Finance Roll

EQUALIZATION ORIGIN

Equalization for State school aid purposes is the process of determining the aggregate true value of all real property in each of the State's 566 taxing districts. This figure is established by a program of assessment to sales ratio analysis. The aggregate true value of real property, together with the value of second class railroad property and the assessed value of locally assessed business personal property, is known as the "equalized valuation."

The present equalization program had its origin in 1954 when a considerably expanded State aid program for education was enacted, with the distribution formula based on "equalized valuation," rather then upon assessed valuation. Equalized valuation has been carried forward as a basic component of newer formulae set forth by the Legislature from time to time to calculate the distribution of State school aid funds.

The equalization process is intended to provide stability in the total market value of a municipality over time. This is an important goal for the sake of stability, predictability, and fairness in municipal and school finance. It is intended to completely reflect changes in market value each year, and thus to bring the assessments in all municipalities to a common standard. On the other hand, it is constrained not to change "too much" by the averaging together of two years' true values to prevent large fluctuations in municipal equalized values. This two year averaging is used in order to preserve stability in municipal and school finance.

THE SALES RATIO PROGRAM

The sales ratio program is based upon a comparison of the assessed values of parcels of real property which have been sold, and for which deeds have been recorded, with their sale values. It is assumed that the assessments on the properties sold will be representative of the assessment practice in the taxing district. Thus, if the assessment of the properties sold average 90 percent of the sale prices, the assumption is that all similar properties in the taxing district are being assessed at an average of 90 percent of their true value or market value.

DIVISION OF TAXATION RESPONSIBILITY

Responsibility for the sales ratio program rests with the Property Administration Section in the Division of Taxation. Procedures of sales data collection and analysis have been developed by that section, but the success of the process requires the cooperation of every county board of taxation and every local assessor. The results of the section's work, in the form of the Table of Equalized Valuations, is certified by the Director of the Division of Taxation on October 1 of each year to the Commissioner of Education for State school aid purposes, and delivered to each county board of taxation for the purposes of apportioning the costs of county government and of school districts covering more than one taxing district. This calculation of equalized values is one of the most important tasks of the Division of Taxation. The results of the calculation have widespread ramifications for the fiscal condition of the municipalities and school districts in the State, and therefore (indirectly) the welfare of every resident of the State.

THE SAMPLE

The utility of any property equalization program, including the one used for State school aid, is contingent upon the extent to which the sample of sales-assessment ratios is representative of all property assessments within the taxing district. Although it is generally assumed that a large sample is preferable to a smaller sample, this is not necessarily true in all cases. The test concerns the randomness of selection in a manner to represent all areas of the taxing district and all characteristics of property within the tax roll of the taxing district. The implied appraisal of the sample requires information not presently available in any centralized tabulation of "usable sales." One way to increase the randomness in the process of estimating market values is to use sales data from a period of time longer than one year. The equalization process currently in place does exactly this by averaging the estimated market values from both the current and previous year when calculating the equalization ratio. More precisely, the current system averages two year's values each computed using one year's worth of useable sales data.

INFLATION / DEFLATION

Either inflation or deflation assures trouble in the equalization process --- lots of trouble. State government cannot hope to moderate the force of inflation that impact on the changes in the sale prices of property which sale prices determine the assessment to sale ratio that is used in the equalization process.

However, underlying the use of the assessment to sales ratio for equalization purposes has been a tacit belief that most real estate values will be largely stable from year to year. As a matter of course the State relies upon an equalization process which is based on this assumption. Most changes in value for equalization purposes are expected to be gradual rather than large or sudden.
CAUSES OF INCREASES IN PRICES OF REAL ESTATE

Many forces of demographic change, large stock market capital gain realizations, desire to live in the municipalities with the best school systems, trends in personal tastes for larger homes, an increase in real personal income, and so on, have been operating on real estate prices. All of these wants of people raise the demand for housing and for places to work and play. And, they are not making any more land on which to satisfy these wants. Therefore, the increase in the demand for space will continue to have a relatively larger influence on land prices. Also, the prospect of inflation leads some investors seeking protection from inflation to acquire real property. While inflation at the same time induces other owners to hold property when sale would have been the normal action, thus hyper inflating property sale prices. Historically, through innumerable inflations, the possession of land and buildings has preserved real value when money and may other assets have lost much of their worth. Our own recent history seems to confirm the principle. Within a locality the specific changes can diverge significantly. These specific changes can create wide swings in the price people are willing to pay for property and in particular land.

State government must learn to live, somehow, with an annual equalization process that conforms to a frequency of value changes that in the past were brushed aside because the amounts involved seemed too small to be troubled about.

Perhaps one way to stabilize the annual equalization process would be to double weight the previous years' true value when the "Hyper Land Change Factor"is one. A factor of one means that the percent change in land assessed values statewide have increased at a rate of growth twice the rate of change in the State CPI in a particular year. During the period from 1971 to 1999, a period of 29 years, a factor of one occurred ten times in New Jersey. Remember, that 43% of the CPI index is comprised of housing. This periodic adjustment to the equalization process would serve to stabilize the total market value of municipalities in the State over time. This is an important goal for the stability, predictability, and fairness in municipal and school finance. It would remove the sudden increases in equalized values reflected in periods of hyper inflation as reflected in land prices and thus bring the annual equalized values in all municipalities to a more common stable standard. In preventing large fluctuations in municipal equalized values from year to year in this manner stability in municipal and school finance could be preserved. Perhaps many suburban and rural municipalities have their county tax apportionment costs increase rapidly when double digit land increases occur. Other municipalities may lose State school aid dollars because of becoming property rich in short order. Stability has a lot of friends in local public finance.