For the last year the most acrimonious fight in Trenton hasn’t been between the two parties or between the Legislature and Gov. Chris Christie, but between Senate President Steve Sweeney and Assembly Speaker Vincent Prieto, as Sweeney attempts to bring fairness to the allocation of school aid by redistributing state aid from districts that currently receive more money than the law say they need to districts that currently receive less.
What Sweeney is trying to do is eliminate the "Hold Harmless" provision in the School Funding Reform Act of 2008 — officially New Jersey’s school aid law — that prevents a district from losing state aid even as its tax base grows or enrollment shrinks.
The politicized provision that Sweeney is trying to eliminate is called Adjustment Aid and effectively disallows a district from ever losing state aid. The existence of Adjustment Aid means that if a district was getting $30 million before SFRA became law, but only needs $20 million, it still gets $30 million.
Due to Adjustment Aid and the state’s inability to put new money into SFRA, New Jersey’s state aid distribution has become even more unfair than it was prior to SFRA's passage. Make no mistake, New Jersey's school funding distribution is a system of haves and haven-nots. For 2017-18 New Jersey will have 369 districts who are underfunded for a cumulative deficit of $2.1 billion, with some the most extreme deficits exceeding $10,000 per student. West Orange is one of those underfunded districts, with a deficit of $18 million, or $2700 per student.
On the other side are 222 districts are overfunded for a cumulative surplus of $696 million, some of whom have surpluses exceeding $10,000 per student.
Opposed to Steve Sweeney are the Education Law Center and the NJEA, who oppose redistribution. Vincent Prieto have not ruled out any cuts to Adjustment Aid, but more often he has said that New Jersey should just “fund the formula,” and let fairness come from large targeted increases in spending, and not spending the existing money more efficiently and fairly. But without redistributing aid, there is no way SFRA can be fully funded barring a miraculous turnaround in New Jersey’s economy.
The “just fund the formula” argument ignores history. Since 1976, New Jersey has almost never fully funded its aid formula. Even Tom Kean, who governed during the economically spectacular 1980s, underfunded his era’s aid law by a cumulative $950 million. Now, full funding is even more difficult, due to New Jersey’s slow economic growth, debt burden and the huge funding ambition of SFRA.
Kean presided over 9 percent annual revenue growth. Today, New Jersey’s revenue growth is 2-4% a year. Under Kean, New Jersey had a AAA credit rating and a fully funded pension system. Today New Jersey’s credit rating is the second worst in the country and our debt, pension, and post-retiree health care debts are $130 billion.
Even though state revenue increases by $1 billion per year from inflation and economic growth, increases in the pension, health care and debt service obligations consume all new revenue. Even before the Transportation Trust Fund tax cuts blew a billion-dollar hole in the state budget, we were in chronic fiscal crisis.
The "Just Fund the Formula" side also ignores what the funding deficit actually is, saying that it is only $1 billion and not the real $2.1 billion deficit. The basis for this $1 billion claim is that SFRA contains Caps that limit a district's aid growth at 10% or 20% of what a district got in the past. This means that even if SFRA's aid formulas say that a district needs $50 million, but it currently gets $20 million, the most aid a district can gain is 20%, or $4 million. These Growth Limits force SFRA to disregard its own calculation of what a district needs and arbitrarily cap aid growth.
Whatever the funding deficit should be reckoned at now, New Jersey's fiscal situation is going to get worse. Much, much, much worse.
Currently New Jersey’s pension funds pay out $10.8 billion a year. The state and localities put in $3 billion for FY2017 and active employees put in $2 billion.
In a properly managed and funded pension plan, the gap between contributions and payouts would be made up by investment earnings. Although the State claims $71 billion in assets, our investment earnings do not even come close to making up the deficit in contributions from the state and active employees.
Thus, several the state’s pension funds will zero-out in the 2020s. The Judges’ fund will zero-out first, in 2021, then State-PERS in 2024, and finally, the biggest of all, the Teachers Pension and Annuity Fund (TPAF) will zero-out in 2027.
Although it is difficult to forecast investment returns a few years into the future, once any fund has zero assets, its investment returns can be calculated precisely: $0.
Once the funds zero-out, the state and active employees will have to fund on a pay-as-you-go basis for pension outlays, which by then will be much higher than $10.8 billion.
So New Jersey is in fiscal crisis now, but that word is insufficient for what awaits in the 2020s, which is CATASTROPHE.
Although New Jersey can (and must) increase taxes, even the so-called Millionaire’s Tax (to 10.75%) that the Democrats have repeatedly passed, would only bring in another $615 million per year. Other revenue enhancements, like closing corporate tax loopholes (ie, implement Combined Reporting) and legalizing and taxing marijuana, might bring a few hundred million more.
New Jersey can reform its system of corporate tax incentives too, but the amount of money New Jersey would gain is likely small. First, the actual costs of these incentives is misunderstood, since there gap between what is approved and what the Treasury actually pays out. For 2016, the State approved $1.6 billion in incentives, but the payout was $347 million. Second, these tax incentives facilitate many worthy developments in NJ's struggling cities, from Paterson to Atlantic City. Third, not every business that says it won't operate in New Jersey without a tax break is bluffing. Some would leave New Jersey or not come here in the first place, thereby entirely depriving New Jersey of tax revenue.
So, what the “just fund the formula” side doesn’t admit is that to fully fund just the K-12 portion of SFRA without redistribution would require either that New Jersey create the highest top-bracket in the United States or increase income taxes for middle-class taxpayers.
And even if New Jersey figured out a way to raise revenue by $2.1 billion to fully fund SFRA (without redistribution), we have many other obligations other than K-12 education too, such as higher education and maintaining the social safety net, so putting all that new tax money into education is not realistic.
The School Funding Reform Act was billed as a reform of the Abbott system, which was a State Supreme Court requirement that the state fund the 31 Abbott districts at the highest spending levels in the country. Jon Corzine’s School Funding Reform Act was a worthy bill, but it was not so much a “reform” of Abbott as an expansion of it to previously neglected poor and working-class non-Abbotts.
The architects of SFRA spent years working out the intricacies of funding targets and acceptable local taxes, but they forgot one simple thing: where the state should get the new money for schools in the first place.
Fully funding SFRA is not realistic under any likely scenario, but with redistribution, fair funding for hundreds of thousands of children at least is within reach.
Jeffrey Bennett is a former member of the South Orange-.Maplewood Board of Education. He writes a blog on New Jersey education aid.