State Education Spending in New Jersey's FY2020 Budget

After months of speculation, Phil Murphy released his proposal for FY2020 on Tuesday, March 5th.  This blog post will focus on education spending.

We won't have the district-by-district state aid numbers until Thursday, March 7th, nor Actual Aid vs Uncapped Aid until next week (at the earliest), but the FY2020 Budget in Brief provides some big picture views of where the state's education money is going.

Phil Murphy's FY2020 Budget Proposal is a $38.8 billion package, of which $15.4 billion will be for PreK-12 education, or 40% of the budget.  Education spending will comprise the same percentage of the budget as it did in FY2019, although the 40% figure is high in comparison to the early 2000s, when education spending was closer to 30% of the budget.

The increase in education spending is based on an assumption that income taxes will increase by $1.1 billion.  There will be an offset due to expanding the EITC, but there is projected a $447 million increase from having the 10.75% tax bracket kick in at $1 million (instead of at $5 million) then another $752.7 million in organic revenue growth.

The $752.7 million in organic revenue growth is very high in comparison to recent years, which I suppose is based on accelerating economic growth.

• Between FY2013 and FY2014 NJ's income tax grew by only $203 million
• Between FY2014 and FY2015 NJ's income tax grew by $938 million.
• Between FY2015 and FY2016 NJ's income tax grew by only $106 million.
• Between FY2016 and FY2017 NJ's income tax grew by $602 million.
• Between FY2017 and FY2018 NJ's income tax grew by $1 billion.
• FY2019 is incomplete, but the Treasury's most up-to-date projection is a $410 million increase, despite creating the 10.75%/$5,000,000 top bracket.

Anyway, the massive contrast between the FY2020 budget and the FY2019 and FY2018 budget is how much smaller the increase for education-related debt is.  For FY2020, the increase for TPAF, Post-Retirement Medical, Whitman-era Pension Obligation Bonds (POBs), School Construction Debt Servicing, and teachers Social Security is only $141 million.

• For FY2019, the five mandatory items increased by $627 million.
• For FY2018, the five mandatory items increased by $507 million.

The biggest cause of the budgetary relaxation is that Post-Retirement Medical costs will decrease in absolute terms, by $244 million.  This is due to getting retired teachers onto Medicare Advantage.

If Post-Retirement Medical Care had increased at the $60 million a year pace it had increase in recent years, then the mandatory spending would be increasing by still a smaller amount than in FY2019, but by $400 million and the increase for K-12 opex aid would be much diminished.

Note, the $206 million is a net increase. There is also redistribution happening.

Of the $15.4 for education $8.7 billion is proposed for K-12 opex aid, aka "Formula Aid," a net increase of $206 million (+2.4%), however, underaided districts will gain substantially more than $206 million due to the redistribution of ~$80 million in Adjustment Aid.  The nearly $300 million for underaided districts should be greater than the natural increase in the deficit and continue to narrow the state's funding gap.

Phil Murphy did follow the new aid allocation method S2, which bases new state aid on a district's deficit, not its existing aid.  This approach focuses new aid on severely underaided districts and will be sufficient for every district to get at least 50% of its Uncapped Aid, for the first time in the SFRA era.

PreK aid will increase to $806.5 million, up $68.4 million (9.3%) from FY2019.  The increase for PreK is greater than the combined increases for miscellaneous items like Extraordinary Aid (+$5 million), Debt Service Aid (+$5.7 million), "Other Aid" ($15.1 million).

Next Year?

I did not foresee the spending cuts to post-retirement healthcare, so I thought that this year's budget would be much more difficult that it appears to be.

So I admit that I have a bad track record, but I don't know how the trend of higher and higher spending on pensions and other benefits will permanently reverse, nor do I think Phil Murphy will get an income tax increase through the legislature every year.

From the Path to Progress

So the phase-out of Adjustment Aid will have to continue.

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• Tentative Reaction to the Murphy FY2019 Budget Proposal
• New Jersey is a Debtors' Prison, the 2017-18 Budget

Who are the "Support Our Students" Districts?

Since the beginning of 2018-19 school year a group of districts has emerged calling itself SOS "Support Our Students" whose raison d'etre is to oppose the redistribution of state aid that is called for by the S2 legislation.

The group is led by South Jersey districts including Toms River, Brick, and Freehold Regional, but there are actually 71 districts involved, mostly but not entirely from South Jersey.

The following is my analysis of these districts.  Here is the "SOS Overaiding Spreadsheet" I used to create this.

