NJ Fiscal Folly

Tuesday, March 21, 2006

The Black Holes Of NJ

Black holes swallow light and matter. Abbott school districts swallow NJ taxes.

According to the NJ State Constitution (Article VIII, Sec I, Par 7), individual income taxes can only be used to reduce or offset property taxes. The money is usually returned to taxpayers through school aid, municipal aid, or property tax rebates. In FY 2006, these three categories will total roughly $11.5 billion.

Unfortunately, the constitution allows wide discretion in establishing formulas for the distribution of such funds. As a result, there is nothing to prevent a massive redistribution of money from some communities to others. Abbott district spending is the inevitable result.

The largest component of school aid is direct payments to school districts. In FY 2006, these payments should total $6.9 billion.

According to the NJ Department of Education, the 31 Abbott districts will receive around $2 billion in FY 2006 for "parity aid", "supplemental aid" and preschool programs. Until recently, given the size of the number, I assumed that this figure pretty much covered everything for these districts, except for construction costs, which are handled separately.

However, acting on a hunch, I went back and added up all of the direct school aid payments to these 31 districts . It turns out that the Abbott districts will receive over $3.8 billion in FY 2006, 55% of all direct payments and 33% of total school aid, municipal aid, and property tax rebates. The largest recipients include Newark ($687 million), Jersey City ($420 million), Paterson ($362 million), Elizabeth ($246 million), and Camden ($244 million).

Gov Corzine is starting to beat the drum for consolidation and/or regionalization of municipalities and school districts. His basic argument is the need for consolidation cost savings to offset property tax increases. This may be a valid reason, but it's also somewhat misleading. The massive redistribution of funds from many NJ communities to the Abbott districts is a major contributor to financial pressures at the local level. Consolidation cost savings won't make a dent in property tax burdens unless Abbott district spending is also brought under control.

Update: The FY 2007 Corzine budget proposal that was released this afternoon contains revised estimates for FY 2006. The figures above were based on previously available information. The new estimates are generally similar to the prior ones, and do not change my basic thesis.

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