I had the good fortune to see Hamilton last month. The audience reaction to songs about the American Revolution and establishing a national bank was almost as impressive as the show itself. I also watched two other emotionally charged three-hour productions in April. These weren’t Broadway musicals about government, though. They were Board of Trustee meetings in my township of 42,000 people. And they evoked the same amount of emotion in both the players and spectators.
Our local elected officials were debating a new tax intended to help offset a big public pension and retirement benefit shortfall. Not only did charges of intellectual dishonesty and financial shenanigans fly across the table, so did a pile of papers. If people dueled in 2019 like Aaron Burr and Alexander Hamilton did in 1804, a couple of township trustees might have been drawing pistols at dawn.
Our shortfall issue isn’t unique. Many local governments across my state of Michigan face the same issue; and addressing it implies a trade-off between tax increases or service cuts.
Indeed, half the nation’s states have saved too little to cover the pension benefits they promised to public sector employees such as teachers, firefighters, and police. Instead, as my Urban Institute colleague Richard Johnson has written, state governments have been underfunding pensions for decades, a problem that worsened during the Great Recession. Over the past decade, state and local governments have been trying to fill the hole. Rich estimates government contributions to public pensions have increased by 76 percent.
But catching up forces state and local governments to choose between raising taxes and cutting current services. As Rich told the PBS documentary show Frontline residents “are the ones who are either going to have to pay [or] accept fewer services, because a bigger share of their tax money will have to go to close this funding gap.”
Even as states try to solve their own public pension problems, they are also pressuring local governments to do the same. More public sector workers are employed at the local rather than the state level, and the responsible party for pension payments varies by state.
In Michigan, local governments not only fund but manage these pensions. In 2017, then-Governor Rick Snyder signed a Michigan law that gives townships like mine 30 years to fund at least 60 percent of their public pension benefits and 40 percent of their retiree health benefits. Right now, my township has funded 97 percent of its pension liabilities, but only 5.8 percent of its retiree health liabilities. It’s short $162 million.
Some frustrated taxpayers in my community blame the township’s elected officials who, they insist, failed to manage tax revenue properly. They say the current trustees (the majority of whom have been in office for 15 years) should have had the fiscal foresight to spend far less and contribute far more to plans. Perhaps. But they may have been limited by 40 years of state law that curbs their ability to raise taxes.
New research by the University of Texas at Dallas’ Evgenia Gorina finds that localities that depend most heavily on property taxes contribute more to their pension systems than those that rely on other sources of revenue. By contrast, localities that rely on less stable tax revenues or on higher levels of state aid are more likely to face pension problems.
What’s going on in my township? According to the township’s budget, 73.5 percent of its revenue comes from property taxes, but we haven’t made large pension payments. This might be due in part to other limits on local governments in Michigan. Unlike other states, Michigan localities can’t levy a sales tax and since 1978, Michigan voters have limited the ability of townships like mine to raise property taxes without voter approval. State revenue sharing with the township has fallen since 2001. And the number of residents in my township is falling.
Maybe the angry taxpayers in my community are right, and our elected officials should have done more over the previous years to prevent our current public pension and benefit shortfall. Of course, voters would have needed to pressure them to do so earlier, too, when the crisis wasn’t apparent. Now, our pension problem is serious and the state is paying attention. The township has to act.
Or… punt. The township trustees just voted to put the issue to voters in an August ballot. We’ll decide whether or not to approve a Police and Fire Special Assessment District (SAD) tax to begin funding pension and benefit liabilities to the level required by state law without cutting services.
Democracy sure feels better than a duel. But if the angry taxpayers succeed and defeat the SAD tax, the township may have no other choice but to cut services and lay off public employees. It’s true, what Hamilton’s George Washington tells Alexander Hamilton:
“Winning is easy. Governing is harder.”
The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.
