Teacher Pension Shift and Its Effect on County Government

The shifting of teacher pension costs to local governments has been discussed for a number of years.  Now that the General Assembly has approved such a shift, there has been much speculation about the effects on county governments. The picture being painted can lead one to believe that counties are coming out ahead after the offsets provided in the state budget are taken into consideration.  However, the reality is that these offsets cover a smaller portion of the costs as they are being phased-in, and some offsets may not be fully realized leaving local governments to cover more of the costs at the end of the four-year phase-in.

While MACo appreciates the work of the General Assembly to minimize the effects of the pension shift, it is still concerned with the long-term effects the shift will have on county governments and their citizens.  Regardless of how you look at it, the shifting of teacher pension costs represents an ongoing, long-term shift of increasing costs to county governments.

For FY 2013, the budget just passed by the General Assembly which begins July 1, the amount of the pension shift equals $137 million.  In this first year of the shift, the offsets being provided are estimated to cover 96% of these costs.  In the fourth year, $216 million is being shifted and the portion being covered by the offsets drops to 69% leaving local governments to pick up the rest.  Further, because of the volatility with some the offsets, each jurisdiction may end up covering more.

Four-year comparison of shift with offsets
County break down of shift with county offsets

For example, MACo has advocated for applying the recordation tax to indemnity mortgages as a general matter of tax fairness. However, these transactions vary greatly from one year to the next and revenue may not be realized in jurisdictions without a lot of development reducing one of the more significant offsets in the first year and those to come. (Additional coverage on the effect of county offsets can be found on Conduit Street.)

Considering the state’s fiscal constraints, the other offsets provided in the out years, which are discretionary, are always subject to change.  Beginning in FY 2014, Police Aid and inflationary grants to local health departments are to be restored.  This funding was cut during the summer of 2009 by the Board of Public Works for FY 2010 and the programs have been flat funded since.  Considering the state’s fiscal constraints and the need to close the structural deficit in FY 2014, there is no guarantee these increases will be funded.  The teacher retirement supplemental grant program funding is also subject to being reduced or eliminated.

Moving forward, we will see more difficult years for counties as the property tax base is in unprecedented decline and the counties’ largest revenue source is projected to remain stagnant for a few more years.  The majority of counties are projecting to bring in less property tax revenue than the prior year.

When examining the effects of the pension shift, one cannot look only at the effects on FY 2013.  One needs to look at the full effect of the shift at the end of the four-year phase-in and the broader financial picture of county government.  Over the past few years, we have seen almost all counties eliminate COLA and merit increases and a third in any given year have enacted furloughs.  In FY 2012, 8 counties increased property taxes.  For FY 2013, we are seeing more of the same.  Some counties are increasing taxes; some are able to make ends meet through across the board reductions and reducing the size of their workforce through early retirement incentives and eliminating vacant positions.  Some counties may give stipends to their employees, but by and large this will be another year without COLA’s for county employees.  Considering the shift of teacher pensions and the bleak revenue outlook, counties can expect more of the same in the years to come.

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