Economic Analysis in April 2010,

Economic Analysis

In April 2010, voters in the state of New Jersey voted to reject school budgets. At the heart of the issue was property tax reform. The position of New Jersey governor Chris Christie was that school boards were receiving an increasing amount of state aid to fund school districts. This aid was intended to keep property tax increases minimal. The governor's contention, however, is that the school boards were using that money to expand their programs. As a result, property taxes in those districts were increasing despite the state aid. As a result of the election, the state has issued a mandate that it will be reducing the amount of state aid to school boards. In order that property taxes are kept low, school boards will need to curtail their spending.

The governor's move is geared towards a 'starving the beast' tactic. The underlying premise of the move is that school boards have not in past been faced with economic incentive to control costs, because they could count on both state aid and property taxes. This created a disconnect for the taxpaying public between the actions of the school boards and their property taxes. By dramatically reducing the amount of state aid given, the public will now be able to draw a connection between the school budgets and their property taxes. The premise is that this will create incentive for the school boards to reduce their budgets, since those budgets need to be approved by taxpayers.

The result of this tactic is that the school boards will need to make cuts in order to avoid property tax increases. With reduced revenue, cuts will be needed to avoid property tax increases. Taxpayers are not expected to vote in favor of budgets that will result in property tax increases. Indeed, the governor's hope is that the voters will only vote in favor of budgets that will lead to property tax decreases.

A strategy in conjunction with this vote is a proposed property tax increase cap that would be passed in the state legislature. This cap would effectively limit the amount of increases that school boards can have in their budgets, including placing limits on increase in teachers' salaries and program spending above that which is considered reasonable.

The economics are essentially the same from the perspective of the school boards. Faced with a reduction in inflows, they will be forced to make cuts in order to find a new equilibrium point at which property tax levels are maintained at their current levels. The school boards could only exceed this equilibrium point if they can convince voters to accept higher property taxes to pay for it.

The issue for the school boards revolves around the idea of what has been termed 'shared sacrifice'. The idea is that specific cuts -- a one-year wage freeze and a 1.5% contribution to health care benefits could bring the budgets into equilibrium with state funding and property taxes (Heininger, 2010). Impacts to the school board will include layoffs, program reductions, administrative pay freezes and in some cases an increase in the property tax levy.

School boards resist the issue because it will force them to make cuts that they feel are detrimental to operations. Hamstrung to some extent by union teacher contracts, school boards may not have substantial leeway on costs immediately, and therefore will need to make cuts in programming and administrative staffing.

For the school boards, wage freezes make it more difficult to attract talented new teachers and administrators. This could result in a reduced ability to deliver services. Also, it renders school board budgets to be more sensitive political issues, which was not the case when the aid was available.

For the state, the reduced aid helps the state budget considerably, as $820 million in aid has been cut. This helps keep the state from increasing its own taxes. In addition, it removes accountability from the state for school board activities and for property taxes. The original policy of providing aid is essentially deemed a failure and replaced with a more direct, market-based approach wherein the school boards are held directly accountable by the taxpayers.

The state also believes that reducing school board budgets will make the state more competitive, as it is felt that the tax structure in New Jersey is sufficiently high as to discourage investment. The school boards would contend that a reduction in education will leave New Jersey will less qualified workers in the long run.