An Out-of-the-Box Solution to Pennsylvania’s $50 Billion Retirement System Debt

Posted by By at 7 February, at 21 : 23 PM Print

A version of this essay was originally published by Pennsylvania Legislative Services, July 2014.

Former Gov. Tom Corbett was right. The problem with our school employees’ and state employees’ retirement systems is real, and it’s forcing school districts to raise property taxes.

The retirement systems have a combined debt of some $55 billion. It’s a debt that must be paid, and it’s increasing, some say, by $10 million per day.

Until recently, I served on the Carlisle Area School District board of directors. I was among 4,500 school board members who are forced to raise property taxes to pay our share of the debt. School districts must pay half of retirement system costs, and the state pays half.

The share of property taxes our district pays toward pension costs has risen 2,004% since Act 9 of 2001. That’s the law that set the retirement systems’ debt spiral in motion. Abetted by governors of both parties, lawmakers raised benefits for retirees, then refused to put into the system what they took out of it.

In 2000-01, Carlisle paid a contribution rate of 1.94% on a payroll of $21.6 million. Carlisle’s share was $209,000.

This year, Carlisle will pay a contribution rate of 26.4% on a payroll of $31.8 million. Carlisle’s share is $4.2 million.

It gets worse. Soon the contribution rate will exceed 30%, and those higher property taxes will continue for at least 20 more years. Under both current law and new “reform” proposals, local taxpayers are stuck with this enormous debt.

Corbett also was wrong. He blamed the pension problem on public sector unions.

Public employees, both union and non-union, paid their full share into the retirement systems all along. This problem is not their fault any more than it’s the fault of local property owners. It is the fault of a bi-partisan policy that didn’t pay for spending and thereby jeopardized the secure retirement of 837,000 seniors, whose lives depend on their pensions.

Current proposals to “manage” the pension debt don’t improve matters. In Capitol parlance, they all “kick the can down the road.” They hope that something magical will happen to make things right, which is the kind of wishful thinking that got us into this mess in the first place.

In reality, we probably will have a significant recession during the next 30 years, which will require kicking the can farther into the lives of our grandchildren. This is not responsible behavior.

Retirement debt is the biggest financial problem facing Pennsylvania. Wall Street credit rating agencies have repeatedly downgraded our bonds – imposing higher borrowing costs on taxpayers – in part because we have not controlled the debt and restored the health of our retirement systems.

For some, that’s reason enough to act. For others, the fate of two generations of students matters most. Not only does the pension debt take huge amounts of money out of the classroom, but it disadvantages most those students and communities who most need stable, equitable, and adequate school funding.

The debt cripples the state’s own budget. Next year’s state budget will spend $2.7 billion without solving the problem, money more productively spent on making Pennsylvania a better place to live and do business.

We need a new approach. Pension experts with whom I’ve talked say the best solution is a dedicated revenue source – one that can be used for no other purpose than paying the pension debt and restoring the health of the retirement systems upon which so many senior citizens depend.

For that purpose, I propose a financial transaction tax (FTT). Its revenues could be used only to retire (if you’ll excuse the expression) the pension debt, and by law the tax would end when specific criteria are met, unless the General Assembly votes to extend the tax or re-purpose it.

To understand this proposal, think of a sales tax applied to the purchase of securities — stocks, bonds, derivatives, mutual funds, swaps, futures, commodities, and other financial instruments. It would not include transactions made in the ordinary course of daily commerce, such as bills paid by cash, check, money order, or credit card.

For example: Today if you buy a $20,000 car, you will pay $1,200 (one thousand two hundred dollars) in sales taxes. If you buy $20,000 of a car company’s stock, you will pay $0 (zero) sales tax.

Why does the one who buys the car pay $1,200 while the one who buys the car company pays $0?

