Seven State Aid Predictions for the Murphy Era

New Jersey is only one month away from the inauguration of Phil Murphy as governor. 

Murphy has never held elective office before and he typically avoided talking about the details of state aid during most of the campaign.

Most of Murphy's opinions on the details of SFRA are unknown.  Murphy has said he supports "tweaks" to SFRA, but never explained what that means.

However, the stances of people in Murphy's circle, like Sheila Oliver, as well as constituencies within the Democratic Party, are known.

My predictions are based on what Democratic constituencies and Sheila Oliver have said.

Prediction 1: $200-$300 million in Adjustment Aid will be redistributed. 

Basis: Phil Murphy said this at a town hall in Maplewood, NJ and again in a televised forum with Tom Moran. It is budgetarily necessary as well.

• Sub-conjecture: There will be some complex mechanism of cutting Adjustment Aid. The districts to lose Adjustment Aid will be ones who are above Adequacy and/or severely under Local Fair Share.
• Basis for Belief: The Education Law Center, which is NJEA funded, only (with extreme reluctance) accepts the loss of Adjustment Aid to above Adequacy districts.  Politically it will be necessary to cut Jersey City's state aid, since it taxes at one-third of Local Fair Share, but is below Adequacy.  

A few Adjustment Aid districts do not have the capacity to pay higher taxes and East Orange is one of them (the EOPS is overaided by $22.5 million, but the town has a 4.638 all-in tax rate, so making up that money will local taxes would be impossible). East Orange is Sheila Oliver's home.

The Education Law Center only wants districts that are below Adequacy to receive additional state aid "State aid increases must be directed to under adequacy districts" but this is such an extreme stance and contrary to what the legislature will want that I don't see Murphy completely denying over-Adequacy districts.

On the other hand, I would not be surprised if under-Adequacy districts get larger percentage state aid increases, which is what SFRA already calls for.  Underaided districts that are nonetheless above Adequacy due to their own high taxes, like Cherry Hill and West Orange, may not receive very much new aid.

Prediction 2: The Distribution PILOT Revenue Will be Changed So that the Money is Apportioned in the Same Way Regular Taxes Are:

Basis: This is something Steve Sweeney wants to see happen, it is something many Republicans (like Mike Doherty) want to see happen, and there isn't anyone visibly opposing this change. Even Steve Fulop of Jersey City is willing to let the Jersey City public schools have 10% of PILOT revenue (instead of 25% of regular taxes)

NJ's Urban Mayors Association met in November 2017 and endorsed this.

At present, 95% of PILOT revenue is given to the municipality and 5% goes to the county.  The local public schools get 0%.

Prediction 3: There will be an Attempt to Reduce Local Fair Share for Districts with High Municipal Taxes:

Basis: It makes fiscal sense, it would satisfy the powerful urban constituency within the Democratic Party, and it an Education Law Center demand.

EG, here is the Education Law Center's demand "Lawmakers must consider providing relief for school districts facing municipal overburden. These districts have high tax rates, but low rates of local school funding due to the high costs of other municipal obligations."

I agree that some urban districts have municipal taxes that are too high to allow them to meet their Local Fair Shares. New Jersey's average municipal tax rate is 0.694, but Newark's muni rate is 1.642, Trenton's is

A town like East Orange cannot pay
its full Local Fair Share.

3.329, Paterson's is 2.578, Elizabeth's is 2.206. East Orange's muni rate is 3.353, which is one of the highest in New Jersey.

It isn't a surprise then that these districts have school taxes that are so far below Local Fair Share. Newark's tax levy is $45 million below LFS, Trenton's tax levy is $16 million below LFS, Paterson's is $51 million below LFS, Elizabeth's is $36 million below LFS, East Orange's is $20 million below LFS.

IMO, factoring in municipal tax rate into the calculation of Local Fair Share would create an incentive to have high muni tax rates.  A fairer solution would be to condition Local Fair Share on a place having a low-income, since that is outside the control of politicians.

Prediction 4: The state will increase its reimbursement of districts for their charter students.

Basis:   Sheila Oliver does not like the principle of "money following the child" and neither does the NJEA.

In August 2017  at a forum with Randi Weingarten of the AFT Oliver said:

Oliver reaffirmed her support for [traditional] public schools. 

�The expansion and growth of charter schools has hurt our public schools,� she said. �We will make sure that our public schools will be front and center on our agenda.� 

Oliver said that although she embraces all kinds of schools, funds should not be diverted away from public education. 

�We can�t take funds out of district budgets to support them," she said.

If "we can't take funds out of district budgets to support" charters, then charters ought not to exist or districts should be double-funded for charter students.

