Pensions and Property Tax…Raising our taxes while claiming they aren’t!

I was recently reading through a website called fixthenumbers.com and much of the information in this post comes from there.  However, some of the conclusions differ from my own and I have injected those thoughts into this blog post.

One of the problems with  the Pension Debate is that Pennsylvanians don’t receive a bill for the pensions so they don’t really understand the cost involved.    We hear a lot about the Pension debacle but what does this mean to you as an individual.

In a 2006 paper published by Richard Dreyfuss called Beneath The Surface he wrote “Pennsylvania government employee-benefit plans operate in a vacuum. In a world where private-sector benefit cutbacks and cost reductions occur on a daily basis, state government in Harrisburg has not responded in similar fashion. In fact, instead of reducing the potential for financial disaster, actions in recent years have served to accelerate the coming crisis.”

Little has changed to reform this since then.  All that has changed is the debt owned by working families for a system they did not create and, for those in the private sector, will not benefit from.   In fact, it could be said that the stagnating economy of the private sector is, in part, a result of the cost of funding that public sector.

The Commonwealth Foundation writes “Since 2006, our combined state pension unfunded liability—today’s gap between what plan participants have been promised and what is actually in the respective pension trust funds—has skyrocketed from $7.6 billion to more than $63 billion. Sadly, this astounding 730 percent increase in debt for the Public School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS) will likely be transferred to the next generation.”

According to a study released in April of 2015 by Pennsylvania Economy League of Greater Pittsburgh,  41% of Pennsylvanians live in a municipality that is financially distressed.  66 of Pennsylvania’s 67 counties have at least one municipality in financial distress according to another study by  the Public Employee Retirement Commission, 2012

What do these communities–and most PA municipalities–have in common?

The mounting costs of unsustainable public sector employee pensions is one of those problems

If you live in Pennsylvania, the uncontrolled legacy pension costs for public sector employees are a growing threat to every community and by extension, every citizen and every business. Managing the costs of these pensions is unsustainable for even the most fiscally sound municipalities. Quality of life services that we take for granted are the first in line for cuts when a municipality is faced with runaway pension costs and tough budget calls are necessary.

We can look at municipalities like York where, according to fixthenumbers.com, 74% of their budget goes to pensions with only 26% going to  Public Safety, Roadwork, Parks, etc.

As the Teacher’s Union has pushed for smaller classrooms and more teachers adding to the cost of the pension problem coupled with wages increasing  at much higher rates than the rate of inflation, municipalities and county governments are cutting jobs that are essential to the safety in the community; jobs like law enforcement.  In some places smaller municipalities have  ended local enforcement in favor of relying on the State Police adding to the overall cost to the rest of the State.  This leads to slower response times in emergency situations.

We see these things as separate issue but it’s strongly connected to the pension problem created by the General Assembly.  It’s a problem they have refused to responsibly address.

The Pension problem is compounded by outdated binding arbitration laws that handcuffs municipalities and school districts at the negotiating table and pushes them deeper into debt.

Act 111 was drafted more than 45 years ago and it has failed to keep the demands of public sector unions in check. Under the current Act 111, local municipalities’ hands are tied once pension and salary negotiations enter binding arbitration. Currently, arbitration decisions do not have to account for a municipality’s fiscal stability or the negative impact the award could have on its ability to keep providing adequate local services. Decisions are almost always made in favor of more benefit and salary increases, which are passed on to the taxpayer through the local property tax.  This is one of the reasons that we see the property tax as an the enabler of the problems that are growing in meeting the demands of public sector unions.

When contract negotiations falter outside arbitrators are brought in to settle the dispute.  They are the ones holding the power.  These decision makers are not elected by or answerable to taxpayers. In the meantime, cash-strapped communities wait in limbo, unable to accurately allocate their resources or complete their budgets until they receive what is most likely an unworkable decision.

All of this cuts deeply into every other segment of a community’s annual budget and perpetuates an unsustainable climate of ever-increasing costs that must be shouldered by taxpayers through their property tax.

SB211 attempts to amend some of these issues.

Contrary to public sector union rhetoric, this is not about union rights or the right to collectively bargain. Those rights will remain unrestricted and uninhibited after SB 211 passes. Instead, this is about the state legislature leveling the playing field so municipalities can control their financial futures.

They will help in several significant ways without hindering the established process. They will require the union and municipality to share the cost of the arbitrator. They will allow both sides to openly present their case to the public. They will then require the arbitrator to base his award on the facts and evidence that have been presented. Additionally, they take pensions off the table prohibiting an Act 111 award from awarding or modifying benefits.

The reliance on property taxes exposes another unfair practice  that betrays local control myths.  Local municipalities are not free to determine tax exempt status of specific properties.  This designation is controlled by the state.

It goes without saying that many organizations deserve the tax-exempt designation. Churches, those helping the less fortunate, and educational and cultural entities obviously pass muster.  But should a profit-making entity be tax-exempt?  That’s the question facing Pennsylvanians today, as more profit-making entities seek a tax exemption status.

