Changes in Equalized Valuation for FY2019 and Implications for State Aid

The NJ Department of Treasury has just released the Equalized Valuation of every town in New Jersey for FY2019 and thus given us an insight into  shifts in state aid for 2018-19 and New Jersey economic trends.

What is Equalized Valuation?
Equalized Valuation is the market value of all the (taxable) property in a town.  It is updated every year by the county tax assessor and is used to apportion county taxes and, theoretically, school aid.

(see note at bottom for how Equalized Valuation is calculated)

Implications for State Aid

Equalized Valuation is used, along with Aggregate Income, to determine a district's Local Fair Share, which is one of the two components of Equalization Aid

The formula for Equalization Aid is:

Adequacy Budget - Local Fair Share = Equalization Aid

So, if a district had an Adequacy Budget of $80 million and a Local Fair Share of $60 million, it would receive $20 million in Equalization Aid, since $80 million - $60 million = $20 million.

If a district's Local Fair Share exceeds its Adequacy Budget, it does not receive Equalization Aid.  45% of NJ districts are not supposed to receive Equalization Aid in 2018-19.

The formula for Local Fair Share for 2018-19 is:

(Equalized Valuation x 0.013828828) / 2 + (Aggregate Income x 0.046200477) / 2

Or in simpler terms:

0.7% of Equalized Valuation + 2.3% of Aggregate Income 

So, if a district gains $100 million in Equalized Valuation, that alone would increase its Local Fair Share by $690,000.  If a district gains $500 million in Equalized Valuation, that alone would increase its Local Fair Share by $3.45 million.  (assuming no change in Aggregate Income)

Jersey City has the largest Equalized Valuation in New Jersey, so I will use it as a concrete example.

Between Tax Year 2018 and Tax Year 2019, Jersey City gained $5.6 billion in Equalized Valuation.  That $5.6 billion gain will cause its Local Fair Share to increase by $38.7 million to about $430 million.  Since Jersey City is overaided by $170.6 million for 2018-19, that means its excess aid for 2019-20 will be $209 million.  (not counting the growth in Aggregate Income which will further increase the Local Fair Share)

Jersey City's massive $5.6 billion growth in Equalized Valuation is growth of 20%. It means that Jersey City's school tax rate will FALL to 0.36% ($124,367,357 out of $34,014,551,210.)

For underaided districts, the increase in Equalized Valuation does not have an impact, since it only changes the money they are theoretically due.  Newark's $1.2 billion gain in Equalized Valuation will translate into an $8.5 million loss in Equalization Aid.  Since Newark is underaided by $130 million anyway, the loss in Equalization Aid is theoretical.

Theoretical Equalization Aid Changes for Twelve Largest Districts in NJ Based on Changes in Equalized Valuation.

	FY2018 Equalized Valuation	FY2019 Equalized Valuation	Change	Estimated Change in Local Fair Share	2018-19 State Aid Excess or Deficit
NEWARK	$16,078,534,983	$17,311,594,311	$1,233,059,328	$8,525,883	-$130,042,863
JERSEY CITY	$28,418,886,079	$34,014,551,210	$5,595,665,131	$38,690,745	$170,778,034
PATERSON	$6,539,377,143	$7,437,865,364	$898,488,221	$6,212,520	-$72,352,193
ELIZABETH	$7,451,469,452	$8,209,148,920	$757,679,468	$5,238,910	-$68,825,175
EDISON	$16,414,706,971	$17,369,327,293	$954,620,322	$6,600,640	-$26,154,921
CAMDEN CITY	$1,778,745,868	$1,718,104,905	-$60,640,963	-$419,297	-$5,823,773
TOMS RIVER	$15,418,546,251	$15,838,934,146	$420,387,895	$2,906,736	$17,581,822
TRENTON	$2,413,197,158	$2,441,950,609	$28,753,451	$198,813	-$43,315,482
PASSAIC CITY	$3,513,360,398	$3,847,350,626	$333,990,228	$2,309,347	-$9,814,810
WOODBRIDGE	$10,839,569,983	$12,096,056,828	$1,256,486,845	$8,687,870	-$47,416,063
UNION CITY	$3,852,537,098	$4,074,202,239	$221,665,141	$1,532,685	-$30,901,116
HAMILTON TWP	$8,768,832,490	$8,928,283,025	$159,450,535	$1,102,507	-$681,835
CLIFTON	$9,642,085,941	$9,959,099,377	$317,013,436	$2,191,962	-$39,036,502
CHERRY HILL	$8,340,254,303	$8,609,940,019	$269,685,716	$1,864,719	-$12,524,161

