was more or less of a factor at different times, but the early 2000s, when pension payments were $0 and Abbott funding increased enormously, were a time when Abbott and pension underfunding are the most clearly linked. New Jersey’s governors have been irresponsible, but so has the whole political establishment, including the NJ Supreme Court, the legislature, and special interest groups.

At this point New Jersey's pension debts are so enormous that allowing the Abbott districts to have more modest levels of funding would not be sufficient to balance the pension system, but just because something doesn’t completely solve a problem doesn’t mean that it isn’t, unfortunately, necessary.  If New Jersey is ever going to put its house in order cuts to the Abbott districts must be made.

See Also:

• The Abbott List Has Always Been Unfair
• The NJ Supreme Court and the Evisceration of the Debt Limitation Clause
• New Jersey Underfunds Higher Education