May 9, 2012 - REAL CLEAR MARKETS
Thanks to promises made over the years by the St. Paul school board, taxpayers in the Minnesota city owe teachers and other education workers some $409 million in retirement health benefits that the district hasn't funded. So the school system has taken advantage of a new state law that allows local governments to levy a special property tax to help finance these benefits. This year, the district anticipates collecting an additional $12.8 million from property owners thanks to this new, so-called "other post-employment benefits" levy, according to the St. Paul Pioneer Press.
The St. Paul school district is one of the few government entities I've found so far that charges a specific new tax to help pay off the staggering cost of retiree benefits. Most places are still dealing with their growing liabilities out of precious general revenues. But more such dedicated taxes are likely on the way.
The tab that state and local governments have accumulated in unfunded retiree benefits now amounts to several trillion dollars. In the last few years much of the debate about these obligations has focused on whether they would generate a wave of local government bankruptcies, thanks to a controversial prediction by celebrity analyst Meredith Whitney.
But while some people have been waiting for a government insolvency tsunami, the cost of retiree benefits to annual budgets has been soaring, crowding out other spending and gobbling up increases in general tax collections. Slowly taxpayer groups and other fiscal watchdogs have started adding up how much citizens may owe their local government workforce and how much they may have to pay in additional taxes as a result. If you live in St. Paul, the exercise isn't theoretical anymore. That may be the case in lots of other places soon.
The crowding up and gobbling up is already here. New York City's pension costs have increased during Mayor Bloomberg's tenure from about $1.5 billion annually to $8.5 billion. The city's also putting aside $1.6 billion this year for retiree health care, though it probably should be investing more. I've estimated that those rapidly increasing retiree costs have soaked up more than one-third of additional taxes the city is collecting these days compared to when Bloomberg took office.
Without reform, you can't raise taxes fast enough to pay off these retirement liabilities in some places. David Crane, a California Democrat who advised former Governor Arnold Schwarzenegger on pensions, recently argued that much of the boost in revenues that would result from voter approval of Gov. Jerry Brown's proposed 2012 tax increase referendum would go to pensions. That's because CalSTERS, the California teachers' pension fund, is so seriously underfunded it needs to nearly double the contributions it receives from school districts to almost $10 billion annually to keep the fund on the path to solvency. Schools would get some $3.5 billion of new tax revenues if voters approve the November initiative, but those new funds would immediately be gobbled up by the higher pension costs.
Illinois residents know what it's like to see tax revenues get sucked into an expensive and underfunded pension system. The state boosted taxes by $7 billion last year and promised to use the money to pay down its backlog of bills. But legislators did nothing substantial to slow the growth of the state's retiree costs. Since 2003 the state has largely used borrowed money, not tax revenue, to make required contributions into its pension funds because the cost of benefits was so high. But this year, under pressure not to keep borrowing, the state must ante up tax money, to the tune of $4.1 billion, to make its pension contribution, plus find another $1.6 billion in interest costs on past pension borrowings. Meanwhile, the backlog of unpaid bills grows bigger.
Taxpayer groups are totaling up the potential damage. Last year the Massachusetts Taxpayer Foundation estimated the total unfunded pension and retiree benefit bill for 50 of the state's biggest communities. Boston, the group discovered, owed $7.5 billion. To pay that off in 30 years with property taxes would require a 118 percent increase in the local levy. Total cost to the average Boston homeowner: $97,825 over 30 years. Even that was nothing compared to the potential tab in the town of Lawrence: a 255 percent tax increase, or $181,604 over 30 years for the average homeowner to pay off the town's promises to workers.
In Chicago, the Civic Federation estimates, the average resident owes nearly $15,000 as a share of the city's share of municipal, county and state pension obligations. Last year the city's former chief financial officer estimated that just adequately funding the municipal pension debt over 25 years could raise property taxes by 50 percent.
If you consider this all speculative and doubt it could happen, think of St. Paul, or of Oakland. Property owners in the California city have been paying a surcharge on taxes for decades to finance a pension system that went bust in the 1970s. The average homeowner today pays $419 in additional taxes to help wind down the system, according to the Oakland Tribune.
For decades residents seeking a place to settle down considered taxes, quality of life and quality of government institutions like schools when they made their choices But today with governments facing immense debt from retirement benefits that have already been earned but not paid for, the new yardstick for where to situate yourself may include asking a local real estate agent, "Just how much would I owe your government workers?"