The Broad View 

The State's total Equalized Valuation grew from $1,242,801,663,665 to $1,288,305,163,962, a one year net increase of $45 billion, or 3.7%, which actually exceeds inflation. However, the median town's gain was only 2.2%, since large portions of the state's total gain are concentrated in a few cities, with Jersey City gaining $5.6 billion and Newark gaining $1.2 billion.

Here is the change, county by county:

The $10 Billion Club

The towns with Equalized Valuations above $10 billion are, with their change in ranking from last year:

1. Jersey City, $34,014,551,210 (unchanged)

2. Edison, $17,369,327,293 (unchanged)

3. Hoboken, $17,341,543,272 (unchanged)

4. Newark, $17,311,594,311 (unchanged)

5. Toms River, $15,838,934,146 (unchanged)

6. Jersey City's PILOTed property, estimate at $12-$13 billion.

7. Ocean City, $12,499,744,267 (unchanged)

8. Woodbridge, $12,096,056,828 (plus 1)

9. Brick, $11,187,561,088 (plus 1)

10. Middletown, $11,110,150,917 (minus 2)

13. Lakewood, $10,738,156,516 (plus 2)

11. Millburn, $10,591,406,653 (minus 1)

12. Franklin Township, $10,556,664,931 (minus 1)

13.  Wayne Township, $10,291,011,176  (newcomer to $10 billion club)

Changes for NJ's Big Cities

The most important story of changes in Equalized Valuation is Jersey City's growth.  Jersey City has grown from having barely 1% of NJ's total Equalized Valuation in the 1990s to having 2.81% of NJ's total Equalized Valuation in tax year 2019.

I maintain my projection that Jersey City will no longer qualify for Equalization Aid in 6-7 years.

-------

See Also

• The Divergent Fates of NJ's Big Cities
• 2016 Equalized Valuations Out (for tax year 2017)
• Biggest Real Estate Gains, Losses in NJ
• Two Cheers for County Taxes!  
• New Jersey and Its Neighbors Job Growth, County by County
• 2017 Changes in Equalized Valuation: the Urban Core Grows

-------

How is Equalized Valuation determined?
Equalized Valuation is determined by calculating the ratio of sales prices to a town's official assessment for its own local taxes.  If sale prices are, on average, 110% of properties's official assessments, then Equalized Valuation would equal 110% of a town's total official assessment.  If sale prices are 93% of official assessment, then Equalized Valuation would equal 93% of a town's total official assessment.

Because Equalized Valuation based on a ratio of sale prices to official assessment, a town's refusal to do a reval does not affect Equalized Valuation.  

Contrary to assertions from Sen. Mike Doherty and the Toms River Board of Education, Jersey City's decades-long refusal to do a reval did not distort its state aid since JC's Equalized Valuation constantly grew along with its real estate market.  Jersey City's state aid was distorted by Adjustment Aid and PILOTing, not the lack of a reval.  

If a town's Local Fair Share exceeds its Adequacy Budget, a change in Equalized Valuation has no theoretical impact on state aid at all, since it doesn't matter if a Local Fair Share exceeds Adequacy Budget by 5% or 150%.  Equalization Aid is $0 in either case.

Note: Equalized Valuation is not the same thing as the aggregate assessed value, which is the sum of all the individual assessments on properties and will not reflect real market value if the reval was not done recently.  Assessed values are only used for a town's internal tax apportionment.

