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Public employee pension vs property taxes

The House Finance Committee held a work session yesterday focused on the fiscal health of Washington's cities and counties.

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Published:2014-10-30 State Print Snohomish Times
Public employee pension vs property taxes

By Jason Mercier
The House Finance Committee held a work session yesterday focused on the fiscal health of Washington's cities and counties. Among the presentations lawmakers heard was a pitch from the Washington Association of Counties to provide local governments more flexibility on existing tax sources while providing new tax options.

One recommendation in particular of note from the Counties:

“Property Tax 1% Cap - replace the 1% limit on property tax growth with a limit that is tied to inflation and population growth.”

Realizing that the 1% property tax cap was originally put in place by voters in 2001 with a 58% yes vote on I-747 and then restored by the Legislature in 2007 during a one-day special session in response to an adverse court ruling, why would cities and counties be asking to the Legislature to change the cap?

Among the reasons they gave was due to the concern that local government pension costs are growing faster than available revenues. Here are some of the pension cost comments from yesterday's hearing:


Pension costs at the state level are also increasing due to changes in life expectancy. This is putting additional pressure on the state's budget outlook.

Before looking to increase taxes to pay in-part for public employee pension costs more reforms are need to address the costs of these defined benefit plans. It is important to note there is no life expectancy impact on the funding ratio for defined-contribution plans.

In somewhat related news, the U.S. Government Accountability Office (GAO) released a report today looking at how pension plans are valued across the country. A couple of interesting findings by GAO:

• "In the public sector, DB [Defined Benefit] plans still provide primary pension benefits for most state and local government workers. In contrast, DB plan coverage in the private sector has declined as these employers continued to shift away from sponsoring DB plans toward sponsoring DC [Defined Contribution] plans. About 78 percent of state and local government employees participated in DB plans in 2013, compared with only 16 percent of private sector employees."

• “The federal government has not imposed the same funding and reporting requirements on state and local government pension plans as it has on private sector pension plans. State and local government plans are specifically exempted from ERISA funding requirements, in part, because of the presumption that state and local governments can rely on their taxing power to pay for DB plan benefits.”

Washington Policy Center recommends that effective state pension reform should be based on the following principles:

• Do not skip any pension payments;
• Close the current defined-benefit plan to new hires;
• Direct all savings toward paying down unfunded pension liabilities;
• Enroll new hires into a defined-contribution plan;
• Constitutionally require the actuarially-recommended pension payment and require a supermajority vote to enact new benefits.

As noted by GAO, the private sector has been moving steadily away from defined-benefit plans for decades, instead offering employees defined-contribution pensions that provide retirement payments to an employee’s pension while helping companies accurately project future pension costs.

The state should do the same to mitigate the temptation to raise taxes to pay for growing public employee pension costs.


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