Opinion ID: 1898472
Heading Depth: 2
Heading Rank: 1

Heading: The Funding Scheme

Text: The Act's funding scheme is described in considerable detail in Robinson V, supra, 69 N.J. at 478-90, 355 A. 2d 129. It is based on a limited equalizing of the taxing power of school districts. It enables all school districts to raise funds as if their tax base were at least 134% of the average school district tax base (tax base meaning in this connection the district's equalized property valuation per pupil). N.J.S.A. 18A:7A-3, -18a. The school district sets the tax rate as if the real property of the district equaled this guaranteed tax base (GTB). The local revenues generated by the tax from the district's actual tax base are then supplemented by state aid, called equalization aid, in an amount that, when added to these local revenues, equals what that tax rate would have produced if applied to the GTB. In the school budget year 1985-86, the GTB was $250,927, with equalization aid totaling $1.34 billion. During that year it had the effect of equalizing the taxing power of 371 districts out of a state total of 578 districts, roughly two-thirds of the state's school districts. The equalization aid for the prior budget year (1984-85) aimed at giving effect to the GTB ($223,100) was $1.24 billion. Had the Act been fully funded, it would have been considerably more. [9] Districts whose school tax base in fact exceeds the GTB do not receive any equalization aid at all. In its funding aspect, the Act does not require or assure any particular level of educational expenditure in any school district. It is indifferent to whether the district spends $1,500 per pupil or $15,000. As far as equalization aid is concerned, its only effect is to pay a portion of the school budget determined by the district. A district can decide to raise $5 million or $2 million; under the Act that is a matter solely for the district to decide. Both state equalization aid and the local tax rate would be affected by that decision. The potential legislative appropriation for equalization aid, therefore, is dependent not only on the level of the GTB but on local budget decisions. There is no limit  theoretically  on the district's ability to tax and spend. [10] The Act gives poorer districts  poor in terms of property valuation per pupil  taxing power to raise more money for school purposes than what a school district with the average property valuation and no equalization aid could raise. Putting aside for the moment the impact of municipal overburden (a condition in many poorer districts where the cost of local government  police, firefighters, other municipal employees, road maintenance, garbage collection, etc.  is so high that the municipality and the school district are reluctant to increase taxes for any purpose, including education), equalization aid attempts to obliterate the enormous disparity between rich and poor for school tax purposes; it creates, instead of rich and poor districts, two different classes: those districts with a guaranteed tax base  almost two-thirds of the districts in the state  and those with a tax base in excess of the guaranteed tax base of $223,100, running from $223,667 to $7.8 million and clustering at $300,000 (1984-85 figures). To understand better its equalizing impact, the GTB and equalization program should be compared with the situation that would exist if there were no equalization aid whatsoever (the districts' real property taxing power ranging from $22,322 per pupil to $7.8 million per pupil, with 58% of the districts below average, 42% above  many enormously poor and a fair number very rich); and with the situation that existed prior to the Act when equalization aid leveled only 157 districts as compared with the 368 not equalized. Robinson V, supra, 69 N.J. at 465 n. 4, 355 A. 2d 129. Three limitations on equalization aid should be noted. Most important of the three, the amount of equalization aid a district receives in a budget year is based not on its budget for that year, the current year, but on the budget of the prior year. Just how severe the impact of that limit can be is realized when a district with equalization aid at a level, for instance, of 80% of the district's budget is analyzed. [11] Assume that district has a $4.2 million budget for this year, representing a spending increase of $200,000 (last year's budget was $4 million). For $4 million of that $4.2 million budget, 80% aid will be forthcoming  the district will have to raise only $800,000 locally to have a total of $4 million. But to get the extra $200,000, the school district will have to raise that entire amount on its own tax base, and the impact on its tax rate will be five times as much as it would have been (because, on the assumption given, the State would have paid 80% of that $200,000 but for this prior year equalization aid rule). This failure to provide current year funding affects districts' willingness to add to or enrich their programs in view of what could be a substantial tax impact. Both the Commissioner and the Board, in their decisions in this case, support legislative change to a current year funding system. The second limitation is the budget cap law, applicable to all districts, restricting annual increases in school district budgets to a certain percentage over the prior year, but allowing low spending districts to increase their budgets more rapidly than higher spending districts. N.J.S.A. 18A:7A-25. This restriction affects equalization aid by limiting the total budget on which such aid is based. The budget cap law is not as important to poorer districts, who do not ordinarily budget to cap. However, the statute allows the Commissioner to waive the cap limitation. The third limitation cuts off equalization aid to the extent that the district's budget, in terms of expenditures per pupil, exceeds that