-------

Biggest Real Estate Gains, Losses, in NJ

This post looks at what towns in New Jersey have seen the biggest gains and losses in their real estate markets in the past four years.

The measurement of real estate value used here is "Equalized Valuation." Equalized Valuation is simply the market value of all taxable real estate in a town.  Equalized Valuation is calculated annually and is used to apportion county taxes and regional school districts.  If one town has 15% of a county's total Equalized Valuation, it pays 15% of county taxes.  If one town has 60% of a regional district's total Equalized Valuation, it (usually) pays 60% of the school levy.

Equalized Valuation is supposed to be used to distribute state school aid, but New Jersey's school funding law (SFRA) is non-operating, so from the point of view of state aid, Equalized Valuation has no bearing.

Equalized Valuation is calculated by taking the average ratio of sales prices to properties' official, assessed price.  If, on average, properties sell for 15% above their assessments, the town's Equalized Valuation is 115% of its official aggregate assessment.  If, on average, properties sell for 90% of assessment, the town's Equalized Valuation is 90% of its aggregate, official assessment.

(In terms of county taxes and state aid, PILOTed properties are the same as tax exempt property because they don't contribute to Equalized Valuation.)

As usual, I've made the data (obtained via an OPRA request to the Treasury Department), available online.



Overall NJ Real Estate is a Stalled Asset

The total value NJ's real estate is barely moving.   In the last four years, the median town's market valuation has only increased by 2.1%.  This lags inflation, which was 3.64% from 2013 to 2016.

The weighted average, however, is an increase of 4.3%, as NJ's total Equalized Valuation increased from $1,159,890,947,281 to $1,209,186,432,406.  That is powered by the gains in the mega-Valuation cities of Jersey City and Hoboken, both of whom are in the top five for total Equalized Valuation and thus have "heavier" weights than 99% of other NJ towns.

South Jersey is Hurting

As always, the average masks great diversity.

Atlantic City and its environs have collapsed, pulling down the state's total. Atlantic County alone has lost $9 billion in Equalized Valuation, from falling from $45.1 billion to $34.9 billion.   Salem, Sussex, Sussex, Cumberland, and Gloucester have also lost Valuation.  Warren's growth has been trivial.

The towns that have lost the most are mostly in South Jersey, although Paterson, Irvington, East Orange and a few other northern cities also appear among the biggest losers.

Click to Enlarge

The Hudson River Shore is Booming

Click to Enlarge

On the other hand, Hudson County has boomed, from $57 billion to $71 billion.  Jersey City alone gained $7 billion, which is 15% of the state's total gain.  Jersey City's $25.7 billion in Equalized Valuation is almost equal to the total Equalized Valuations of Sussex and Warren counties.

Over 14% of NJ's Growth in Equalized Valuation ($7.1 billion
out of $49.3 billion) has been in
Jersey City alone.

The booms in Hoboken, Jersey City, and Weehawken are old news though.  What's interesting about this cycle is that North Bergen, West New York, Harrison, Guttenberg, and Union City have had extremely strong gains.  Would I call North Bergen, West New York, Harrison, Guttenberg, and Union City extensions of the "Gold Coast"?

No.  But they are getting there.   

Kearny and North Arlington did well too, although that could be from increases from non-residential property, such as logistics.

Atlantic City has lost $15 billion
in Equalized Valuation.

Bergen County also gained $9 billion, from $161 billion to $170 billion, with its southern section doing well, including Fairview. Monmouth has gained $7 billion.  

Implications for State Aid

The formula for Local Fair Share in NJ for 2016-17 is

(Equalized Valuation x 0.013156218 + Aggregate Income x 0.046185507)/2

So, for every $100 million in Equalized Valuation a district gains, its Local Fair Share would be increased by $657,810.  Since Equalized Valuation and Aggregate Income usually move in tandem, the actual increase to Local Fair Share would probably be greater than this.

Looking at the towns that have lost the most Equalized Valuation, it's easy to understand why state aid redistribution is so important to Senate President Steve Sweeney.

