NJ Business Matters: The Blog of the CIANJ

Today in Trenton: School Funding Formula Part Deux

The legislature is holding a rare holiday-week session today so the General Assembly can hear and debate details of the Governor's proposed $7.8 billion school funding formula. School funding consumes the largest share of the state budget and a new formula to replace the ad hoc and disjointed system currently in place offers the greatest opportunity for property tax reform.

Since the Senate hearing, formal legislation has finally been introduced. To our pleasant surprise, the property tax relief contained within the proposal is more substantial than expected. It requires towns spending more than the state definition of adequate who also receive more than the minimum 2% in state aid to return money above the 'adequacy' marker directly to the taxpayers. The baseline (before children are defined as special needs, at risk etc and before they reach high school age) in the formula is more than $9,600 per student. Under the new proposal, more than 100 towns would be required to return money to taxpayers.

While accountability in the formula is still lacking in that there is no correlation between funding levels and results, the changes do offer much of what CIANJ has long-stood for. Our testimony before the Senate is available here. A district-by-district breakdown of who would get how much from Trenton is also available. 

The Administration seeks to have the proposal pass the legislature during the current session, which means it would need to pass by January 7th.

If Only Reform-Making Were As Quick As Credit-Taking

The editorial board at the Star-Ledger points out that New Jerseyans probably won't be giving thanks tomorrow afternoon for their property taxes "only" climbing 5.5% last year.

Sunday the paper reported on its own analysis demonstrating rates experienced their slowest climb in the past 6 years. And while Governor Corzine and several legislators were taking credit, the Ledger reminds us (and the politicians) that legislative efforts were only partially responsible,

For example, it's absurd to argue that the creation of a state comptroller, the establishment of county school superintendents, the forming of a commission to study local government consolidations, or some meager prospective pension reforms had any real impact on this year's property taxes.

That said, the imposition of a 4 percent cap on local budgets probably did have an effect, even though only one in four towns managed to meet that mandate this year. Still, this offers the best hope for controlling property taxes in the future. The success of the cap depends on the state hanging tough and saying no to towns and school boards seeking exemptions to that limit.

It is also worth noting that in North Jersey, the inflation rate was 3.1%. Property taxes escalating at 5.5% is still unsustainable.

The greatest opportunity for tax savings is in the creation of a more equitable school funding formula in which dollars follow a child. The portion of property taxes dedicated to schools is a super-majority of most Jersey homeowners' tax bills. About half of the state's $7.8 billion dedicated to schools go to 31 Abbott districts, the other half is spent on the remaining 585 districts. That creates a scenario in which local property taxes in 585 districts pick up a larger share of the tab for public schools than in other states, which is why NJ boasts America's highest property taxes.

Check's In The Mail, Reform is On The Waiting List

This spring, when property tax relief measures were being signed amidst a fit of self-congratulations CIANJ acknowledged that some relief was always welcome, but that this was far from the necessary true reform.

Kudos to the Courier-Post for making the same point today, a week after rebate checks arrived in the mail.

[W]e also believe these relief checks are, in the grand scheme of things, just a very tiny step toward actual property-tax reform that would permanently and significantly lower our highest-in-the-nation property taxes of $6,300 per year on average. That's more than twice the national average for property taxes.

For one, raising one tax to give people "relief" from another tax isn't reform; it's smoke and mirrors.

Second, real property-tax reform means actually slashing people's quarterly tax bills. If you woke up tomorrow and found you suddenly owed only $1,200 and not $2,000 to the local tax collector next quarter, that would be actually cutting taxes. Continuing to collect the same amount in taxes but then giving a little back to people as a check or a tax credit is not the same thing.

The way to cut property taxes is to eliminate the fat from our government by reducing its size and consolidating and sharing services. We must also lessen the percentage of funding school districts draw from property taxes.

Our lawmakers in Trenton, despite the palpable outrage around the state over high property taxes, have done nothing in recent years to cut the size of state government or force consolidation and the sharing of services. Nor have they improved the school funding formula.

Businesses pay property taxes twice. Once through directly paying about one-third of all property taxes collected in New Jersey (while owning about 6% of the property) and then again through higher wages paid in order to attract talent and sustain a high quality of life. Despite that, businesses do not directly benefit from the much-ballyhooed rebate checks.

The biggest opportunity to actually reform the system lies in a fair school funding formula. The re-distribution of suburban property taxes, Abbott districts, repetition of administrative services due to our 616 school districts and lack of accountability within failing districts all contribute to our highest-in--the-nation property tax status. The longer the legislature waits to address those issues, the more entrenched the situation becomes and the more businesses, taxpayers and students become victims of a system.

Update: It seems as though residents interviewed by Tom Hester with the Associated Press have the same feelings as the Post and CIANJ.

