By Michael F. Kaelber, Esq., Coordinator of Continuing Legal Education and Research
The funding of public education in New Jersey is a topic that school leaders, such as superintendents and school business administrators, often discuss but do not fully appreciate the intricacies. We often look at state aid numbers or limits to which taxes can be raised locally, bemoan the fact that we would like to get more money for our school budget, but may not appreciate the process behind the numbers. The purpose of this article is to peek behind the curtain of New Jersey school funding to see and understand the analysis and process behind the numbers.
New Jersey School Funding – Some General Observations
The total New Jersey state budget for fiscal year (FY) 25 is set at $56.7 billion. State spending during Governor Murphy’s administration has increased annually during the last seven years; more than $20 billion since the last $34.7 billion budget of Governor Christie, a 63% increase. Much of the increased spending has been to provide increased funding into the state pension system for public sector workers, most notably the Teacher Pension and Annuity Fund (TPAF), which covers most school employees, increased state aid for schools and tax relief.
Total New Jersey state education aid for FY 25 is $20.8 billion, approximately 37% of the total state appropriation for FY 25. State education aid includes $14.8 billion from Gross Income Tax revenues and $6.0 billion from other General Fund revenues.
Fifty percent (50%) of the $14.8 billion in Gross Income Tax revenues are generated through regular payroll tax deductions with the other 50% being generated by bonuses and capital gains taxes. Those revenues vary from year to year depending on the economy. When the stock market and financial industries do well, New Jersey does well in its income tax collections. When the stock market and financial industries do not do well, New Jersey income tax revenue suffers.
New Jersey is highly dependent on its high-income earners for Gross Income Tax revenue. A 2023 study by SmartAsset determined that the
- Top 1% of wage earners in New Jersey, those making over $825,965, paid 33.58% of the income taxes in New Jersey.
- Top 5% of wage earners in New Jersey, those making over $338,884, paid 55.6% of the income taxes in New Jersey.
Previous studies have shown that the top 10% of wage earners paid over 75% of the income taxes in New Jersey, while the top 25% of wage earners paid over 90% of the income taxes in New Jersey.
State Payment of Employers Share of TPAF and Social Security
Board of education members, school administrators and citizens in New Jersey’s middle class and more affluent communities often remark that their school district does not receive much, if anything, in state school aid. While that may be true when it comes to formula aid under the school funding formula, there is a significant amount of financial aid from the State of New Jersey that all school districts receive.
Pursuant to N.J.S.A. 18A:66-33, the State of New Jersey pays 100% of the employers share of TPAF and Social Security for school districts. This is not true for municipalities, counties and for board of education employees who are in the PERS retirement system, which must pay the employer’s share of state pension and social security. Over the years, with many state administrations, regardless of party affiliation, there were times when the full payments were not made to TPAF. Recently, thanks to payments made by the Murphy administration, the state pension system, including TPAF, is moving closer to solvency.
For FY 2025 approximately $6 billion in state aid, outside of the school funding formula, will be paid to New Jersey school districts to pay for the employer’s share of TPAF and social security. Every school district receives that financial support from the state of New Jersey regardless of the wealth status of the school district.
Property Tax Caps
New Jersey’s first property tax cap law was passed in 2007. P.L. 2007, c.62, codified at N.J.S.A. 18A:7F-37, 38 and N.J.A.C. 6A:23A-10, 11, 12, provided for a homestead property tax credit for New Jersey residents and provided a means to ensure that property tax relief was sustainable through a property tax levy cap of 4%, applicable to school districts, counties, municipalities, fire districts, and solid waste collection districts. For school districts it was a hard 4% cap with a narrowly defined set of exceptions and included a four-year sunset provision, which would act as a safety valve so that any unexpected consequences of imposing a tax levy cap could be addressed before being made permanent. For school districts, exceptions to the 4% cap were provided for increases in enrollment, reduction in state aid, health care costs, and Commissioner approved waivers in a number of categories.
In 2010 the Legislature revised the property tax cap law, P.L. 2010 c.44, reducing it to the current 2% and making it tighter and even more restrictive. The law still applies to school districts, municipalities, counties, fire districts and solid waste collection districts. However, the non-school district governmental entities have more flexibility under the cap than to school districts.
What did the 2010 2% tax levy cap law do?
- The tax levy cap law was made permanent. The original law had a four-year sunset provision. The current 2% tax levy cap is a permanent part of New Jersey statutory and regulatory law.
- It eliminated the automatic adjustment for loss of state aid and Commissioner approved waivers.
- It contains adjustments for school district enrollment increases, health benefit costs and certain pension costs.
Commissioner Waivers Eliminated Under 2% Property Tax Cap
The following Commissioner approved tax levy cap waivers, which were available under the 4% tax levy cap law are no longer available under the current 2% property tax law.