Sweeney's own District 3 is suffering.  Greenwich, Paulsboro, West Deptford, Penns Grove, and Carney's point are all represented by Sweeney and experiencing increases in their school tax rates caused by declining real estate value combined with increasing taxes.

Chris Christie has kept state aid frozen since 2013-14.  It's unclear what he is going to do in his last budget for FY2018, but regardless, New Jersey's next governor is going to have a lot of mess to clean up as our budgetary crisis and inflexible state aid meet the reality that many districts have gotten poorer and/or larger and need resources currently given to districts that have gotten richer and/or smaller.

Redistribution is Needed Now!!

----

See Also 2016 Equalized Valuations Out

Two Cheers For County Taxes!

No one loves their county government in New Jersey, but something that's almost never pointed out about county government is that county taxes are by far the fairest of the three major property taxes in New Jersey.

My point about county taxes being the fairest is intuitive, although seldom made and rarely quantified.  This post will hopefully demonstrate the superior fairness of county taxes and suggest that school taxes and aid can be made fairer by copying two features of county taxes, their broad base and the fact that they are reapportioned annually.

Yes, I know some readers are incredulous about any defense of county government in New Jersey.  I agree that county government has a lot of corruption, bossism, and nepotism.  County government is more distant from constituents than school boards and municipalities and few of us feel we get much direct benefit from it.  And yet, the concept of countywide services and countywide tax base has many attractive features.  This post will demonstrate two of those features, with a focus on the benefits of annual reapportionment.

The greater fairness of county taxes come from two factors:

1.  Counties vary in wealth, but since counties are larger and more diverse than municipalities, the variation between county wealth is much narrower than the variation between towns and school districts and therefore tax rates are more similar.

2.  County taxes are reapportioned every year based on changes in Equalized Valuation and therefore are by far the most flexible of the three property tax types.

The apportionment method for county taxes is equivalent to a town doing a reval annually, but for towns themselves instead of individual property holdings.

County tax apportionment is determined by the percentage of a county's total Equalized Valuation that a town has.  So, if a town has 16% of a county's total Equalized Valuation one year, it pays 16% of the taxes and if the next year its percentage falls to 15%, it then pays 15% of that year's county taxes.

Equalized Valuation is computed by the ratio of sale prices in the previous year to the official assessments on those properties.  If average sale prices are 120% of official assessment, then the town's Equalized Valuation equals 120% of its official aggregate assessment.  If sales are on average for 95% of official assessment, then Equalized Valuation equals 95% of official aggregate assessment.

Equalized Valuation cannot be distorted by a lack of a reval, although it can be distorted by PILOTing.

The reduction in county taxes means that a town that is in economic decline gets some fiscal breathing room from the county that it would not in practice get on its school and municipal taxes, since the school district and municipality are stand-alone entities and state education aid and municipal aid are frozen.

(The source of this data is the "Abstract of Ratables" contained in the Department of Community Affairs' Property Tax Information Tables.)

Context Facts:



FYI: Counties and their Equalized County Tax Rates.

Note, this is not an apples to apples comparison since some counties provide more services than others, however, even comparing school taxes and municipal taxes isn't apples to apples either since taxpayers get different spending levels for their money.

Cumberland County	1.06	Union County	0.528	Burlington County	0.398
Salem County	1.042	Sussex County	0.515	Middlesex County	0.38
Camden County	0.845	Essex County	0.512	Somerset County	0.37
Warren County	0.75	Hudson County	0.511	Hunterdon County	0.364
Passaic County	0.735	Atlantic County	0.456	Monmouth County	0.296
Gloucester County	0.67	STATE AVG	0.604	Morris County	0.249
Mercer County	0.632	Ocean County	0.405	Cape May County	0.241
				Bergen County	0.234

Theoretically school aid and municipal aid should increase for a declining town and offset tax increases, but our school and municipal aid formulas have never or rarely been fully funded, rationally distributed, and for the past few years they have been stuck at 2013 levels.  For many school districts, aid has effectively been frozen since 2002.