Oliver has also said "What I am vehemently opposed to is using the money that goes to our public school system to support charters."

The NJEA does not appear to want "money to follow the child" either.  If a child goes to a charter school, the NJEA wants at least a portion of that money to stay in the residential district.

The NJEA has been a little more vague though, but it has demanded some change.

�NJEA has consistently supported the proposal by Assembly Speaker Vincent Prieto to gather the appropriate stakeholders to develop a plan to transition back to the current funding formula. In addition, we have called for that group to study the funding mechanism for charter schools, as the current mechanism is causing drastic program cuts in the districts from which charters draw their students.

And:

New Jersey should follow a similarly thoughtful and deliberative process for reviewing the current aid formula and recommending reasonable adjustments. That should include an honest look at the adverse financial impact that charter schools have on host district schools and ways to alleviate that harm.

Even the Christie administration has sent extra state aid to districts with growing charter school populations through a unilaterally-created aid stream called "Host District Stabilization Aid," a $27,653,005 expense for 2017-18.

If funds aren't leaving district budgets for charters, then the students have to be kept in districts or the state has to reimburse districts for their charter transfers.

It's also possible that we will see the Department of Education give money directly to charter schools rather than route that money through local school districts.  This might relieve some tension between traditional public schools and charters, but it would be a gimmick in terms of any real budgetary assistance since now school districts would have less money to begin with.

Prediction 5: SFRA will move away from the Census-weighting for Special Education Students in the Calculation of Equalization Aid.

Basis for Belief: It's superficially common sense. Even some politicians already want to do it.

It's a benign demand by the NJEA:

Blistan also highlighted the plan�s commitment to providing relief to districts that have been harmed by the current approach to special education funding. 'Districts should be not be punished for providing students with the special education resources they need. This approach will bring fairness to districts while continuing to meet the needs of students,' said Blistan, who is also a special education resource center teacher in Washington Township.

At present, NJ assumes that every district has 14.69% of its students classified, when everyone knows that classification rate would vary, like all populations vary.

The Department of Education opposed using Census weighting during the Corzine years and Christie years for seemingly sincere reasons, but that may change under Murphy.

Unfortunately, changing the calculation of Adequacy Budgets in Equalization Aid is meaningless as long as the overall distribution is out-of-whack and the state cannot come up with the additional money to fund it.

So this is like renovating the kitchen in a house that is falling into a sinkhole anyway.  

Prediction 6:  There will be a Loosening of the Tax Cap

Basis: Steve Sweeney's state aid reform commission proposed some amendment to the cap, presumably to allow aid-losing districts to tap their tax bases.

The NJSBA supports loosening the cap to allow automatic tax authority to districts with high Out of District tuition costs.

Prediction 7: The State will Expand PreK Disproportionately

Basis: It's something the Democrats all say they want to do and there are well-funded lobbies in place to support PreK expansion, with support from VIPs like Jim Florio and Tom Kean.  From 2011-2016 basically all Democrats in the legislature were more interested in PreK than K-12. 

In a Zero-Sum Budget Enrivonrment, PreK Expansion
Comes at the Expense of Everything
Else

Although Steve Sweeney is more sensitive to New Jersey's tax stress and indebtedness than most other Democrats, PreK expansion is something he strongly supports nonetheless.

Children who attend preschool see greater achievement than their peers and are less likely to drop out. Pre-K is vital for kids to reach their maximum potential, and we are committed to continuing to increase funding for pre-K.

� Steve Sweeney (@NJSenatePres) December 11, 2017

I say the PreK increases will be "disproportionate" because the increases will be much larger percentage-wise for PreK than K-12 education.  NJ's PreK funding was going to be $655 million for FY2018, but the legislative Democrats got it a $25 million increase, or 3.8%.  The legislature's (net) last-minute increase for K-12 aid and Extraordinary Aid was only $125 million, a 1.6% increase.

The Wild Cards

1.  The Republican tax plan.

If the SALT deduction is capped at $10,000 per taxpayer and the Mortgage Interest Deduction is capped at $500,000, real estate values in middle-class and affluent suburbs will decline by perhaps as much as 10%.  

If real estate values fall, then it would reduce those towns' Local Fair Shares and SFRA would, in theory, send them more Equalization Aid.

NJ already has a severe outmigration problem and its suburbs are already in decline, but the capping of the SALT deduction would likely accelerate those trends.

See: "They're Staying Away in Droves."

2. The Janus decision

Mark Janus, Illinois Child Care Specialist &
Petitioner in Janus v AFSCME

In June 2018 the United States Supreme Court is expected to rule that mandatory agency fees for public workers are unconstitutional as "compelled speech" and a violation of the principle of free association.

