Property Tax Post: Governors Struggle to Strike Balance between Property Taxes and Pensions

Governors across the country are facing budgetary tensions that pit cuts to public pensions against raised property taxes. The chief executives of Illinois, Pennsylvania and New Jersey have all recently been the objects of criticism over their plans to shore up state public pension systems. This struggle to fund pension systems while at the same time cutting state funding for education and attempting to avoid major property tax increases is symptomatic of state governments nationwide.

Most recently, in Pennsylvania, Governor Tom Corbett has used the threat of property tax hikes to curry support for his pension reform bill, reports the Pittsburgh Post-Gazette. Pennsylvania school districts recently received a waiver from the state government to raise property taxes above the cap put in place by state law, with one-third of the districts citing pension costs as the reason. To illustrate the severity of the pension problem, school districts in Bucks County, the fourth-largest county in the state, have seen pension costs increase by 289 percent in the last ten years.  

In Illinois, Governor Pat Quinn took pains to separate himself from fellow Democrat and Chicago Mayor Rahm Emanuel’s plan to fund Chicago’s five-year, $250 million pension obligation by raising property taxes on Chicago residents, notes the Chicago Sun-Times. Quinn, who is up for re-election this year, has opposed increasing property taxes to fill the shortfall. The Governor’s opposition resulted in a plan to fill this year’s gap with a 56 percent increase in a telephone tax, and no alternate plan to offset it for the next four years. In addition, when the state Legislature debated a bill to reform two of Chicago’s pension systems in April , it was not approved until language related to property tax increases was removed.

Over in New Jersey, Governor Chris Christie has recently found himself in trouble for delaying payment of property tax rebates until May 2015 in the face of budget and pension shortfalls. Delaying property tax rebates will give New Jersey another year to come up with the $395 million needed to pay out the rebates. But at the same time, this year’s budget scales back New Jersey’s contribution to public worker pensions, and property taxes have already increased 9.7 percent in the last four years as state education funding has been cut by $1 billion.

This shortfall in state pensions across the nation has presented politicians and voters with the stark choice between drastically reforming pension obligations and raising property taxes. Pennsylvania is the only state of these three that has seen an increase in its property taxes, but it has also cut education funding, making it even more difficult for school districts to fill their pension shortfalls with property tax increases. All three governors of these states have touted pension reform proposals, but merely reforming pensions without providing funding to meet obligations will not solve the problem. The architect of Pennsylvania’s reform proposal, for example, admitted as much by acknowledging that the plan does not address property tax relief in the short term.

Of course, property taxes are not the only available mechanism for remedying the pension shortfall, but income taxes increases have also been all but ruled out. Gov. Christie vetoed tax increases that New Jersey’s Legislature sent to his desk, and Gov. Quinn will not have a chance to sign an income tax bill for Chicago given that Mayor Emanuel considers a city income tax unconstitutional .

Without either the desire or ability to raise property or income taxes, states have turned to reforming public pensions using a variety of small measures to supplement the shortfall.  In Illinois, the gap for this fiscal year was filled by a 56 percent increase in a telephone tax , and Gov. Christie partially filled New Jersey’s by withholding the property rebate until the spring.  

Until politicians are willing to implement a wholesale reform of how public pension obligations are funded and find a reliable, alternate revenue source, residents will continue to face potential property tax increases that go towards funding pensions rather than education and other essential local services.

 By George Lynch

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page:  Do you think that property taxes should be raised to make up for public pension shortfalls? What other revenue sources should be used to fund pensions? Should funding pension obligations or increasing education spending be a priority for state and county governments?

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