dollar per pupil amount that is the sixty-fifth percentile of all school districts' budgets. In other words, if the district with a lower tax base per pupil than the guaranteed tax base nevertheless spends more than the statewide average expenditure per pupil, it will receive equalization aid even for the excess expenditure up to the point where the district's per pupil expenditure equals the sixty-fifth percentile of all districts, i.e., equalization aid will stop as the school district's budget per pupil approaches that of the highest-spending districts of the State. Again, this restriction is of little importance to the poorer districts. For those districts with property valuation above the guaranteed tax base, the Act provides minimum aid. Keyed to property wealth and the size of the district's budget, [12] this element of the funding scheme, while not as substantial as in the past, remains an expenditure that is counter to equalization (aiding the richer districts instead of the poorer districts). In 1984-85, for instance, minimum aid totaled $93 million (as compared to $1.2 billion of equalization aid in that same year); immediately prior to the Act, however, minimum aid equaled $290 million as compared to equalization aid of $431 million for the same year. In 1989-90, $163 million in minimum aid was distributed; equalization aid totaled $1.9 billion. The Act also provides for categorical aid, amounts given by the State to districts regardless of their wealth or the total size of their budget, based on the recognition that certain essential programs cost more than others. Categorical aid supports special education for students with particular handicaps, compensatory or remedial education, and bilingual education. The aid formula consists of calculating the statewide average expenditure per pupil (measured by the district Net Current Expense Budget (NCEB)) and multiplying it by a statutory fraction assigned to the category, N.J.S.A. 18A:7A-20, the product being the amount a district will get in additional aid for each pupil in that category. For instance, in 1984-85 the additional cost factor for compensatory education was .18, and bilingual education .23 (the additional cost factors can be changed each year by the Governor unless the Legislature objects, N.J.S.A. 18A:7A-21). In 1984-85 the statewide average expenditure per pupil measured by NCEB was $3,329, and therefore a district with 100 students taking compensatory education courses would have received $59,922 in compensatory education categorical aid. In 1984-1985, total categorical aid was $315.4 million ($206.1 million for special education; $88.1 million for compensatory education; $21.2 million for bilingual education). Categorical aid is distributed as a flat grant per pupil rather than in accordance with the GTB equalization aid formula. Finally, there is transportation aid and pension aid, the latter consisting of the State's contribution to the Teachers' Pension and Annuity Fund (TPAF), both of which are non-equalizing. The transportation aid is a percentage of the total transportation costs of a district and is distributed in a way that bears no relationship to the wealth of the district. Payments by the State to the TPAF, however, are affected by the districts' wealth, since the richer districts tend to have more and better paid teachers per pupil than the poorer districts. The contribution to the TPAF is a substantial amount ($535.8 million in 1984-85) and is counter-equalizing. There are, however, as was noted in Robinson IV, supra, 69 N.J. at 149-50, 351 A. 2d 713, administrative and other problems that would arise were this aid terminated on its present basis and instead distributed pursuant to the equalization aid formula. [13] Of considerable importance, in the State's view of this case, is federal aid. For many years, since 1965, the Elementary and Secondary Schools Act (now titled the Strengthening and Improvement of Elementary and Secondary Schools Act), 20 U.S.C.A. § 2701 et seq. (Supp. 1989), has provided needed extra funding for programs for disadvantaged students. Federal aid is fairly narrowly targeted not only as to district but as to use. Its impact on poorer districts is indicated by the numbers: in 1984-85 Camden received $394 per pupil; East Orange, $166 per pupil; Jersey City, $471 per pupil; Irvington, $320 per pupil; Newark, $808 per pupil; Trenton, $480 per pupil; and Paterson, $244 per pupil. Although substantial, federal aid amounts only to approximately 5% of the total of all districts' current expense budgets (nationwide, federal aid is about 8% of districts' budgets). The State, in its arguments concerning both the adequacy of school budgets in poorer districts and the asserted disparity in expenditures per pupil between such districts and richer districts, often uses expenditure figures that include federal aid. When federal aid is included, the level of funding per pupil in poorer districts is increased and the disparity of such funding compared to richer districts decreased, sometimes dramatically. The question of the significance of this aid and its appropriate function in school finance analysis was very much at issue in this case. While obviously such aid must be acknowledged, we have determined it should not affect our conclusions concerning either constitutionality or remedy, both as a matter of constitutional interpretation and federal law. Briefly, we view the State's constitutional obligation to provide a thorough and efficient education as not adequately satisfied if dependent on federal aid, which today is subject to substantial fluctuation. Plaintiffs' witness called it a roller coaster. [14] Furthermore, as we read the federal law, even the mere consideration of federal aid in determining the need for or amount of state aid would violate the federal aid statute. 