New Jersey’s School Funding Formula Is Short Changing West Orange by $25 Million

New Jersey’s school funding formula is built on a simple promise. If a local school district levies a reasonable property tax to generate its fair share of the cost of educating its students, the state will fill in the gap.

At a high level, this seems fair. But the devil is in the details - specifically in the way that the formula calculates a district’s local fair share.

School districts generate the majority of their revenue through local property taxes, so it makes sense to calculate this fair share based on a community’s wealth. But the formula also incorporates the personal income of the residents of the district.

The net result of this decision is that two districts with similar levels of wealth can end up receiving wildly different levels of state aid.

In the case of West Orange, the use of income in the formula inflated the district’s local fair share by $25 million for the 2025-26 school year - and substantially reduced the amount of equalization aid that we received.

How Local Fair Share Is Calculated

Let’s take a look at the math inside the formula to understand exactly how the district’s local fair share is calculated.

The local fair share has two components - the wealth component and the income component.
For the wealth component, you take the total equalized valuation of all property within the district ($7.7 billion) and multiply it by a set rate (1.49%).

This comes to $115 million.

For the income component, you take the total personal income of all residents within the district ($2.7 billion) and multiply it by a set rate (5.99%).

This comes to $166 million.

These two numbers are then averaged together to calculate the district’s local fair share: $140 million.

This number is then used to calculate a district’s equalization aid. Based on a number of other complicated factors, the state calculates a district’s adequacy budget ($155 million). This represents the base amount the district needs to spend, before accounting for some additional costs like special education and transportation, to provide an adequate education.

The difference between a district’s adequacy budget and its local fair share yields the amount of equalization aid it receives from the state. Increasing the local fair share effectively reduces the equalization aid.

Based on the existing formula, West Orange received $15 million in equalization aid for the 2025-26 school year. If personal income had not been factored into the formula, we would instead have received approximately $40 million.

In other words, the current formula short changed the district by $25 million.

Why Income Should Not Be Factored Into the Formula

The use of income as a component of the formula is problematic for a number of reasons.
First, it’s divorced from the reality of taxation in New Jersey. Property taxes are collected by local governments and income taxes are collected by the state. A local school district cannot generate additional tax revenue if some of its residents have higher incomes or if there is a year over year increase in income.

The state, on the other hand, does generate more income in these situations. And the revenue from that income tax is required by the state constitution to be used for property tax relief. But the net effect of the formula is to reduce state aid to districts with high income residents and increase property taxes for all residents in that district.

Second, that additional tax burden is applied equally to the entire district. Maybe you think it’s ok for wealthier homeowners to pay a higher property tax rate. But this higher tax rate is applied to everyone who lives in the district. This includes the 40% of our students’ families that are low income. This is particularly problematic in a diverse suburb like West Orange, with families at both ends of the income spectrum.

Third, the inclusion of a handful of very high earners can significantly inflate a district’s perceived wealth. It only takes a small number of seven or eight figure earners to inflate a district’s income by tens of millions of dollars.

This is also highly variable from year to year. The timing of when high earners move between districts or realize gains leads to volatility in a district’s income. Two years ago, West Orange saw a 16% year over year increase in its district income - which resulted in a steep decrease in its equalization aid.

While some of these problems can be mitigated by changing the way that income is incorporated into the formula, the fairest solution would be to eliminate its use altogether. A district’s revenue comes from local property taxes, and its local fair share should be calculated according to the value of property in the district.

How Income Distorts Local Fair Share

To see how the use of income in the formula can distort things, consider these four districts: West Orange, Cherry Hill, Edison, and Piscataway.

Each of these is a large, middle class district with a median household income between $120,000 and $130,000. But the income distribution varies quite a bit from town to town. West Orange and Cherry Hill have an average, per capita income of about $60,000. It’s about $50,000 for Edison and about $40,000 for Piscataway.

What’s happening here is that West Orange and Cherry Hill have small pockets of very high earners, and that is inflating the per capita and total income for those districts.

The result is that West Orange and Cherry Hill are required to collect a much larger share of their equalized valuation to meet their local fair share. West Orange would have to collect 1.82% of its equalized valuation to meet its local fair share and Cherry Hill would have to collect 1.73%.

By contrast, Edison is only required to collect 1.51%, near the state average. Meanwhile Piscataway is far below the state average at 1.32%.

If income wasn’t factored into the formula at all, West Orange would receive about $40 million in equalization aid instead of $15 million. Cherry Hill would receive about $28 million, but instead they received nothing. Edison and Piscataway would have remained about the same.

Ultimately, the formula’s use of gross income robs districts like West Orange - and then it requires them to levy a higher property tax to meet their local fair share.

Which Districts Are Impacted the Most

West Orange isn’t alone in this. But it is among the school districts most impacted by the use of income in the school funding formula.

Cherry Hill tops the list. The use of income in the formula inflates its local fair share by almost $29 million. Last year, they got no equalization aid at all. If local fair share was calculated based on property values, they would have received about $28 million in equalization aid.

West Orange’s local fair share was inflated by $25 million. As a result, its potential equalization aid went from $40 million to $15 million.

East Brunswick’s local fair share was inflated by $15 million. As a result, its potential equalization aid went from $32 million to $17 million.

Washington Township in Gloucester County’s local fair share was inflated by $14 million. As a result, its potential equalization aid went from $41 million to $27 million.

Hillsborough’s local fair share was inflated by $18 million. As a result, its potential equalization aid went from $13.5 million all the way down to zero.

It’s Time to Fix the Funding Formula

There are a number of problems with New Jersey’s school funding formula, and in the last few years they’ve become increasingly hard to ignore. Chief among these is the use of district income in the calculation of a district’s local fair share.

This punishes districts like West Orange with small pockets of high earners. It inflates our fair share and reduces our potential equalization aid. As a result, we end up with higher taxes and less support from the state.

The funding formula is built on the idea that a district should raise its fair share of local revenue. That makes sense - but only if this amount is calculated fairly. And that should mean that a similar rate is applied to equalized valuation throughout the entire state. That’s what would happen if the funding formula was modified to remove income as a factor.

At the very least, gross income should be replaced with median income. This would alleviate the problem somewhat by eliminating the impact of outliers and very high earners.

The Legislature was considering reforms to the funding formula, but they failed to take action before the end of the last legislative session. This cannot wait. Either the Legislature needs to take action now - or Governor Sherrill needs to take action on her own when she delivers her budget address.

The students of West Orange are counting on it.

I've served on the West Orange Board of Education since 2022, and I've served as the President since 2023. To learn more about the Board's official position on state funding, please see the resolution passed at our December Board of Education meeting or these comments sent to the NJ Department of Education in November.