The Effects of Annual Reapportionment

There are several different ways to demonstrate changes in tax apportionment over time.

1.  A chronological comparison of a town's school district, municipal, and county taxes.
2.  A chronological comparison of the amount of money the towns of a county pay in county taxes.
3.  A chronological comparison of the percentage of county taxes coming from different towns.

The biggest swing in county taxation in NJ over the last few years has been in Atlantic County, where Atlantic City's county tax levy has fallen from $45 million to $28 million, or, from 32% of the total county tax levy down to 16%.   Yet, because Atlantic City is a special example where its major industry is collapsing, I will focus on more typical jurisdictions.

We'll use Newark as an example of a town with a declining tax base whose county taxes are stable as we compare the trajectories of Newark's school, municipal, and county taxes over the past seven years:

As you can see, Newark has almost doubled its municipal tax levy and increased its school levy by 25%, but its county tax levy has increased by only 13%, a figure that barely exceeds inflation.

Newark and its nearly satellite cities, Belleville, East Orange, Orange, Irvington, and even Bloomfield and Nutley continue to erode in tax base. Nutley, in fact, has done worse than Newark in the past few years, presumably because the closing of the Hoffman-LaRoche megaplant.

 The rest of Essex County holds its own, and then mostly Millburn assuming a higher share of the burden. Millburn's county tax levy has increased by 52% since 2007, from $31.8 million to $48.5 million.

Newark was called "America's Renaissance City" during the 1990s, but that's only true in relation to how awful Newark had it in the 1970s and 1980s. In tax base at least, Newark is still in relative and even absolute decline. Since 2013, Newark has lost over $2 billion in Equalized Valuation (from $15.5 billion to $13.3 billion in 2016).

The new townhouses that have popped up in Newark presumably add little to the tax base and Newark's new downtown buildings are almost all PILOTed.

Although there is nothing voluntary about Millburn assuming this burden, it is impressive.  In ten years, Millburn may actually surpass Newark to become Essex County's biggest taxpayer in absolute terms.

Trenton has had a similar phenomenon as Newark, but Trenton's tax base is even weaker than Newark's and it has not increased its municipal levy by as much and its school levy at all.

I hesitate to speculate on why Trenton's tax increase lags Newark's, but Trenton's all-in tax rate is 5.733, the fifth highest in New Jersey.  Newark's all-in tax rate is 3.308 and is nowhere near the worst in New Jersey.

Were I to graph all of Mercer County Trenton's portion of county taxes would shrink while towns growing in tax base or real estate prices would grow.   For Mercer County, Princeton and West Windsor have both assumed another $12 million each.

Paterson appears to be even weaker still than Newark and Trenton, as its county levy has actually FALLEN in the last six years from $45 million to $41.8 million.

Although I'm using NJ's largest cities like Trenton, Newark, and Paterson to illustrate changes in county taxes, there are many small towns who are declining even more.  Prospect Park for instance has struggled more than Newark has, so have Belleville and Nutley in Essex and presumably many satellite urban-suburbs.

Jersey City Mischief (As Usual)

The simple method of apportioning county taxes can be distorted by a town giving tax abatements.

 

The state's PILOT law is terribly designed and gives towns incentives to take advantage of their neighbors in regional school districts, counties, and the state as a whole.

The abuse is enabled by the fact that taxes in regional school districts, counties, and state aid are apportioned by Equalized Valuation, but a property with a tax abatement does not appear as part of a city's official assessment and is therefore "invisible" to the calculation of Equalized Valuation.  Since PILOTed properties aren't part of Equalized Valuation, they are "invisible" to the apportionment of taxes for regional school districts, counties, and state aid.

What makes the incentives even stronger is that PILOT payments can be structured so that the municipality gets more money from a property with a PILOT than it would from one under normal taxation.  This is because PILOT fees are paid 95% to the municipality and only 5% to the county, with the school system totally cut off.

Montclair has been completely open about how it uses PILOTs as a way of shielding its wealth from Essex County (ie, Newark).