20 U.S.C.A. § 2854 (No State shall take into consideration payments under [20 U.S.C.A. §§ 2701 et seq. ] in determining the eligibility of any local educational agency in that State for State aid, or the amount of State aid, with respect to free public education of children.). We deem it inevitable that a constitutional determination and remedy based on the assumption that federal aid will continue would have such an effect. See also 20 U.S.C.A. § 2728 (conditioning receipt of federal funds on maintenance of funding effort by the local district and the State and further providing that federal funds shall be used to supplement rather than supplant funds from State and local sources). Put differently, federal aid, targeted solely at helping poor children, is not intended to enable a state to keep in place a funding scheme that disproportionately penalizes them. If New Jersey's funding scheme were equal and fair, which it is not, federal aid would continue, and together with state and local expenditures it would provide an even greater opportunity to educate disadvantaged children. The State's position in advancing such an argument in order to save this failed system gives us concern. If New Jersey's educational funding system is not thorough and efficient on its own, we question whether the State should want to preserve it by relying on federal aid, at the inevitable cost of depriving poorer children of their full measure of help. Finally, to the extent that the constitutional obligation is measured by the regular education provided by the district (the NCEB), federal aid is irrelevant. Federal aid is targeted for specific uses, e.g., compensatory education, special education, and bilingual education. Like state categorical aid, it is not intended to diminish disparities in educational expenditures per pupil. We do not mean to suggest that a state will always be foreclosed from considering federal aid in determining the constitutional adequacy of its educational system, or that the remedies designed to redress constitutional failure may not someday be affected in some way by such aid. The federal law cannot mean that the State must forever be totally blind to its existence. The implications of these federal restrictions and their potential conflict with the State's obligation to devise a funding system in the light of all relevant factors, including federal aid, may someday have to be resolved. For present purposes, however, given today's level of such aid, its fluctuating nature, and its purpose, it is not a critical factor in determining the underlying constitutional issue. State aid for capital expenses, whether capital outlay or payment of debt incurred to fund such outlay, is also provided to districts below the guaranteed tax base pursuant to the equalization formula. If, for instance, a district spends $500,000 for capital items, including expenditures to fund debt previously incurred for capital items, the State will reimburse the district under the equalization formula used for current expenses. The needs for capital construction throughout the state are so vast that all parties, including the State, agree that the present system is not sufficient to meet that need. The State contends, however, that a thorough and efficient education is being delivered throughout the state, unaffected by this unmet need, and that maintenance and minor capital improvements can be adequately funded through equalization aid. In our discussion of the factual issues there are some terms frequently used that should be explained. Richer suburban districts means those suburban districts whose indicators of wealth  per capita income, property values, and socioeconomic status  are the highest. Poorer urban districts includes urban areas with the highest poverty indicators and the lowest socioeconomic status; its precise scope is set forth infra at 338-342, 575 A. 2d at 384-386. Net Current Expense Budget (NCEB) is the school's expenditure budget for the year less all federal aid, categorical aid (and any other state aid except equalization aid), transportation expenditures, monies unused in prior years (appropriated free balances), as well as miscellaneous revenues. Essentially, it is the sum of local school district property tax revenues and state equalization aid for current expenses. The ALJ noted that on a statewide basis, NCEB is about 80% of the current expense budget and is sometimes thought to represent the district's cost for its regular education program. In that sense, the regular education program is intended to cover the education offered in the district except those programs supported by categorical and federal aid. The NCEB per pupil is simply the NCEB divided by the number of resident pupils of the school district. Current expenditures per pupil include all expenditures other than those required for debt service and capital outlay, or expenditures supported by federal aid. Because current expenditures includes categorical aid, it is often expressed in terms of current expenditures per weighted pupil, which are the current expenditures divided by the number of resident pupils augmented by the weighting factors. The weighting factors, or additional cost factors, for each educational need category are set forth in the statute. N.J.S.A. 18A:7A-20. For instance, a pupil taking a compensatory education course would count for more than one pupil, in fact, in the year 1984-85 would count for 1.18 pupils. The day school expense is the total expenditures of the district for the year in question, including all federal aid and state categorical aid, in addition to the items included in the NCEB. Day school expenditures per pupil is calculated by dividing the day school expenditures by the number of resident pupils, and although it includes expenditures for categorical programs, it does not weight pupils enrolled in those programs.