This means that NJ's public sector will become right-to-work and the 20-30% of teachers and other staff who are discontented with the NJEA can stop paying dues. At a 30% dropoff, that would mean a loss of $40 million out of the NJEA's $140 million budget. (see this for NEA affiliate financial resources)


Since NJEA dues will now be voluntary, the NJEA will have to invest more of its remaining money into membership retention and keep dues lower so that more members do not quit. At present NJEA state-dues are $897 per full-time teacher, plus a few hundred dollars more for the national organization, county organization, and local organization.

The NJEA will still be very powerful even if 30% of members leave, but it will not be colossus it is now and the Democrats may have more latitude to side with taxpayers and not the NJEA and other unions.

What Pre-K Our Way Doesn't Say

Pre-K Our Way, an organization committed to expanding state-funded Pre-K in New Jersey, has been covering NJ-policy and news websites with ads for the last year asking New Jerseyans to ask their legislators to put money into expanding Pre-K access to another 50,000 children.

Pre-K Our Way's goal of another 50,000 students in Pre-K is based on the Pre-K component of SFRA, which calls for two years of universal state-funded Pre-K in any district where FRL-eligibility exceeds 40% and means-tested Pre-K for FRL-eligible children living in all other school districts.



Pre-K Our Way has heavy hitters on its side.  Jim Florio and Tom Kean are its co-chairman.  Brian Maher, the former CEO of port colossus Maher Terminals, is a generous contributor.  The organization doesn't lack for powerful friends and money.

As noble as Pre-K Our Way's goal is, the problem with their effort and organization is that they almost never admit how much expanding Pre-K would cost or explain where New Jersey should get the money.

In the above ad, Pre-K Our Way says "for more information," go to their website, but one critical piece of information that isn't on that website is how much Pre-K for another 50,000 kids would cost!

On the contrary.  The Pre-K Our Way FAQs says that Pre-K doesn't cost anything:

From their FAQs:

IS NEW JERSEY�S PUBLIC PRESCHOOL PROGRAM FREE?
Yes. The existing state-funded high-quality preschool programs are available to the public in these fewer than 40 communities at no cost.

No cost?  Since when is the $653 million NJ is spending now for operating expenses alone "no cost"?

Haha, what Pre-K Our Way means is "at no cost (to parents)."  There's no such thing as a free lunch and New Jersey taxpayers pay for our existing Pre-K.  

What Pre-K Our Way is afraid to reveal in their publicity is that their plan for another 50,000 Pre-K would cost nearly $700 million.

Here's the math behind the estimate:

New Jersey provides Pre-K in the Abbott districts through school districts and through private providers, with a majority of children in private centers.
(It's a de facto voucher system.  The private providers can be for-profits and even religiously affiliated. (Yes, there have been scandals.))

Our costs pefor 2017 are:

• $12,788 per child in a district-run program.
• $14,375 per child in a private provider-run program.

The math is simple if NJ's 50,000 Pre-K-eligible students went 50:50 private Pre-K:public Pre-K, 25,000 x $12,788 + 25,000 x $14,375 =

$679,075,000

$679,075,000 is huge amount of money.  It exceeds of 2% of the state's total budget and 8% of our K-12 aid.  However, the actual amount would likely be higher due to the tendency of students to choose the more expensive private providers.

(New Jersey's Pre-K costs (and possibly quality) per student are the highest in the country.  By contrast, even New York City only spends $10,200 per student on Pre-K and the national average is only $4,125.)

Talking about 50,000 Kids Sounds Better than
"Spend $679 million!"

New Jersey can (and must) increase taxes to better fund education, but money is finite and zero-sum and more money for Pre-K will come at the expense of some other discretionary program, quite likely K-12 aid and/or higher education.

Higher education is particularly vulnerable since the constituency is smaller than for K-12. Already, NJ's support for public colleges has been eroding.  In 2014, for instance, NJ spent $2.32 billion on higher ed.  For 2017, we will spend $2.2 billion.  (And the per student distribution of aid for colleges is totally irrational too.)

NJ's decades-long disinvestment in higher ed is harming students & families: https://t.co/09BFwIFVDz pic.twitter.com/jFM0kuWdxw

� NJPolicyPerspective (@NJPolicy) September 7, 2016

Pre-K Our Way answer to worries about the rest of the budget is that Pre-K saves money in the long-run since students who have it are less likely to be held back and require special services. Extrapolating into students' adulthoods, claims are made that for every $1 spent on Pre-K, $7 is saved.