- NJQSAC/NCLB – Failure to meet the Core Curriculum Content Standards, now Student Learning Standards; funding for needed programs and services
- Energy Cost Increases Over 4%
- Capital Outlay Increases Over 4%
- Appropriation of Non-Recurring Revenues, Surplus
- Non-Health Insurance Cost Increases Over 4%
- Hazardous Route Transportation Cost Increases Over 4%
- Special Education – Per Pupil Costs Over $40,000, Increases Over 4%
- Tuition Increases – Sending-Receiving/ Vo-Tech Over 4%
- Opening a New Facility
- Emergency; student health, safety, welfare
All of these waivers, which were available under the 4% property tax levy cap law are no longer available under the current 2% property tax levy cap law. It is a much tighter and more restrictive cap for school districts.
Property Tax Levy Cap Waivers Which Remain under the 2% Property Tax Levy Cap
There are still some property tax levy cap adjustments available for school districts; an adjustment for enrollment increases, an adjustment for health care cost increases and an adjustment for Public Employee Retirement System (PERS) pension contribution cost increases.
- Enrollment increase adjustment – the per pupil prebudget year adjusted tax levy multiplied by the sum of
- 0.50 for each unit of weighted resident enrollment that constitutes an increase from the prebudget year over 1%, but not more than 2.5%;
- 0.75 for each unit of weighted resident enrollment that constitutes an increase from the prebudget year over 2.5%, but not more than 4%; and
- 1.00 for each unit of weighted resident enrollment that constitutes an increase from the prebudget year over 4%.
Commissioner approval may be obtained for a 1.00 multiplier for any increase in weighted resident enrollment if the average class size would exceed 10% above the facilities efficiency standards. Enrollment increases are determined by Department of Education enrollment projections based on a five-year rolling average.
- Health care increase adjustment – increase from pre-budget year budgeted amount for health care costs over 2% (Health, Prescription Only) less any withdrawals from the current expense emergency reserve account. Adjustment for increases over 2% may not exceed the average SEHBP percentage increase; 10.6 % for 2024 -2025.
- PERS contribution increase adjustment – increase in normal and accrued liability PERS pension contributions for the budget year that exceed pre-budget year contributions by more than 2%
Second Ballot Questions
Pursuant to N.J.S.A. 18A:7F-39 and N.J.A.C. 6A:23A-12.1, a board of education may submit to the voters a proposal to exceed the property tax levy cap, including any waivers. The proposal must be included in preliminary budget and may not include programs and services necessary to achieve New Jersey Student Learning Standards. There must be an interpretive statement which identifies the program purposes and include whether voter approval will result in a permanent tax levy increase. The Executive County Superintendent must approve the proposal before it can be submitted to the voters and may disapprove the proposal if all potential efficiencies are not met.
The proposal shall be deemed approved if a majority of people voting vote in the affirmative. This is a change from the original 4% property tax levy cap legislation which required a 60% affirmative vote for second ballot question approval. If the proposal is defeated, there is no appeal and the base budget may not be modified to fund the purposes of the proposal. There is an exception for donations or contributions from external sources other than the board of education to fund the purposes of the proposal only if implementation will not require any funding by the school district in the budget year and/or subsequent budget years.
Recent legislation clarified when school districts can bring separate proposals for additional spending to the voters. P.L. 2024, c. 60, signed into law 9/4/2024, authorizes school districts to submit separate proposals for additional spending for the subsequent budget year, not only at the annual school election, but at any special school election; January, March, September, December. Proposals may be submitted at a special school election once per year and may be combined with a capital project submission.
Cap Banking Restored Under the 2% Property Tax Levy Cap
Pursuant to the 2% property tax levy cap law, N.J.S.A. 18A:7F-39 N.J.A.C. 6A:23A-10.1, school districts once again have the ability to use unused tax authority in any of the next three succeeding budget years. In simple terms, this means that if a school district increased its tax levy by 1.5%, it could use the remaining 0.5% of tax levy cap in any of the next three succeeding budget years and could raise its property tax levy by 2.5%; the usual 2% plus the 0.5% which it did not use.
The Executive County Superintendent may disapprove the use of banked cap if it is determined that the board of education did not implement all potential efficiencies in the administrative operations of the school district. If approved, the board of education must fully utilize unused tax authority from the earliest prior year(s) before utilizing unused tax authority from the prebudget year.
The current property tax cap structure, a hard 2% tax levy cap, with limited exceptions, has created a challenging time for school districts. Collective bargaining agreements have consistently increased by more than 2%; health benefit costs have consistently increased by more than 2%, energy costs have consistently increased by more than 2% and insurance costs have consistently increased by more than 2%, just to name a few. Yet most school districts are faced with the ability to increase their budgets by only 2%. Personnel costs now make up as much as 85% of a school district budget. There are fewer and fewer discretionary spending areas every year. Many school districts have reached a point where the only place to cut costs is to lay off staff; reductions in force.
Legislative discussions are currently taking place, seeking possible solutions for school districts struggling with New Jersey’s current property tax levy, often for reasons beyond the control of school districts. In the meantime, it is important to understand the key factors that impact school funding under current State law, and the available options for districts seeking to navigate challenging financial situations.