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.

Yes, the 2004 Tax Increases Did Accelerate Outmigration

When people in New Jersey argue about taxes, those opposed to higher taxes warn that the 2004 income tax increases accelerated outmigration of high-income people in New Jersey.

Here's an example of an outmigration warning from January 21, 2019 by Assemblymembers Kevin Rooney and Christopher Phillips

After income taxes were increased in 2004 on people earning over $500,000, New Jersey lost $18 billion of gross income over the next nine years. Then the problem got worse. In 2013, 35 percent of the people who moved out earned over $150,000, just three years later it was 45 percent. High-income residents decide to reside elsewhere because they are taxed more than in any other state.

I've seen numerous attempts by the New Jersey Policy Perspective and similar liberal groups to debunk this, but the claim is correct.

	# of Returns		Adjusted Gross Income of In-Migrants	Adjusted Gross Income of Out-Migrants	In-Migrants % of Out-Migrant Income
	In	Out
1990-91	74,069	100,275	NA	NA
1991-92	74,712	94,315	NA	NA
1992-93	74,088	90,863	$3,109,968	$3,740,193	83.15%
1993-94	72,179	88,575	$3,080,073	$3,720,335	82.79%
1994-95	76,092	91,714	$3,168,906	$4,023,477	78.76%
1996-97	71,957	90,701	$3,665,025	$4,569,006	80.21%
1998-99	76,680	91,053	$4,437,332	$5,227,106	84.89%
1999-00	78,923	93,494	$4,668,916	$5,834,690	80.02%
2000-01	81,574	94,149	$5,271,005	$6,713,492	78.51%
2001-02	82,308	94,335	$5,119,710	$5,808,325	88.14%
2002-03	79,049	94,606	$4,591,525	$5,446,912	84.30%
2003-04	77,667	98,422	$4,613,696	$5,726,311	80.57%
Average 1992-2004					82.14%
2004-05	79,062	104,014	$4,859,034	$6,661,067	72.95%
2005-06	80,561	109,461	$5,190,136	$7,149,857	72.59%
2006-07	76,751	102,940	$4,860,283	$6,948,131	69.95%
2007-08	79,519	101,091	$5,232,255	$6,814,362	76.78%
2008-09	77,106	92,412	$4,765,374	$5,968,435	79.84%
2009-10	73,241	87,630	$4,277,277	$5,542,167	77.18%
2010-11	74,343	93,872	$4,486,058	$6,091,112	73.65%
2011-12	90,339	107,415	$5,766,367	$7,863,770	73.33%
2012-13	87,796	106,749	$7,108,936	$8,717,719	81.55%
2013-14	79,397	103,380	$5,769,268	$8,806,488	65.51%
2014-15	62,791	83,295	$4,646,875	$7,078,183	65.65%
2015-16	82,629	109,569	$7,479,871	$11,009,181	67.94%
Average 2004-2016)					73.08%

See  https://www.irs.gov/statistics/soi-tax-stats-migration-data-2015-2016

The New Jersey Policy Perspective claims that income can never be taken out of a state because income is tied to an employer or client base, but 25% of NJ's income is non-wage income that is transferable and sometimes salary income is transferable if someone works from home, someone's employer relocates, or if someone moves to another state and keeps the NJ job.

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See:
"They're Staying Away in Droves"

In Five Years Jersey City Will Be Ineligible for Equalization Aid

Over the last 10-15 years, the only part of New Jersey that has outperformed the national economy has been Hudson County, especially Jersey City.

Jersey City's growth is impressive by whatever metric you want to use, from overall jobs to population growth to income growth to real estate valuation.

When Steve Fulop calls Jersey City New Jersey's "economic powerhouse" he isn't exaggerating.

Jersey City and Adjustment Aid:

Jersey City was already overaided by $111 million in 2008 when the School Funding Reform Act became law, but since then Jersey City's wealth growth has made already substantial overaiding enormous, to the point where despite cuts to Adjustment Aid in 2012-13, 2017-18, and 2018-19, Jersey City's Adjustment Aid grew to $170 million.

This growth in wealth created an embarrassment of riches for Jersey City and eventually led to the passage of S2, which intends to phase-out all of Jersey City's Adjustment Aid at the 2018-19 level.

The Jersey City political establishment originally fought very hard against phasing-out Adjustment Aid by hiring lobbyists, getting Vincent Prieto to block reform, getting the Education Law Center to write a disgracefully out-of-context report about Jersey City's Adjustment Aid, and blatantly playing the Race Card, but eventually Jersey City yielded.  One of Jersey City's State Senators, Sandra Cunningham was actually constructive in the passage of S2 and even was listed briefly as a co-sponsor. For their parts, the other Jersey City reps were passive.

In April 2017 Steve Fulop declared that in the future Jersey City will share PILOT revenue with the school district.  In November 2018 Jersey City City Council passed a 1% payroll tax that is expected to provide $70 million to the Jersey City Public Schools.

Jersey City and Equalization Aid:

Amidst the battle over Jersey City's Adjustment Aid, something that has not been commented on is that Jersey City's tax base growth is strong enough that it is on its way to not even qualifying for Equalization Aid. Jersey City media and political class seem to understand that Jersey City is going to lose Adjustment Aid in five years, but there is no recognition that beyond that Jersey City is going to eventually lose another $191 million.

The reason for this looming loss is that Equalization Aid is a dynamic stream of aid that brings a district's spending up to whatever its Adequacy Budget is under the simple formula:

Adequacy Budget - Local Fair Share = Equalization Aid 

So, if a district's Adequacy Budget grows due to enrollment growth, Equalization Aid grows.  If a district's tax base decreases, then Equalization Aid grows too.

