“Unsustainable” Pension Costs Are The Driving Force Behind Local Tax Increases

It is no secret that there are a record number of local tax increases on the November 2016 ballot, but the dirty little secret is that the strongest driving force behind these measures is “unsustainable” skyrocketing pension costs.

The specifics of each case need to be evaluated on a case by case basis, which I have done, but the simple conclusion remains a vote for local tax increases is essentially a vote for more government revenue to pay for an explosion in pension costs for public employees.

Each local story is different, and there maybe a few outliers that I have not found thus far, but if you examine the data closely the evidence is there to prove this assertion.

Most of these tax increases are sold as essential to provide some “essential” government function that polls well, such as roads, schools, or public safety, but the real effect is to allow the public agency to free up more funds to pay for the “crowding out effect” that pension costs are having on local budgets at all levels of government in California.

“There are more local revenue measures on California ballots this November than any of the five prior gubernatorial or presidential elections,” stated Michael Coleman, an expert in local government finance, who found that there are 427 measures proposed for the November 2016 ballot.  This number is 40-60% higher than any other election going back to November 2006.

A review of the measures reveals that the proposed local tax increases are concentrated in the parts of the state that also have the biggest pension problems, based on my research.

Moreover, a significant number of measures are even proposed in areas such as the Bay Area which have significant economic growth, and therefore growth in tax revenues, but these localities still say they need more money to cover large baseline increases in the cost of government, mostly due to pension and benefit costs.

If you examine local agency annual budgets, more than 80% of their cost increases are driven by pension costs, and other employee compensation benefits costs, particularly health care.

In the Bay Area alone, there are a record number of measures, despite rapid tax revenue growth of 4-10% over the past several years.  The growth in real gross domestic product has averaged just over 4% for the San Francisco—Oakland—Hayward metropolitan areas for 2014 and 2015, according to the U.S. Department of Commerce.

The biggest of these measures is the proposed $3.5 billion bond for the Bay Area Rapid Transit District (BART) which is paid for by parcel tax increases on homeowners in Alameda, Contra Costa and San Francisco Counties.

But a close analysis of the measure shows that $1.2 billion of the bond can actually go to pay for labor costs which are driving big budget deficits at BART, along with generous contract extensions approved in 2013 and 2016 that boost salaries by more than 30% for workers that were already the best paid transit workers in the nation.

Taxpayers in all three Bay Area counties taxed under the propose BART bond, also face a proposed 0.5%-0.75% sales tax increase for “transportation” and “general city services.”

There are a variety of other parcel taxes on the ballots in Alameda, Contra Costa and San Francisco Counties to pay for schools and school construction.  Voters in Alameda County face a hike in the utility users tax to “modernize” the tax at a cost of $9.6 million.

Voters in San Francisco face a proposed increase in the real property transfer tax on homes sold to raise $45 million and another “grocery tax” to raise another $7.5 million.

Why are all these taxes necessary?  Primarily to fund unsustainable benefit costs, not improvements in government services provided.

The City and County of San Francisco faces $16 billion in unfunded pension debt for all its public plans based on a “market rate” evaluation by Stanford University, and another $2 billion in debt for retiree health care.

Depite being one of the wealthiest cities in the state, San Francisco’s total net value (assets minus liabilities) is only $6.5 billion as of 2015, which is eclipsed by its pension debt by nearly three times.  And this debt continues to grow.

Alameda County has several cities and the county itself, but pension debt continues to be a problem for most localities, particularly the City of Oakland.

The City of Oakland faces a $3.5 billion unfunded market rate pension liability, despite record revenue growth, according to Pensiontracker.org.  In 2015, the city’s balance sheet went negative to the tune of $86 billion due to the inclusion of pension costs, down from a positive $1.2 billion in 2014.

Voters in Oakland also face the “grocery tax” on sweetened beverages to raise $10 to $12 million that is sold as being for “health and education programs” but the revenue can in effect be used to help pay for pension cost overruns.

Contra Costa County is another wealthy Bay Area County with surging revenues, but on paper the county is dead broke due to huge pension liabilities.  The market value of the county’s pension debt is $6.5 billion, which helped sink the county’s balance sheet in 2015 to a negative $192 million net value, down from $852 million in 2014.

Contra Costa County’s balance sheet will take another $500 million hit in 2017 when its unfunded retiree health care liabilities come onto the books.

San Francisco, Alameda, and Contra Costa are some of the wealthiest and fasted growing in the state in terms of economic and revenue growth, yet they a seeing a continued decline in their balance sheets due to an unchecked explosion in the cost of government, particularly due to pension and other employee benefit costs such as health care.

Politicians who govern these counties and many others in the state, which are even in worse shape, are turning to voters to increase taxes for “essential” or popular government programs.

But the unspoken true is that the underlying cause of the record number of proposed tax increases is the inability of local governments to effectively manage their budgets, particularly with regard to “unsustainable” pension costs for public employees.

Don’t be fooled this November.  Every vote for a local tax increase is essentially a vote to reward bad behavior, poor fiscal management, mounting debt, and the state’s unsustainable system of public finance.

The whole system is propped up by powerful public employee union interests both in Sacramento and at the local level, so the only thing “essential” about these measures is that they are needed to continue to fund unaffordable benefit costs for a privileged class of public employees.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.