School District Regionalization: The Land Use Connection

August 22nd, 2016 by Tim Evans

Will school district consolidation save New Jersey taxpayers money? It might, but equally important, it might lead to better land-use decisions that preserve open space, reinvigorate downtowns and main streets, and relieve the pressure on towns to expand sprawling infrastructure.

On June 15, the Education Law Center and the Educational Testing Service hosted an event entitled Bringing Students Together, on the topic of school district consolidation. With more school districts than municipalities, New Jersey certainly seems like a promising case for realizing considerable cost savings through merging school districts and streamlining top-heavy administrative structures. In fact, one session at the conference was devoted to a discussion of the experience of three southern Hunterdon County municipalities creating a single regional school district to run all of their schools, K through 12, in place of the four separate school districts (three elementary schools plus a regional high school) that had previously performed this same function – a merger that was motivated by issues of efficiency.

Largely absent from the day’s proceedings, however, except for Sen. Bob Smith’s remarks near the end of the day, was the impact that New Jersey’s fragmented public-education structure has on land-use decision-making and development, and, relatedly, on the disparities in the property tax rates paid by residents of different municipalities in the same area.

The School Funding-Land Use Connection

The connection among school funding, property taxes, and land use is informed by a few basic facts:

• Schools constitute the single biggest component of local government expenditures and typically account for more than half of all property tax dollars collected and spent. In 2015,¹ the median school tax rate across all 565 municipalities in New Jersey was 1.465 percent, compared to a median municipal tax rate (funding local services other than schools) of 0.61 percent and a median county tax rate of 0.42 percent.
• A hypothetical municipality having the statewide median rate for each of the three components of property tax would thus have an overall property tax rate of 2.495 percent, the sum of the individual components (1.465 + 0.61 + 0.42 = 2.495). In this median municipality, the school tax accounts for 58.7 percent of all local taxes collected (1.465 ÷ 2.495 = 0.587).
• As of 2013 (per Governing magazine), New Jersey spent an average of $17,572 per pupil on public education.
• In terms of school costs, residential units occupied by households with school-age children generally do not pay for themselves. Statewide, the average value of a residential property in 2015 is $352,183. If the average property is assessed at the median school tax rate of 1.465 percent, this produces school tax revenues of $5,159 (352,183 x 0.01465) – far short of what it costs to educate even one child. (Commercial properties and households without school-age children pick up the difference via the school taxes on their properties, effectively subsidizing the education of all of the district’s children as part of a de facto societal agreement that a well-educated populace is in the general public interest.)

With these facts in mind, many municipal leaders conclude that all housing should be treated as a fiscal loser, generating more costs than revenues, with the sometime exception of age-restricted housing that is explicitly off-limits to school children. Under this mindset, every municipality has an incentive to engage in “fiscal zoning,” in which municipalities write their zoning codes with the bottom line in mind, encouraging non-residential properties and senior housing while discouraging most other types of residential development, especially higher-density, usually less-expensive, housing.

The practice of actively courting “clean ratables” – that is, non-residential properties like office buildings, malls, and hotels that produce abundant property tax revenue but don’t generate costly-to-educate school children – while discouraging residential development (under the assumption that it does not pay for itself) is commonly referred to as the “ratables chase.”

Fiscal Zoning and Regional Inequity

One result of this “ratables chase” (pdf) is that many municipalities adopt large-lot zoning, i.e. requiring large minimum lot sizes for residential developments. Homes on large lots have two advantages, from a fiscal standpoint. First, requiring large lots reduces the total number of homes that can be built on a parcel of land of a given size, thereby limiting the number of school children that are likely to move into the development. And second, the homes that get built on those large lots are likely to be big and expensive, as developers seek to recoup in per-unit profits the revenues they must forgo in not being allowed to build and sell more units in total. Large, expensive homes still may not generate enough property tax revenue to cover the costs of educating the kids who live in them, but they’ll come closer to doing so than more modest-sized homes or apartments.

A major consequence (whether incidental or intentional) of large-lot zoning is that only upper-income households can afford to buy homes in municipalities that engage in the practice. For this reason, large-lot zoning is often called “exclusionary zoning” because it has the effect of excluding households of more modest incomes from being able to live in certain places. A 2011 Rowan University study (pdf) found exclusionary zoning to be widespread in fast-growing suburban areas. And in a result that is probably not unrelated, a 2013 joint Rutgers/UCLA study (pdf) found New Jersey’s schools to be among the nation’s most economically and racially segregated. (The segregation of New Jersey’s schools by both race and income – and the exclusionary zoning that leads to it – was mentioned repeatedly throughout the day at the Education Law Center’s conference, including by two former New Jersey Supreme Court justices who served as panelists.)

How does New Jersey’s fragmented system of public education intensify the incentives for fiscal zoning? And how might regional school districts help mitigate them? It has to do with the size of the units of competition in the ratables chase. Recall that New Jersey has more school districts than municipalities. This means that many districts serve only a single municipality, and that all revenues to pay for that district’s schools must therefore be raised within the borders of that municipality, using only that municipality’s supply of taxable property as the resource. It is at the municipal level, then, that the competition for a given region’s limited stock of “clean ratables” occurs, with each municipality vying for the office complex, industrial park, or major retail center that will shore up its tax base while simultaneously doing its best to keep out school children.

