The Florio administration last week countered a lawsuit challenging New Jersey's diversion of almost $600 million of school aid to tax relief, arguing that, despite the shift, public education is adequately funded.

The lawsuit, filed in state Supreme Court by the Education Law Center, is the second to contend that New Jersey's system of financing public schools creates an unconstitutional disparity between rich and poor districts.

The first, which successfully overturned the system last year, resulted in Gov. Jim Florio's Quality Education Act of 1990. The act set aside about $1.1 billion in increased aid, most of which was to be directed toward poor districts in an effort to offset the imbalance found by the court.

But the massive tax increases needed to support the program, as well as additional taxes the governor instituted to help balance the state's budget, turned public opinion against the administration.

Tax relief took on greater political significance as a result, and the Legislature approved amendments to the act that redirected some of the school aid to property tax cuts.

About $360 million of the original $1.1 billion was shifted directly to a program to reduce local property taxes.

In addition, tightened spending caps imposed on districts by the reformed education act further diluted the proposed increases to school aid. When a district reaches its spending ceiling, any state aid left unspent must be used toward cutting property taxes. About $230 million of state school aid is expected to be diverted to property tax relief in this manner.

Marilyn Morheuser, executive director of the Education Law Center, filed a new lawsuit in July, arguing that the dilution of the original $1.1 billion increase left the plan so watered down it would not be abe to eliminate the disparity between rich and poor districts.

In its response last week, Florio administration attorneys argued that Ms. Morheuser's arguments are premature and miss the point by analyzing only "hypothetical" aid levels that would have resulted from the original version of the reform legislation.

Rather than compare historic aid levels to the proposed funding levels in the unamended act, the court should compare them to the increased aid that will remain even with the diversion of a portion to tax decreases, the administration said in court papers filed last week.

The 28 "special needs" districts the court originally found to be underfunded will receive about $215 million in increased state aid, the administration said, adding that the districts "were taking the first steps to address some of the educational disparities between these districts and richer suburban districts identified by the court" in its earlier decision.

An additional $82 million was sent to the special needs districts but had to be used for property tax relief because the districts had reached their spending caps.

School districts statewide received an additional $758 million in state aid for the 1991-92 school year, according to the Florio administration.

"In light of the economic conditions of the state and slower than anticipated growth in state revenues, the increased aid to education during this first year is dramatic," the court papers argued. They said the program should be given time to work before it is reviewed or rejected as inadequate.

"If the [Quality Education Act] is given the opportunity to work, the disparities in expenditures and substantive programs will continue to be reduced until the fully implemented act, in combination with other educational initiatives, results in their elimination," the administration said.

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