Pensions and property taxes
Does anybody think property taxes are too high? I’m guessing nearly 100% of the people reading this column would answer, “Yes,” to that question. While most of us don’t like the thought of having to pay taxes, we realize it is necessary in order to fund government services and our schools. When it comes to property taxes, and school taxes in particular, what many people object to is annual increases in the property tax rates.
Most people don’t realize that the primary factors driving school tax increases are not directly controlled by the local school boards. Those factors include health care costs, cyber/charter school tuitions, and the focus of this article, pension costs.
It’s no secret that public pensions in Pennsylvania are in a financial bind. Estimates of the unfunded liability, the amount of money needed to cover anticipated costs that cannot be covered with existing funds, is somewhere around $74 billion. How did this happen, and what does this have to do with property taxes?
When it comes to pensions, both the state and the local school district contribute to the Public School Employees Retirements System (PSERS) for each school employee. Each employee also makes contributions via a mandatory payroll deduction. The employee deduction is a fixed rate. The amount contributed by the state and local school district, however, varies from year to year and is set by the state legislature … and there-in lies the problem.
From 2001 through 2008, PSERS investments were doing so well that the legislature decided they didn’t need to match the actuarially required rates for contributions. They significantly underfunded the pension system during these years. Then the great recession hit, and PSERS was not immune to the collapse of the financial markets, even though their investment returns out performed the actuarial investment rate of return. Suddenly, a pension system that was funded at over 100% dropped to one that was significantly underfunded.
Anyone who has a 401K knows that you don’t stop making contributions just because your investments are doing well. You know there will be ups and downs in the market, so you keep making contributions. Unfortunately, our state legislators were not that wise and decided other priorities were more important than steadily funding their pension obligations when the markets were doing well. This is what precipitated the state’s “pension crisis.”
Starting in 2011, the PSERS employer/state contribution rate began a steady increase from a rate of 8.65%. For the 2016-2017 school year, that contribution rate stands at 30.03% and is projected to rise to 32.57% next year. That means for every $100 a school district pays in wages to its employees this year, it is paying an additional $30.03 to PSERS. The state will then reimburse the school district at least half of that amount next year.
This year, the Upper Adams School District expects to pay $3,396,233 to PSERS for pension contributions. The net expense to the school district, after receiving state reimbursement, will be approximately $1,546,631. If the state had maintained a steady contribution rate through the first decade of this century, a rate similar to what school employees contribute - approximately 7% - the Upper Adams School District’s net contribution would be no more than 3.5%, or approximately $384,710.
The difference between what the district is likely to pay and what it might have been paying had the legislature acted more prudently is $1,161,921. In Upper Adams School District, that amount is equivalent to 1.332 mils, or $133.20 for a property assessed at $100,000.
The legislature created this crisis, and the legislature needs to fix it. Legislation currently under consideration seeks reforms that will lessen future pension benefits to school employees, but those reforms will not lessen the burden on school districts and property owners. The debt remains and must be paid. The only way to lower this burden and provide relief to property owners is for the legislature to bite the bullet and develop a new funding source.
One alternative is to issue Pension Obligation Bonds. This, however, carries significant risk and is a form of borrowing money to pay off debt. Not the greatest solution, but a possible one.
My preference is to implement some form of Investment Transfer Tax (ITT). A .1% tax implemented over 10 years would effectively restore solvency to PSERS. That’s a penny of every $10 dollars traded, a dime for every $100, $1 for every $1000 traded, and $10 for every $10,000 traded.
Nobody wants to pay more taxes, but this is an obligation that needs to be met. If a person can afford to move $10,000 around in the stock market, then he or she certainly can afford to pay $10 to make that trade. An ITT would help lessen the tax burden on property owners and fix the pension problem once and for all.
Dennis Cope is a retired administrator of the Upper Adams School District and a member of the DFA Education Task Force