California Gov. Jerry Brown sold a $6 billion tax increase
to voters in 2012 by promising that nearly half of the money would go to
bolster public schools. Critics argued that much of the new revenue would wind
up in California’s severely underfunded teacher pension system. They were
right. Last June Mr. Brown signed legislation that will require school
districts to increase funding for teachers’ pensions from less than $1 billion
this year in school year 2014-15, which started in September, to $3.7 billion
by 2021, gobbling up much of the new tax money. With the state’s general
government pension fund, Calpers, also demanding more money, California
taxpayer advocate Joel Fox recently observed that no matter what local
politicians tell voters, when you see tax increases, “think pensions.”
Californians are not alone. Although fiscal experts have
warned about the worsening condition of government pension systems for years,
many taxpayers felt little impact from the rising debt—until now. Decades of
rising retirement benefits for workers—some of which politicians awarded to
employees without setting aside adequate funding—and the 2008 financial
meltdown have left American cities and states with somewhere between $1.5
trillion and $4 trillion in retirement debt. Even with the stock market’s
rebound, the assets of America’s biggest government pension funds are only 1%
above their peak in 2007, according to a recent study by Governing magazine.
Under growing pressure to erase some of this debt,
governments have increased pension contributions to about $100 billion in 2014
from $63 billion in 2007, according to the Census Bureau’s quarterly survey of
state and local pension systems. But the tab keeps growing, and now it is
forcing taxes higher in many places.
A report last
June by the Pennsylvania Association of School Administrators found that nearly
every school district in that state anticipated higher pension costs for the
new fiscal year, with three-quarters calculating their pension bills would rise
by 25% or more. Subsequently, 164 school districts received state permission to
raise property taxes above the 2.1% state tax cap. Every one of the districts
cited rising pension costs.
Meanwhile, the deeply troubled Philadelphia school system’s
pension tab increased to $159 million in the current school year, which started
in 2014 and goes to mid-2015, from $55 million in 2011. To bail it out, the
Pennsylvania legislature crafted a special deal to increase cigarette taxes in
the city by about $60 million annually.
In April two-dozen Illinois mayors gathered to urge the
state to reform police and fire pensions, which are on average 55% funded. The
effort failed, and municipalities subsequently moved to raise taxes and fees.
The city of Peoria’s budget illustrates the squeeze. In the early 1990s it
spent 18% of the property-tax money it collected on pensions. This year it will
devote 57% of its property tax to pension costs. Reluctant to raise the
property levy any more, last year the city increased fees and charges to
residents by 8%, or $1.2 million, for such items as garbage collection and
Burdened by so much debt, taxpayers in some places are
unlikely to see relief soon. When California passed its 2012 tax increases,
Gov. Brown and legislators promised voters the new rates would expire in 2018.
But school pension costs will keep increasing through 2021 and then remain at
that elevated level for another 25 years to pay off $74 billion in unfunded
teacher liabilities. Public union leaders and sympathetic legislators are
already trying to figure out how to convince voters to extend the 2012 tax
increases and approve “who knows what else” in new levies. It’s a reminder that
in some places the long struggle to pay off massive government pension debt is
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