There's some evidence backing up claims of academic success (though not savings for school districts) in New Jersey from the APPLES study (Abbott Preschool Program Longitudinal Effects Study), which claimed, by 5th grade, that kids who had two years of Abbott Pre-K had a 31% lower rate of sped placement 40% lower rate of grade-retention, and higher scores than students who had had no Pre-K.

However, the APPLES project did not have random selection.  Parents who would not take advantage of a "free" Pre-K program that purports academic benefits may not have the same attitude towards education as parents who do enroll their kids.  Indeed, the APPLES study disclosed that the non-enrolees were poorer, less likely to work, and less likely to speak English at home.

The APPLES researh also found that the gap for special education placement between students who had had one one year of Pre-K versus two was very small.

 A "beautifully designed" Vanderbilt University study that did use random selection found that indeed, at the beginning of kindergarten, poor kids who had had high-quality Pre-K outperformed those who hadn't, but by second grade the positioning was reversed, and the kids who hadn't had Pre-K outperformed on behaviorial and academic measures those who had.

Anyway, when it comes to spending, effectiveness IS IRRELEVANT because there is a difference between savings for a district and savings for the state.

The financial irrelevance of Pre-K spending is that the Education Law Center and Abbott districts have adamantly opposed any reductions in money for K-12.  SFRA only lowered payments to Abbott districts slightly.  If a district is over 60% FRL-eligible and 10% LEP, its Adequacy Budget will be $22,000-$23,000 per student.

MOREOVER, SFRA does not factor in special education placement rates in its formulas for state aid.  All else being equal, a district with a 10% special education rate and one with a 25% special education rate would get the same state aid.  So no matter how effective Pre-K is at lowering special education placements, the state saves no money.  All that happens is that the recipient districts keep more state aid to spend on non-special ed items or offset their taxes.

The ELC and Abbotts want to have it both ways:

1. They justify Pre-K, in part, by saying it reduces costs later on.
2. They oppose any reductions in state aid, even though Pre-K is supposed to reduce costs later on.

Perhaps it is cost effective in the long-run for New Jersey to spend another $700 million on Pre-K than K-12, but if so, Pre-K Our Way needs to be honest about where that money is going to come from.  If Pre-K really does save money, then where is the state's "Pre-K Dividend"?  If there is a dividend, it only comes in the adulthood of kids who had Pre-K, who plausibly might need less in transfer payments and have less involvement with the justice system.

New Jersey is Broke

Even if one accepts that Pre-K saves money in the long run and should be considered an investment, there is the dilemma of how a state as broke as New Jersey can find the money for that investment in the first place.

How soon will the meltdown happen?  For FY2016, NJ's pension funds paid out $10 billion, had $800 million in expenses, and only took in $5.4 billion from localities, the state, and active employees.

The most recent projections for when separate funds will go broke are:

• The Judges' system will go broke in 2022.  
• State-PERS will go broke in 2024.  
• TPAF will go broke in 2027.  

The pension funds' unfunded liability is $43 billion.  The math is again simple, unless there is a miraculous bull market or federal bailout, New Jersey's pension funds will be depleted before any "Pre-K Dividend" arrives.

When the meltdown arrives before the Pre-K dividend arrives, how long-term can we afford to be?

Pre-K Our Way also disregards how just three expenses, Pensions, Health Benefits, and Debt Service ("PHD"), consume more or all of New Jersey's new revenue.

Source:
http://www.nj.gov/treasury/omb/publications/17bib/BIB.pdf

There is no new available revenue to expand Pre-K with.  The only ways Pre-K could be expanded are through:

1. increasing taxes
2. cutting other expenses.
3. getting federal aid.

Should New Jersey raise taxes when it already has the highest taxes in the country?   Given the irrevocable nature of pension benefits, shouldn't we put all new money into pension funds?

What about cutting other spending?  Education spending has risen to 38% of the budget from 31% of the budget since 2000, and despite that, K-12 education is severely underfunded.  New Jersey's property taxes are double the national average, and taking money away from state aid means that our property tax crisis will not let up.

Expanding Pre-K might sound noble, but it's an expense that New Jersey can't afford unless there is federal help.  Any money that would go towards Pre-K would have to be taken away from our deteriorating pension funds and/or programs that benefit other sectors of the New Jersey population.

Eight years ago (when SFRA was passed) middle class and working class towns were promised state aid and tax relief.  Today, 140 districts get not even 50% of the K-12 aid SFRA recommends.  20% of New Jersey districts don't even offer full-day kindergarten, let alone Pre-K.  The most underaided towns are in downward spirals exacerbated by inferior services and excess taxes.

Eight years later they're still waiting too.

As Pre-K Our Way would say:

That's not right.


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See Also:

• New Jersey Underfunds Higher Education