Pension Shift and “Mitigation” Plan – Do the Numbers Really Add Up?

As part of Governor O’Malley’s FY 2013 budget plan, he has proposed transferring $239 million in teacher pension costs to county governments.  This cost shift is occurring all at once, not a phased-in approach like previous proposals and the burden is being placed on the county, not the Board of Education.

To assist counties with covering these costs, the Governor has also proposed a series of revenue enhancements totaling $244.5 million.  However, when you  look at the proposal on the table, the offset is for only one year.  After which, contribution costs go up and the local offsets go down, leaving counties with an even bigger hit.  Based on recent estimates released by the Department of Legislative Services, county costs will escalate by nearly $70 million immediately in FY 2014, and rising in each subsequent year thereafter, reaching over $358 million by the end of the projection, FY 2017.  This may leave many counties with no other choice but to seek local tax increases.

Further, when you begin to examine the components of the offset, one begins to question whether they will generate the estimated amount of revenue or whether the offset is going to the counties at all.  Listed below are the proposals the Administration characterizes as a pension shift offset and MACo’s concerns with each.

Proposed Offset

Comments/Concerns

Eliminate the requirement that  school boards pay pension costs for federally funded teachers (Administration characterizes as pension shift offset)Relieves the schools from this requirement, but no offsetting funding relief to county governments
Forgive repayment of $367 million to income tax reserve fund, $36.7 million for FY 2013 (Administration characterizes as pension shift offset)Counties always argued that repayment of this fund was unnecessary
State Income Changes – cap income tax deductions and phase-out exemptions for higher income earners, based on Administration estimates, generates $110.7 million in revenue for county governments (by increasing taxable income amount for higher income taxpayers) (Administration characterizes as pension shift offset)Income levels affected are being met with opposition;  any “softening” in brackets reduces county revenue effect

Estimated revenue is based on 18 months of revenue for FY 2013 and will drop by roughly a third in FY 2014 and beyond

Higher earners’ late-filing extensions mean some revenue (maybe 10%) not realized until FY 2014

Close the recordation tax loophole for Indemnity Deeds of Trusts (generally commercial property transactions), estimated to generate $39 million in revenue (Administration characterizes as pension shift offset)Very high volatility in revenues, depending on specific large transactions

Difficult to build budgets on figures with such uncertainty, forecasted revenues are a guess

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