Twenty of the SOS districts have fewer than 500 students:

OAKLYN BORO	431
FRANKFORD	419
RIVERTON	352
WILDWOOD CREST	281
STILLWATER TWP	251
OGDENSBURG	214
FREDON TWP	195
NORTH WILDWOOD	191
SPRINGFIELD TWP	181
WEYMOUTH TWP	171
PORT REPUBLIC	162
WENONAH BORO	158
SANDYSTON-WALPACK	149
WOODLAND TWP	131
HAMPTON BORO	124
LAVALLETTE	123
BLOOMSBURY	120
STOW CREEK	110
ROOSEVELT	104
GREENWICH TWP	63

The median district gets 149% of its Uncapped Aid, but there are 17 districts getting over 200%, four getting over 300%, and one Springfield Township of Burlington County, getting 456%.

District	Updated Aid as a Percentage of Uncapped Aid (Choice Aid excluded)
SPRINGFIELD TWP	456.10%
LOWER CAPE MAY REGIONAL	349.58%
FRANKFORD TWP	323.50%
WENONAH BORO	314.65%
WEYMOUTH TWP	295.58%
MANALAPAN-ENGLISHTOWN REG	284.54%
GREAT MEADOWS REG.	276.64%
EATONTOWN BORO	269.83%
ROOSEVELT BORO	269.49%
BRICK	266.51%
WASHINGTON TWP	251.34%
EVESHAM TWP	247.67%
NORTH WILDWOOD CITY	247.35%
HOBOKEN CITY	228.23%
STILLWATER TWP	223.62%
NORTH WARREN REGIONAL	202.08%
HAINESPORT TWP	200.96%

There are actually three UNDERAIDED districts who have joined SOS, Delanco, Burlington City, and Point Pleasant Beach.

The median district actually does pay 100% of its Local Fair Share, but there are fourteen districts who pay less than 80% of their Local Fair Shares, including HOBOKEN.  

	Taxes as Percentage of LFS	Gap Between LFS and Tax Levy
LOWER CAPE MAY REGIONAL	79.30%	$5,295,510
CLEARVIEW REGIONAL	79.10%	$4,885,326
BRICK	78.80%	$27,503,507
TOMS RIVER REGIONAL	76.80%	$45,870,690
TINTON FALLS	74.50%	$7,715,909
KEANSBURG	68.50%	$2,332,575
GLOUCESTER CITY	66.90%	$2,811,770
POINT PLEASANT BEACH	63.70%	$6,991,353
PEMBERTON TWP	57.70%	$9,158,649
WILDWOOD CREST BORO	42.00%	$10,212,297
VINELAND	38.00%	$37,552,075
NORTH WILDWOOD CITY	33.90%	$13,327,242
LAVALLETTE BORO	21.50%	$13,047,069
HOBOKEN CITY	20.10%	$173,999,690

Note, Local Fair Share isn't the same tax rate for every district.  It ranges from 0.7% up to 2.0%.  For Toms River, Brick, Wildwood City, Point Pleasant Beach, and other Jersey Shore districts, Local Fair Shares are very low because vacation homes do not have income attached to them and Local Fair Share is partly based on residential income.

The state median for Local Fair Share is a 1.42% tax rate, but Brick and Toms River have 1.2% Local Fair Share tax rates.  Wildwood City's Local Fair Share tax rate is 0.8%.  

I do not have the time to determine which of these districts are above or below Adequacy (which I don't focus on because spending relative to Adequacy depends on local tax effort and not just state aid), but more than half are above Adequacy.  

How Education Spending Ate the NJ Budget

One important consequence of New Jersey's 21st Century budget travails is the severe neglect and outright cuts of the state's municipal aid, other local aid, and direct tax rebate payments.

Although we hear often about the underfunding of public education in the

Sourge, FY2002 Budget, Pg 8
https://bit.ly/2EbqKcf

Christie era (including on this blog!), it is the OTHER ITEMS paid for by NJ "Property Tax Relief Fund," from municipal aid to direct tax rebates to library funding to community colleges, that have been much more neglected and gutted.

In the 1990s, municipal aid averaged 30% of school aid, but by FY2019, municipal aid was only 10% of school aid.  

Although the state's municipal aid programs complex and opaque, the overall numbers  appear in the state's Budgets in Brief and show the flat-funding of municipal aid and direct tax rebates from 2001 onwards, cuts in 2010, and continued flat-funding from the new 2010 baseline.

Note, this slide was updated with FY2020 data after I originally wrote this post.

New Jersey's peak year of direct property tax rebates was FY2008, when we distributed $2.8 billion.