Some suggest that securities are an investment with risk that deserves special treatment. True, a car is not an investment; it’s a commodity. A car probably will be worthless in 10 to 20 years. Whereas, the value of even a poorly managed car company’s stock is likely to increase, and the investor probably will receive dividends. Moreover, if the stock’s value has fallen when the investor sells it, the investor gets a tax write-off for the loss. So publicly funded insurance against risk already exists.

Like a sales tax, the FTT would be a fixed percentage of the value of the purchase, except the FTT’s rate would be a mere 3/10th of 1 percent.

Back to the example: The $20,000 car still carries a sales tax of $1,200. The FTT would impose a tax of $60 on a $20,000 securities purchase. In fact, someone would have to buy $400,000 worth of securities to pay the same amount of tax as the one who buys a $20,000 car.

Based on a federal proposal for an FTT of 3/10th of 1%, such a tax in PA could raise between $3.5 and $7 billion a year. This estimate assumes that PA represents just 2% of Wall Street trading, although our population is 3.8% of the nation’s.

Staying on the conservative side of the spread, let’s say an FTT would raise $5 billion a year. Statewide, school property taxes raise about $14 billion a year. So an FTT of just 9/10th of 1% ($180 on a $20,000 purchase) could generate enough revenue to eliminate school property taxes altogether. That’s how much revenue this tiny tax can raise.

But that’s not the point. The point is to eliminate the pension debt and restore our retirement systems. The FTT must be a dedicated, temporary tax.

Enacting such an FTT allows us to:

  • cut property taxes going toward pension costs to pre-Act 9 levels;
  • give 837,000 senior citizens a cost-of-living adjustment (COLA). Many have not had a COLA in a decade. The rest have never had a COLA;
  • stop spending $2.7 billion on “reform” that doesn’t solve the problem;
  • stabilize the retirement systems; and
  • reduce state borrowing costs by improving PA’s bond rating.

For some, the first response is, “No new taxes.” Some history is in order.

The first financial transaction tax was enacted in 1694 in London. It is England’s oldest tax. Some 40 countries have one. The United States also had an FTT from 1914 to 1966. A remnant still pays for the operation of the Securities and Exchange Commission.

New York State has an FTT that generated $12 billion in 2012-13. The tax has been in effect since the early 1900s. However, in the 1980s, New York decided to rebate 100% of the tax while keeping their FTT on the books.

In any event, the alternative to “no new taxes” is the “same old taxes” piled higher and higher on the “same old taxpayers.” The 2,000% increase in property taxes for pensions proves the point.

Some argue that brokerage jobs will flee the state. There’s no reason for that to happen for the same reason that collecting the sales tax on cars does not cause dealers to flee the state. The owner of the account pays the tax, not the broker.

Tax collection is always a concern, but the FTT would be difficult to evade. Financial transactions occur electronically. Brokers would sort their clients by zip code and automatically transfer 3/10th of 1% of a transaction’s value to the PA Treasury.

There are, of course, many questions. What kind of transactions, such as contributions to retirement plans, should be exempt? What kind of taxpayers, e.g. non-profits, should be exempt? Is 3/10th of 1% enough? Too much? What criteria will determine when the FTT ends?

To answer these questions, lawmakers should commission the Legislative Budget and Finance Committee research these questions and draft legislation as soon as possible. That way, lawmakers and citizens have time to learn about the idea and have it available for state budget debates.

Last June, the Carlisle school board unanimously adopted a resolution asking our lawmakers to sponsor such a study. If other districts follow suit, that also will help to educate the public and lawmakers.

This problem presents a perfect opportunity for Gov. Tom Wolf and Republican legislative leaders to show millions of homeowners and senior citizens that their government really can solve this problem in a way that is both fair and responsible.

Will they?


Photo by Tax Credits

This post was written by:
- who has written 4 posts for Rock The Capital
Tim Potts is chairman of The Majority Party PA, a political action committee dedicated to using public opinion research as the basis for public policy. He lives in Dickinson Township, Cumberland County, with his wife and cat. - Email Tim Potts

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