As Montclair's Mayor Robert Jackson explained in 2013, "In a PILOT agreement, 95 percent of the tax revenue comes to the town, not 83 percent. We get more money from that PILOT than we would if they paid taxes." 

Montclair's deputy mayor, Robert Russo, chimed in, "That's what I really like about the [PILOT] program. I am not a fan of the county taking money from us. What we're doing is enhancing the township's revenue. No one [in Montclair] is getting hurt."

PILOTing directly benefits a municipality by diverting additional revenue to it (coming at the expense of the county and schools), but it also indirectly benefits a municipality by hiding the ratables from the county. This allows a municipality to hoard its tax base without sharing with the rest of the county.

As annoying as Montclair's PILOTing is and the mayoral bragging about it, Montclair doesn't allow very much new development period, so the overall percentage of Montclair's tax base that is hidden behind PILOTs is small. Even if most of Montclair weren't off-limits to new development, Montclair pays for its school school system with local taxes and if it PILOTed excessively it would be cannibalizing its own school tax base and have a voter rebellion.

Not so for Jersey City. Jersey City should be commended for how accepting it is of new housing, but its schools are paid for by the state and there is no incentive for it not to PILOT virtually everything.  Jersey City has thus exploited the PILOT law like no other town in New Jersey to the point where 30% of its valuation is PILOTed.   Jersey City's abuse of the PILOT law is so substantial that it was in fact sued by Secaucus, North Bergen, and Bayonne in the late 1990s/early 2000s over not paying for its fair share of county taxes.

Calculating backwards from some data the Jersey City municipality released in 2015, the valuation of Jersey City's PILOTed properties is about $8.6 billion.   Were those properties taxable and paying taxes at the .511 Hudson County tax rate, they would be paying about $43 million in county taxes.  

Jersey City's leadership is aware of how PILOTs distort county taxes (and state aid).  As former Jersey City Mayor (and convicted felon) Jerry McCann explained in April 2016 in a letter about Jersey City's tax history:

All tax abatement revenues are used to offset the amount needed to be raised through taxation. Tax abatements do reduce our share of the county taxes since [abated properties] are not part of that ratio [used to calculate Equalized Valuation]. If the abatements are removed, we will have to pay more in county taxes as well as [get] less in state aid for our schools.

(McCann's actual text is in the photo caption, I've interpolated some clarifying clauses)

Jersey City is New Jersey's economic boomtown, but if you look at just the last nine years, the percentage of Hudson County taxes paid by Jersey City has actually decreased.



Since Jersey City, by its own boasting, has been a boomtown, its portion of county taxes should have increased; it's possible that the decline is partly due to declining real estate values in outlying parts of the city, but it must also be partly attributable to the fact that a large portion of new development has been PILOTed.

The story of Hudson County for the last nine years as been Hoboken's explosive growth and assumption of county tax burden (with a slight assist from Weehawken).  Since 2005, Hoboken's county taxes have MORE THAN DOUBLED, from $32 million to $67 million, and Hoboken's county taxes exceed its municipal and school taxes.

It should be noted unlike for Newark, Trenton, and Paterson, Jersey City's county tax levy has increased substantially, from $75 million to $105 million, but has been proportional to the overall increase of Hudson County.

Also, if I were to begin this chart a few years earlier around the year 2000, Jersey City's portion of the Hudson County tax levy would increase, although suspiciously not in proportion to the perceived increase in Jersey City's wealth.

Finally, it should be noted that for FY2017, Jersey City is taking up another $10 million in county taxes and relieving almost every other town's burden, although Jersey City will still pay only 32.2% of Hudson County taxes, a percentage that is below where it was in just 2008.

Since Jersey City hides so much of its wealth from Equalized Valuation, Jersey City's freeholder Bill O'Dea should get a chutzpah award for voting against the last Hudson County budget because he thought the computation of Equalized Valuation was unfair to Jersey City.