New Jersey's nadir was FY2018, when it had shrunk to only $420 million.

New Jersey's peak year for Municipal Aid was also FY2008, when it was $2 billion.  Municipal aid sank to a nadir of $1.3 billion in FY2011 and in FY2018 it was only $1.524 billion.  For FY2019 although Phil Murphy and the legislature increased PreK by over $50 million, increased K-12 opex aid by $350 million, they only increased municipal aid by $12 million, all of which was earmarked as Transitional Aid.

New Jersey also distributes a lot of money referred to as "Other Local

Aid."  Other Local Aid consists of a basket of programs including libraries, reimbursements for sundry administrative expenses, and county-specific spending that might be considered pork barrel.  This category of aid has increased over the years, but at a sub-inflation rate and most of the increase has gone to a category called "Employee Benefits on Behalf of Local Governments.

Library Aid has been cut from $18.5 million to $9.2 million.

County College Aid was $191.1 million in FY2001.. County College Aid  had risen to only $199.8 million in FY2018.

For New Jersey to increase municipal aid and direct tax rebates for inflation (+19% since 2008) would require municipal aid to now be $2.4 billion and direct tax rebates to now be $3.4 billion.  Since New Jersey's population has grown by 3.5% since 2008, the real increases in per capita should be 3.5% higher.

The great contrast, of course, is to education spending, which has increased from $6.8 billion in FY2001 to $14.9 billion in FY2019, despite enrollment K-12 enrollment loss 2001.
*(NJ's enrollment nominally from 1,341,503 students in 2001-02 to 1,369,715 in 2017-18, however that includes PreK students.)

Over the 21st century timeframe, the state's education spending has increased more rapidly than other items funded by the "Property Tax Relief Fund" and the entire state budget.

Of course, the increase in K-12 opex aid has been more modest, but the large increases for the Teachers Pension and Annuity Fund, school construction debt servicing, Whitman-era Pension Obligation Bonds, teachers Post-Retirement Medical, teachers Social Security, and PreK are still real money intended to support education, and that money comes out of the state's income tax revenues.

Municipal Aid is Not Distributed Justly

I don't understand all the formulas and sub-formulas of municipal aid, but a glance at the amounts of aid that different towns are getting shows that the amounts do not make sense based on population or the principle that state aid should compensate for a town having a low tax base.

	Muni Aid Per Resident	Population (2017)	Total Formula Aid
Hoboken	$202	55,131	$11,113,035
Bayonne	$131	67,186	$8,829,801
Lakewood	$50	102,682	$5,157,607
Toms River	$91	93,017	$8,492,807
Clifton	$116	86,607	$10,052,853
Franklin Lakes	$158	11,255	$1,781,701

Or how about the fact that Jersey City, despite its increase in wealth, gets more municipal aid ($63.9 million) than Elizabeth and Paterson combined ($62.2 million), despite Elizabeth and Paterson having a population that is still 8,000 people larger?

	Muni Aid Per Resident	Population (2017)	Total Formula Aid
Elizabeth	$224	130,215	$29,190,687
Paterson	$222	148,678	$32,991,868
TOTAL for E & P.	$223 (weighted avg)	278,893	$62,182,555
Jersey City	$236	270,753	$63,860,522

Municipal and County Budgets will Come Under Pressure

The neglect of municipal aid is not sustainable for obvious reasons in that their budgets are growing, but also because municipal and county budgets will come under increasing pressure due to the following measures.

• Phil Murphy and the legislature allowed the police & fire salary arbitration cap to expire.
• Phil Murphy and the legislature passed S5, which will allow the police & firefighter unions to increase their pension benefits.
• The state is lowering the expected rate of investment earnings for the pensions from 7.65% to 7.0%.  Lowering this "Discount Rate" will increase the amounts of money municipal and county employers must contribute to the pension funds because in the future expected investment earnings are lower.
• The $15 minimum wage, which the NJ League of Municipalities opposed because it would increase their costs.

The fact that New Jersey has flat-funded orgutted Municipal Aid, Other Local Aid, and Direct Tax Rebate is another reason why NEW JERSEY MUST REDISTRIBUTE ADJUSTMENT AID, since any attempt to fully fund all NJ school districts just with new revenue would necessarily cause continued flat-funding and negative funding for other vitally important state obligations.

