The Pension Sink Is Gulping Billions in Tax Raises

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Remember that ‘temporary’ tax hike for California schools? Most is now going
to public worker retirements.

By STEVE MALANGA | | January 13, 2015

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.

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