Shell Game

It's post-Labor Day and that means a few important things: the Yankees are about to surge, the Giants are about to disappoint and politicians are ready to pander as they look to win your votes on Election Day.

Today, the Star-Ledger cautions you against listening about the successes during the highly-touted special session on property tax reform - the major accomplishment of which is a rebate largely funded by last year's sales tax increase. As we've noted here multiple times, any measure of tax relief is welcome news to our over-burdened taxpayers. However, true reform including a new school funding formula and bringing public employee benefits more in line with the private sector are necessary to make relief sustainable. The Ledger editorializes,

With Labor Day gone and the fall campaign for control of the Legislature about to get under way, voters can expect to hear about how much better off New Jersey's taxpayers are.

Don't believe it.

Let's review what drives spending: personnel costs. A preliminary look at recent teacher contracts shows about half the 200 that expire this year have already been signed, generally coming with annual salary increases of 4.6 percent. It isn't likely that number will budge much when all of them are settled. Then there will be salary adjustments for police, firefighters and other government workers.

Don't be surprised if, when the numbers are all in, the statewide average rise in property taxes mirrors that of past years -- in the 6 to 8 percent range.

And when it comes to the actual value of your rebate check, they add,

Rebate checks averaging $1,051 will arrive in the next month or so, but those checks aren't worth as much as they seem.

The average property tax bill last year was $6,170, and the average rebate will be $1,051. But if that tax bill increases by even 6 percent -- the low end of predictions -- the average homeowner will be paying $370 more in taxes, reducing the rebate to $681.

On top of that, a family earning $108,263 is paying an extra $253 in sales tax because it was raised from 6 percent to 7 percent last year. That money goes to the rebate program.

Bottom line: That $1,051 check is really more like $428.

Can anyone in Trenton understand why voters may feel they've been taken yet again?

Issuing Debt to Pay for Relief Which Was Funded By A Tax Increase

New Jersey is considering taking out a short-term loan to cover $2 billion in costs as the state awaits expected "revenues" (aka taxpayer money) to come into Trenton. Today's Record reports the loan coincides with the $2.5 billion property tax rebate plan. Senator Lance aptly notes the program is not sustainable following this year,

The fact that the state is borrowing money upfront to cover the costs of the property tax rebates is further evidence that the program is not sustainable, said Senate Minority Leader Leonard Lance.

"I think it's an indication of a much more serious matter next year, when we will not be able to pay for the program because we don't have enough revenue," said Lance, a Hunterdon County Republican.

This year's rebates will be paid for with revenues from last year's 1-cent sales tax hike.

However, a new source of funding has yet to be determined for next year, if the rebates are to be repeated.

Next year the state expects to start off the budget season with a $2.5 billion structural deficit.

We've added a lot of readers since the days of the special session on property tax reform, so here are some of our thoughts on the program:

• Businesses pay the nation's highest property taxes twice - once by virtue of paying about one-third of the state's overall property tax package and then again through higher wages needed to attract and retain talent seeking a high quality of life. Despite paying one-third of property taxes collected, it is seldom noted businesses are ineligible for the program.
• Any degree of property tax relief is appreciated, but short-term relief is no substitute for the long-term reform measures needed.

Of course, all this heightens the need for a new school funding formula and to reduce spending. Before plans such as asset monetization can be considered, spending patterns must be altered. If you're going to sell off the family car to pay off your credit card, you'd better cut up the card. That has yet to happen.

Reap What You Owe

The bills are coming due for pension benefits owed to New Jersey's public employees, and the taxpayers in some towns may be in for some sobering news following their rebate checks.

As today's Star-Ledger reports,

In all, the Treasury Department numbers show, the tab for supporting retirement benefits for hundreds of thousands of government workers, fire fighters and police officers will be $1.056 billion, due next April. That includes $416 million to cover the cost of public employee pensions and $640 million for the retirement benefits of police officers and firefighters.

Last year the total due was $650 million, and in 2004, when the state began phasing in pension contributions after a payment "holiday" of several years, the bill was a diminutive $53 million.

"We recognize that these contribution amounts are large and represent substantial increases from last year," said State Treasurer Brad Abelow, in a statement that accompanied a town-by-town breakdown of the new bills. "They are symptomatic of the need for New Jersey to put its fiscal house in order, which Governor Corzine is committed to doing and is making significant progress toward."

The CIANJ and other business and taxpayer groups recognized that the benefits paid to our public employees were more generous than private sector practice and unsustainable. As the Corzine Administration works with localities to correct some poor practices stretching back more than a decade, there must be equal attention paid to ensuring the problem does not worsen. That includes requiring future retirees to pay a percentage of their own health insurance, and reducing the mandates that have helped drive insurance prices so high.

Click here for a town by town breakdown of who owes what in 2008.