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See Also:

• NJ Underfunds Higher Education
• The Role of Abbott Funding in NJ's Pension Crisis

Forecasting 2019-20 State Aid

We won't know what Phil Murphy's state aid numbers are until March 7th, and those numbers will be subject to amendment by the legislature anyway, but I wanted to attempt to make a forecast for 2019-20 state aid now and demonstrate the continuing necessity of redistributing Adjustment Aid.

Background:
The 2018-19 Deficit:

For 2018-19 Phil Murphy and the legislature increased K-12 funding by $351.4 million and redistributed $32.1 million of Adjustment Aid, for a grand total increase of $381 million for the underaided districts.

Despite this $381 million increase, the deficit for the 370 underaided districts of New Jersey only fell from $2 billion to $1.75 billion, a fall of $250 million.

The decline in the deficit being so small is due to the fact that SFRA recalculates state aid every year and the deficit grows annually due to the combination of inflation, tax base erosion in certain underaided districts, and enrollment increases in certain underaided districts.

I cannot forecast how much increase will be due to enrollment increases and tax base erosion, but just to keep up with inflation alone, state aid for 2019-20 would have to increase by 2.9% of the $6.24 billion that underaided districts got in 2018-19, or $180 million.

The 2019-20 Revenue Growth Estimate:

K-12 opex  state is is overwhelmingly funded from income taxes, ie, the "Property Tax Relief Fund," but with a small assist from .5� of the sales tax.

The NJ Lottery is now owned by the pension funds too (including TPAF) and the lottery money flowing into the pension funds reduces the amount of money that NJ has to contribute to TPAF.

For FY2019, the Treasury's projection was that the income tax would bring in $16 billion, which is a 5.4% increase or $824 million increase over FY2018.

That 5.4% or $824 million increase includes $280 million from increasing the income tax to 10.75% for incomes over $5 million.  Without the top bracket income tax increase to 10.75%, NJ's revenue increase would only be $544 million.

Overall, it would not be reasonable to expect a 5.4% gain in the income tax for FY2020 unless there is another income tax increase.  

Through December 2018 New Jersey's revenue badly lagged projections anyway, but assuming that collections rally in the second half of FY2019 and we do pull in $16 billion anyway (unlikely), we can make the following estimates for what New Jersey's new income tax revenue would be.

FY 2020, NJ Income Tax Growth Scenarios
If the increase is 3%...(this is unlikely)	+ $480 million
If the increase is 4%...	+ $640 million
If the increase is 5%...	+ $800 million
If the increase is 6%...(this is unlikely)	+ $960 million

New Jersey is a Debtors Prison:

As I've said a million times on this blog, the real reason opex state aid is underfunded in New Jersey is because we are disastrously indebted and the bulk of revenue growth must go into the severely underfunded Teachers Pension and Annuity Fund (TPAF), plus other streams of education-related spending which are not K-12 opex aid, such as Post-Retirement Medical Care, Whitman-era Pension Obligation Bond debt servicing, school construction debt servicing, and Teachers Social Security.

For FY2019 New Jersey increased funding for the debt streams by the following amounts:

• Teachers Pension and Annuity Fund  +$392.5 million
• Post Retirement Medical +$51.8 million
• Pension Obligation Bonds +$17.6 million
• School Construction Debt Servicing +$148.3 million
• Teachers Social Security +$16.3 million

Grand Total of Increases for Above Items: $626.5 million

The increases for FY2018 were similar, except there was a much smaller increase for School Construction Debt service that year and modestly larger increases for TPAF and Post-Retirement Medical.

Anyway, as you can see, assuming that New Jersey increases by $600 million the above spending streams and NJ's revenue grows by ~5% there will be very little left over for K-12 opex aid (unless the state also passes additional tax hikes).

Other Discretionary Expenditures of the "Property Tax Relief Fund"

The Property Tax Relief Fund also funds Extraordinary Aid, school construction debt service, direct tax rebates, municipal aid, community college funding, and PreK.

We have no idea what Phil Murphy will want to do budgetarily with those expenditures, but if Murphy does increase their funding, it will reduce the amount of money available for K-12 opex aid since New Jersey's budget is zero-sum.

For FY2019 Phil Murphy increased PreK by $57.6 million and he talks about PreK often, so we should expect another sizable increase for PreK funding.

Since Extraordinary Aid got a $0 increase in FY2019 and municipal aid only got a minuscule $12 million increase, I'd be surprised if we saw such tiny increases again.

New Jersey Must Redistribute Adjustment Aid 

Based on S-2, 13% of 2017-18 Adjustment Aid is supposed to be redistributed.  Since some districts' Adjustment Aid is protected, the amount will be 13% of $600 million, or about $80 million.