�Our votes against it were more about some of the problems with the first Equalized Evaluations that�s required by state law, which shifts the burden of increases and spending to those cities, based on how much their property values go up year-to-year and we find that to be unfair,�

I can't get into the unfairness of Jersey City's own tax apportionment here, but Jersey City's surge in Equalized Valuation is due to gentrification along the waterfront while other neighborhoods see much less growth. Since Jersey City is a single-entity in the eyes of the formula for Equalized Valuation, and not a collection of distinct neighborhoods on their own trajectories, the increase in Equalized Valuation catches Greenville and other poorer areas up in it and Greenville residents have to pay for an increase in county taxes that isn't justified for them based on where their market values are.

Normally a town would reval and treat its own taxpayers fairly, but Jersey City hasn't done a reval since 1988.

Conclusion

There are many in New Jersey who have "Maryland Envy" and wish we had county school districts.

In terms of integration and tax fairness, the idea county school districts is impossible to argue with, but I think the ship of county school districts sailed 200 years ago.

However, I do think that NJ could still have some kind of county tax for school systems.

Failing that, we need to have an annual repportionment of state aid.  We would have to get to the point of consistent funding first, where every district has the same per student aid deficit relative to its SFRA target, but once we are at fairness, we could theoretically redistribute aid every year and give aid-losing districts a tax cap amendment to make up for the aid they would lose.

The annual reapportionment of county taxes shows that a town with a rising tax base can increase its taxes without an adverse effect.  Should an adverse real estate market effect develop because of high county taxes, the system is self-correcting and that town's Equalized Valuation will fall relative to its county neighbors and later county taxes will fall or be flat.

New Jersey is light-years from aid fairness, but if we ever arrive at a rational, fair distribution, we need not fear taking away aid from a thriving town so that it increases its tax levy.  What we should fear more is forcing a declining town to increase its taxes against the headwind of tax base decline.

Although making a town with a growing Equalized Valuation raise its school taxes would be bad for long-time residents whose incomes lag the growth of their property values, I think this is less bad than making property taxpayers pay more in taxes on properties whose values are eroding.  Forcing taxpayers with declining assets to pay more in taxes ultimately accelerates a spiral of decline which is in no one's interest.

So Two Cheers for County Taxes: one, because the capture taxes from all kinds of towns and two because they are flexible in a way other property taxes aren't.

May the functions of county governments grow!

---

See Also:

The Loss of Property Wealth in NJ's Most Underaided Districts

The Divergent Fates of NJ's Big Cities

Loss of Property Wealth in NJ's Most Underaided Districts

We all know that underaiding negatively impacts students, teachers, and taxpayers in an underaided district.  

This post is about a downstream consequence of underaiding that I haven't addressed yet; how it forces towns to sacrifice their schools and/or accept heavy tax burdens and therefore weaken their real estate markets.  This post is a reminder to people that school quality and taxes count and when these factors are unattractive, buyers will avoid the town and homeowners will see the values of their homes depreciate.

NJ's most underaided towns have almost always exceeded the state's average loss of property wealth in the last six years, be they in South Jersey or North Jersey - rural, suburban, or urban.  This post suggests that underaiding is a reason and shows the depth of the property base loss.  

A Positive Feedback Loop Isn't Necessarily a "Positive" Thing

There are many people who will tolerate high taxes if they are receiving superior services, but the number of people who will voluntarily tolerate high taxes combined with inferior services is far fewer.

If a town's schools are underfunded and sub-par and if that town's taxes are also high, the town will have a more difficult time attracting new residents than a peer town whose schools are superior and taxes are lower.  When this is the case, sellers have to discount their homes in order to sell them.  

Thus, there is a positive feedback loop of market decline where :  

>The more a market declines, the higher the tax rate gets

>>The higher the tax rate gets, the more the market declines 

>>>the more the market declines, the higher the tax rate becomes.

>>>>etc etc 

As newer residents may be poorer than older residents, sustaining a tax levy might become increasingly difficult.  

(Having Five Nodes is Arbitrary.
"A Declining Real Estate Market" and "Loss of Equalized
Valuation" are the same thing with different terminology.)