From a taxpayer perspective this means these entities are not contributing to their share of municipal services, including police, fire, EMS, street lighting, street maintenance, snow plowing. Instead, the property and business owners in a municipality are subsidizing the cost of these services by paying higher property taxes.

In spite of these problems, in February 2015, the PA Senate voted for a Constitutional Amendment to essentially relax the criteria to be considered a purely public charity. Currently, our state’s judiciary has a say and has interpreted state law with a high set of criteria. This Constitutional change is intended to give all determinations over purely public charities and tax exemption to the General Assembly which supports a lower set of criteria.

This is just one more way that the General Assembly raises our taxes through the local property tax while claiming they aren’t raising our taxes.  As local resources become scarcer, your community must make up the difference somewhere and citizens and tax-paying businesses will be on the hook.

Compounded this problem further is  an unbalanced school funding formula that leaves some districts flush while others are forced to squeeze more out of the taxpayer.

Per-pupil funding can range from as high as $22,962 in some districts to as low as $8,659 in others. Those districts receiving less funding have to reduce educational programs or raise taxes to cover the difference. This is often the case in poorer, urban districts where taxpayers can least afford to pay more.  Yet in many of this urban districts, taxpayers are paying a much higher millage rate.  This means they pay more for every $1,000 worth of property they own.  Their overall tax bill may be lower, but the cost per thousand is often much higher.

The notion that education is local is ridiculous.  The investment in a child’s education often leads that child though the educational system and then on to college outside of the local community.

From there the student will move on to employment which will also generally be outside of the district that funded their education.

In Pennsylvania, because of the poor job market, this often means relocating out of the state.  The investment in that child’s future can mean the child leaves the area, not contributing to the local taxes once that education is complete.

We should fund education with this in mind.  That requires eliminating the property tax model as one of the primary funding mechanisms of education.

In doing so we eliminate the tax-exempt problem for entities making a profit; we remove the ability to allow local property taxes for education to be held hostage in arbitration and we place the responsibility for funding the pension where it belongs, with the General Assembly that created it.

As a state, we’re failing at basic math. Locked up in these disparities are much-needed road repairs, new police and fire hires, new equipment, higher education standards and lower taxes. It’s time to educate and advocate for taxpayer fairness.

That fairness can never be achieved through a property tax which operates on a seriously flawed system of assumed wealth that can result in taxes increasing beyond an individuals ability to keep up which can lead to that person actually having their homes or even their business taken away from them.

The county-wide reassessments have proven time and again that these new assessments do not actually accomplish what is intended.  It does not level the playing field.  The large number of successful appeals after an assessment demonstrates that the decisions are assumed and often incorrect.  These appeals add to the cost of local government and to the taxpayers who must go through the appeals process.  It also adds to the cost of local property taxes.  Every successful appeal creates a projected revenue shortfall that must be made up through higher milage rates.

While it’s true that the pension is compounding these other problems it is not the root of the problem.  The pension is a symptom borne out of a reliance on property taxation for funding allowing legislators to continue to raise our taxes while claiming they aren’t.

Solving the pension problem will not fix the property tax problem  because there will only be new avenues that our legislators will look to accomplish the goal of raising the taxes through regulations at the local level.  This is most true when it comes to education funding.

The property tax must be eliminated and replaced with a system of funding that is based on ability to pay.  Without it’s elimination the arbitration process will continue to allow for the abuse of homeowners even with the proposed amendments of SB 211.

Once the Property Tax is eliminated, the other issues will have to be addressed by our General Assembly and in the process we will be restoring responsibility and accountability to the General Assembly who have, by their own actions,  continued to pass the buck to local bodies.  It will also tie the hands of the myriads of Departments, Agencies and Commissions forcing them to go to the General Assembly to seek funding for their regulations rather than arbitrarily just kicking it down to the local level.

The piecemeal approach and the band-aids often offered by our General Assembly are more about keeping us enslaved to the property tax so they can continue to pass these costs and higher taxes on to us through our homes.  Until that changes, no comprehensive reform will be successful.

HB/SB 76 must be a part of a comprehensive reform package because it is the only bill that responsibly moves education funding away from our homes and towards taxes based on ability to pay.

By enacting HB/SB 76 we can save the plight of struggling working families who are losing their homes and preserving small business entities operating out of those homes.

By forcing the other issues to be dealt with responsibly we will save the state more revenue placing less burden on the working families while making the state a friendlier place to do business bringing in competing business to help internally regulate business without government interference.  This will be a major step in allowing markets to function the way they should  rather than through tax incentives and giveaways controlled by our General Assembly as they pick who wins and who loses in this state.

Let’s be honest, their track record when it comes to the working families in this state is poor.  In their choosing winners and losers, we lose every time.

For more information of HB/SB 76 please visit www.ptcc.us

 

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