Since New Jersey cannot fully fund the underaided districts through new revenue alone due to slow revenue growth and rapid debt-servicing growth, it is critically important that redistribution be implemented or else the underaided districts will get never get near full funding.

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• "New Jersey = Debtors' Prison: The 2017-18 Budget"
•  New Jersey Underfunds Higher Education
• "Tentative Reaction to Murphy FY2019 Budget Proposal"

Actual Enrollment versus Weighted Enrollment for NJ School Districts

SFRA wonks reading this already know that SFRA is a "weighted aid formula" which sets higher spending targets for districts with more at-risk students, eg, students who are older, who are Free & Reduced Lunch eligible, and/or English Language Learners.  SFRA wonks know that SFRA also uses "exponential weighting" for at-risk students, which means that there are additional added weights for at-risk students who attend a district that is 40-60% FRL-eligible and a higher weight still if a district is over 60% FRL-eligible.

If you're curious about what the weights actually are, the 2016 Education Adequacy Report provides them.

SFRA uses its weighting formula to create an "Adequacy Budget" for a district, ie, the amount a district should spend in order to provide a "thorough and efficient education."

Under SFRA, if a district's tax base is insufficient to meet its Adequacy Budget, the district receives Equalization Aid to make up the difference under the formula.  SFRA's term for a district's tax-levy capacity is "Local Fair Share."

Hence, a district like Asbury Park, whose students are  over 90% FRL-eligible, has an actual enrollment of 2,168, but a "weighted enrollment" of 3,563.  Freehold Boro has an actual enrollment of 1,673 and a "weighted enrollment" of 2,503.

On the other hand, a district with middle-class or affluent students will have a much weaker weighting.  North Caldwell, an elementary-only district whose students are  is a very affluent, has an actual enrollment of 651 and a weighted enrollment of 655.   Chesterfield, another elementary-only district, but which is more middle-class than North Caldwell, has an actual enrollment is 770 and its "weighted enrollment" is only 788. 

This is the formula for Equalization Aid:

Equalization Aid = Adequacy Budget - Local Fair Share.

Well, If you've ever wondered what your district's weighted enrollment is or how high the weighting can inflate a district's enrollment, this Weighted Enrollment Spreadsheet gives you your answers.

The following districts have the 30 largest inflations.  Although most of the districts listed here are Abbotts, and some of the non-Abbotts like Wildwood City have strong tax bases, they aren't all Abbotts.

District	Projected Enrollment	Projected Weighted Enrollment	Percentage Difference	Abbott?
ASBURY PARK	2,168	3,563	164.3%	Yes
UNION CITY	12,363	20,118	162.7%	Yes
EAST NEWARK	348	564	162.1%	No
ATLANTIC CITY	6,723	10,876	161.8%	No
PASSAIC CITY	14,235	22,960	161.3%	Yes
PLEASANTVILLE	3,546	5,677	160.1%	Yes
PLAINFIELD	10,252	16,362	159.6%	Yes
TRENTON	15,161	24,168	159.4%	Yes
BRIDGETON	5,923	9,441	159.4%	Yes
LAKEWOOD	5,997	9,558	159.4%	No
LONG BRANCH CITY	5,104	8,111	158.9%	Yes
DOVER TOWN (VICTORY GARDENS)	264	419	158.7%	No
PERTH AMBOY	10,388	16,457	158.4%	Yes
PAULSBORO	1,057	1,674	158.4%	No
ELIZABETH	26,158	41,389	158.2%	Yes
NEW BRUNSWICK	9,962	15,748	158.1%	Yes
MANCHESTER REG.	871	1,375	157.9%	No
CITY OF ORANGE TWP	5,247	8,266	157.5%	Yes
WILDWOOD CITY	717	1,125	156.9%	No
WOODLYNNE BORO	568	891	156.9%	No
NEWARK	51,896	81,253	156.6%	Yes
WEST NEW YORK	7,719	12,084	156.5%	Yes
IRVINGTON	7,739	12,111	156.5%	Yes
CAMDEN CITY	15,512	24,255	156.4%	Yes
PATERSON	28,716	44,855	156.2%	Yes
LINDENWOLD BORO	2,753	4,295	156.0%	No
DOVER TOWN	2,889	4,490	155.4%	No
HARRISON (Hudson)	2,138	3,314	155.0%	Yes
GUTTENBERG	1,333	2,061	154.6%	No
BOUND BROOK	1,765	2,711	153.6%	No

This underscores how rough an approximation for "poverty" the Abbott list is.