Conversely, if a district's Local Fair Share becomes larger than its Adequacy Budget, its Equalization Aid becomes $0.  260 districts in NJ are already ineligible for Equalization Aid.

For Jersey City, the 2018-19 Equalization Aid arithmetic is:

$590,163,255 - $398,895,043 = $191,268,212 

What these numbers mean is that when Jersey City's Local Fair Share equals $590,163,255, its Equalization Aid becomes $0.

For 2018-19, Jersey City's Adjustment Aid is $170 million.  S2 already establishes a phase-out of this. Assuming Jersey City's tax base grows, Jersey City will have to raise its tax levy by another $191 million after that.

The $191 million in Equalization Aid is down from $277.6 million in 2008-09.   Due to the constant growth of Jersey City's Local Fair Share, this Equalization Aid will soon go to $0.

How Quickly is Jersey City's Local Fair Share Growing?

Local Fair Share is determined by the following formula:

0.7% of Equalized Valuation + 2.3% of Aggregate Income

(note, the multipliers are tweaked annually)

As you can see below, both components of Local Fair Share are showing rapid growth in Jersey City, especially in the last few years.

Unfortunately Aggregate Income is not released publicly. I've gotten Aggregate Income for the 2016-17 to 2018-19 School Years via OPRA requests.
Also, note that a district's Equalized Valuation is from the previous year and Aggregate Income is from two
previous years.  The Local Fair Share for 2018-19 is based on
EV calculations done in 2016-2017 and Tax Year's 2015 Aggregate Income

As you can see, there has been an acceleration of Local Fair Share growth in Jersey City.  From 2008-09 to 2016-17, Jersey City's Local Fair Share only grew from $196 million to $336 million, but in 2017-18 it rocketed to $370 million and in 2018-19 $399 million.

However, growth continues to accelerate.  In the last year Jersey City gained $5.6 billion in Equalized Valuation ($28,418,886,079 to $34,014,551,210).  That $5.6 billion in growth will translate into an an increase of $39 million in Jersey City's Local Fair Share, plus whatever increases comes from growth in Aggregate Income.

Even conservatively projected, Jersey City's Equalized Valuation will reach $50 billion in a few

99 Hudson Street alone may add $1 billion to
Jersey City's Equalized Valuation and $10-$20
million to the Local Fair Share.

years, even disregarding the expiration of PILOTs.

If Jersey City continues to gain an average of $2.7 billion per year in Equalized Valuation and $655 million a year in Aggregate Income, it will translate into a growth of $34 million annually in Local Fair Share, since $2.7 billion in Equalized Valuation equals $19 million in additional Local Fair Share and $655 million equals $15 million a year in additional Local Fair Share.

Combined, that's $34 million a year in additional Local Fair Share, which would be a 5-6 year phase-out of Jersey City's Equalization Aid.

Assuming that there is at least a $20 million gain from the growth of Aggregate Income, Jersey City might be looking at a 3-4 year elimination of its Equalization Aid.

Since Jersey City's 2018-19 Equalization Aid is $190 million and the Adequacy Budget is unlikely to grow faster than inflation (from 2017-18 to 2018-19 Jersey City's only Adequacy Budget grew from $584,758,085 to only to $590,163,255, it will probably take 5 years for the Local Fair Share to equal the Adequacy Budget and for Equalization Aid to be $0.  (See note after the conclusion about the definition of "Adequacy Budget.")

At that point, Jersey City will be in the same club as New Jersey's middle-class & affluent suburbs, as well as Secaucus, Hoboken, and Weehawken.  

The distribution of wealth in the 1980s, where the suburbs were affluent and the cities poor, will be inverted as far as Hudson County goes.

Although the upcoming tax increases will cause Jersey City people some anxiety, the underlying cause is Jersey City's success.  Although Jersey City's tax levy will have to quintuple, the assumption behind these calculations is that Jersey City's Equalized Valuation will soon reach $50-$55 billion.

Once Jersey City's Equalization Aid is $0, there are no further state aid cuts that will occur, and any growth in the Equalized Valuation will  just cause the tax rate to fall further.

When Jersey City's Local Fair Share reaches about $600 million, on a $50-$55 billion Equalized Valuation, it will be a school tax rate of 1.2%-1.1%, which is below NJ's average.

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Note on Adequacy Budget Definition:

In the context of SFRA, an Adequacy Budget is the amount of money a school district is supposed to have in order to deliver a "thorough and efficient education."

A district's Adequacy Budget depends on its enrollment, the number of FRL eligible students it has, the number of ESL-students it has, and the average costs of its county.

What is confusing is that SFRA actually has two concepts known as an "Adequacy Budget."

The first concept is the "Adequacy Budget for Equalization Aid," which is used in conjunction with Local Fair Share to determine if a district gets Equalization Aid and then how much.

For 2018-19 Jersey City's Adequacy Budget for Equalization Aid is $590 million.

The second concept is "Adequacy Budget for Cap Comparison," which has now become obsolete, but was used in the pre-S2 version of SFRA to determine if an underaided district was eligible for a 10% aid increase or a 20% aid increase.

The "Adequacy Budget for Cap Comparison" includes some spending categories that are not included in the "Adequacy Budget for Equalization Aid."  It is usually 7% higher than the "Adequacy Budget for Equalization Aid."

If you see that JErsey City's Adequacy Budget is $630 million, that is Jersey City's Adequacy Budget for Cap Comparison.

In the context of calculating Equalization Aid, only the Adequacy Budget for Equalization Aid" is relevant.