State Aid is Supposed to Stop Downward Spirals

The point of state aid - municipal and school aid - is to arrest this downward spiral.

If state aid is properly distributed, the infusion of money from the thriving parts of New Jersey should be able to equalize a town's taxes and school spending with other towns and give residents fewer reasons to leave and new residents more reasons to move in.  Maybe the process of decline is reversed, maybe the town is only really stabilized, but still, the tax/school spending situation would be a lot better if state aid were fairly distributed.  

In looking at underaided school districts, I am not saying that underaiding is the sole reason for their real estate declines or even the major reason. I am, however, saying that it is a reason and therefore in addition to hurting taxpayers and schoolchildren, it hurts their families' home values and financial security

In looking at NJ most underaided districts for 2016-17, I am aware that I am not looking at a random sample.  Since Equalized Valuation is a key component of the calculation of state aid, towns that have lost Equalized Valuation since state aid was last properly (though inadequately) run in the Corzine era, have become the most underaided due to the mechanism of the aid formula.  Therefore, looking at the most underaided and showing that they have lost the most Equalized Valuation is partly a self-fulfilling prophecy.  

Although loss of Equalized Valuation is probably a bigger cause than effect of underaiding, logically speaking it is part of a feedback loop that produces deeper underaiding, so this self-fulfilling prophecy is to be expected.  

My assumption is that most of the most underaided for 2015 would have been among the most underaided in 2009 too.  

Note: Equalized Valuation is the market value of a town. It is computed annually by the county tax assessor. Equalized Valuation is used to apportion county taxes. It is supposed to be used to distribute state aid, but as we all know SFRA is non-operating. The Dept of Treasury gives every town's EV at the Table of Equalized Valuations. I have put the data I used here:

The Most Underaided Are Almost Always Low Spending and High Taxing

Above, Total Budgetary Cost Per Pupil
Excluding regionals and Hi Nella (which is non-operating).  Original Source, Taxpayer Guide to Education Spending: Available here:  http://bit.ly/1XH0sPR

And these districts always always have tax rates that exceed Local Fair Share.

Of the most underaided districts whose spending is above the median (Atlantic City, Wharton, Linden, and Newton), all have among the highest taxes.  

Source: http://bit.ly/1UCWnOm

Since 2009, the state as a whole (ie, counting the underaided) has lost 11% of its Equalized Valuation, indicating how weak our "recovery" has been, but the underaided districts exceed this average loss significantly, having lost 24% of their (weighted) Equalized Valuations.   Atlantic City is a large outlier, but even with Atlantic City factored out, the underaided districts would have lost 17% of their Equalized Valuations.  

So, in underfunded school/high tax conditions, is it any wonder that almost all of these underaided towns see declines in their real estate markets that exceed the state's average?  Of the 40 most underaided non-regional districts, 35 have lost more than the state's average 11% loss!

Source: Table of Equalized Valuations: http://www.state.nj.us/treasury/taxation/lpt/lptvalue.shtml

Some readers may notice that Chesterfield has actually gained 1% on its 2009 Equalized Valuation, but Chesterfield is the exception that proves the rule since Chesterfield has had significant real estate development and thus a gigantic increase in its student population, from 439 students to 767 students.  

So despite the small increase in Chesterfield's Equalized Valuation, Chesterfield has much less tax base per student than it did before.  

Conclusion

By not redistributing state aid from certain wealthy and overaided districts the state, ironically, deepens underaiding for already-underaided districts since it damages their real estate markets, lowers their Equalized Valuation, and increases their hypothetical Equalization Aid.  

There are many educational and tax rate reasons to demand the redistribution of state aid, but another one is to stabilize real estate markets and help families protect the value of their houses, their greatest assets.

One of the biggest drivers of wealth inequality is differential appreciation and depreciation of real estate values, so if you purport to want to reduce wealth inequality, then slowing a process of the destruction of wealth has to be part of your agenda.  

---

See Also "Beyond the Point of Fairness: New Jersey's Highest Taxed School Districts."

Two Cheers for County Taxes! (the fairest of all property taxes)