But of course there are only so many malls and office parks to go around, and certainly not enough for each individual municipality to have one. Furthermore, because of economies of scale and agglomeration, large non-residential properties tend to cluster in a relatively few number of discrete locations rather than distributing themselves more uniformly across the landscape the way residential development does. Drawing school district boundaries at a small geographic level like the individual municipality thus leads to large disparities among districts in terms of fiscal capacity. Such a partition rewards disproportionately the one or two municipalities where the region’s non-residential property-tax generators happen to cluster, endowing them and their respective school districts with a much higher percentage of properties that are net fiscal winners than is true for their less-fortunate neighbors.

This uneven distribution of large non-residential properties among small geographic units sets up a high-stakes system of winners and losers, wherein the minority of municipalities / school districts that are fortunate enough to host a regional commercial node are the winners in the ratables chase, and their neighboring municipalities, which will end up serving as the bedroom communities and customer bases for those commercial nodes, are the losers. The winners get a relatively low property tax rate (thanks to the tax base being padded with big non-residential properties) that helps them attract additional businesses and high-end residents who are looking for low taxes and can afford the price of entry. The losers get higher tax rates, lower property values, and struggling business districts as households and businesses that can afford to locate elsewhere vote with their feet.

How Regionalization Could Help

Now consider a scenario in which school districts are shared by and operated over a larger unit of geography – the county level, for example, as is the case in Maryland and Virginia. All schools in a county would be operated – and paid for – by a single district, a district with taxing power over all property in the county, regardless of the specific municipality in which a property is actually located. Geographically larger districts, such as at the county level, will each tend to encompass a mix of properties that more closely resembles the state or regional average, because each district includes both the handful of municipalities where a given area’s non-residential properties tend to congregate – and the handful that tend to host most of the region’s high-end housing – along with their more numerous neighbors with primarily middle-class residential tax bases. By increasing heterogeneity within a district while reducing it among districts, regional school districts serve to smooth out at the macro financing level the localized spikiness in the distribution of commercial and industrial properties and upper-income housing, avoiding unfairly punishing or rewarding individual municipalities for the spatial distribution of the region’s most reliable tax-revenue generators – something, as noted above, that is largely determined by regional economic forces and transportation networks rather than by the virtues or shortcomings of the municipalities themselves. Regional districts essentially function to spread the costs and benefits of public education more evenly across diverse municipalities by matching more closely the geographic level at which schools are financed with the geographic level at which large commercial properties are supported by surrounding markets.

Under this scenario, there is a substantially diminished incentive for an individual municipality to try to score a regional mall or office park, since, regardless of that property’s location, the school-tax revenues it will generate will flow into a county-wide pool of money that pays for all the county’s schools, rather than remaining within the borders of the specific host municipality in which the property decides to locate. The fiscal benefit of each “clean ratable” accrues to all the county’s schools, not just to those located within the property’s host municipality, so each municipality can afford to be much more fiscally indifferent to the property’s location within the county. Large projects with regionally significant impacts can then be located where they make the most sense for the larger region, with individual municipalities no longer having to worry as much about how the project might affect their individual bottom lines and resulting tax rates.

By similar logic, any individual municipality’s incentive to resist residential development, and particularly to resist more-affordable housing options, is also substantially mitigated. If the school district is county-wide, when one municipality approves a residential development, any children who move into that development will be educated at schools that are paid for using revenues raised from taxing the entire county’s property tax base, not just those properties located within the municipality hosting the new development. The costs of educating any individual development’s children are shared by the entire county, rendering the composition of the host municipality’s particular tax base largely irrelevant. Freed of the municipal imperative to minimize the number of school children per acre (and to maximize the value per housing unit), homebuilders are less likely to encounter local opposition when attempting to meet market demand for a wider variety of housing types besides just large homes on large lots, resulting in improved housing options for all needs and income levels. Over the long term, reduced resistance to greater housing diversity at the municipal level should result in a decrease in economic (and, by extension, racial) segregation in schools throughout New Jersey, as a household’s residential locational options become less constrained by its income and its prospects for future success become less determined by its ZIP code.

Because New Jersey’s fragmented system of public education has such deleterious effects on land development and on housing diversity and affordability, via the influence of fiscal considerations (school expenses chief among them) on municipal leaders’ decisions about what kinds of development to approve, New Jersey Future strongly supports efforts to create more regional school districts that serve multiple municipalities. Neutralizing fiscal zoning would lead to more rational land-use decisions and is just as powerful an argument for regionalization as are the likely cost savings from reducing administrative overhead that were the Education Law Center conference’s main focus. A move to more regional school districts would diffuse the fiscal effects of land development and allow local officials to concentrate less on “What ratable do we need?” or “How many school kids is this development going to generate?” and more on “What land uses are best for our community?”

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1. All data on property taxes and average residential values are from the Center for Government Services New Jersey Data Book. Back to article.