School property tax reform an anger-driven substitute to addressing pension debt

May 20--Larry Kratzer believes Pennsylvania is compromising his golden years to cover crazy retirement promises made to public school employees. This upsets him.

Kratzer, 68, will pay nearly $2,800 in property taxes this year to the East Penn School District, which will raise taxes by 2.9 percent for the 2017-2018 school year. About $72 of the $80 hike to Kratzer's bill will go toward the district's ever-increasing obligations to the Pennsylvania School Employees Retirement System, based on information the school board provided this month.

Since retiring six years ago from a security job with Lutron Electronics, Kratzer has lived on modest savings from investments plus $1,200-a-month Social Security payments that have grown much slower than his property taxes levied by the borough and Lehigh County. His effective tax rate is more than twice the national median.

Kratzer is not sure how long he can afford to keep his home, assessed at $157,000, but he's certain he will break before the state Legislature reckons with its pension crisis.

His only hope, Kratzer says, is the Property Tax Independence Act -- the controversial bill that would replace the local school property tax with higher state personal income and sales taxes and by levying sales tax on more goods and services. The Senate fell one vote short of adopting it in 2015, and sponsor Sen. David Argall, R-Schuylkill, said he plans to reintroduce it. A spokesman last week said it would happen "in the near future."

Kratzer knows the bill won't solve the pension problem. He knows it's essentially a tax shift benefiting people like him at the expense of younger workers and renters. He knows his struggles aren't their fault, and that many of them are struggling to get by, too.

But in the absence of true reform, he says, it's a new generation's turn to carry the heaviest burden.

"They're not even paying close to their fair share," he said. "Don't you think a person deserves a break after 50 years of being bled dry?"

Many agree homeowners need relief, including the Pennsylvania Coalition of Taxpayer Associations, a group of 80 grass-roots organizations demanding reform.

In the Legislature, the Property Tax Independence Act has strong bipartisan support -- and opposition. Many budget watchdogs and fiscal conservatives that regularly clash with public-sector unions see the bill as dangerous. They say it will only stoke the state's fiscal Dumpster fire and speed up a looming workforce crisis, besides undermining public education.

Proponents say they're tired of only hearing about meaningful reform. School property tax elimination, they say, will be the added fuel that forces the Legislature to pull the alarm on underfunded pensions. With the public school system overwhelmed by state-mandated pension contributions and other edicts, something has to give, they claim.

"We are tired of all the talking," said state Sen. Mike Folmer, R-Lebanon, one of the bill's strongest supporters. "This bill would shake some boots, no doubt about it, but it would force us to change the status quo, look at true pension reform and repeal other unfunded mandates."

The Public School Employees Retirement System, claims to be the 20th largest state-sponsored defined benefit public pension fund in the nation. As of July 2016, it had unfunded long-term debt of $42.7 billion, according to the Pennsylvania Independent Fiscal Office. That's nearly $9,000 per household.

The true cost is probably even higher because that total assumes pension fund investments earn 7.25 percent annually, widely considered too optimistic.

To make matters worse, the separate State Employee Retirement System had unfunded liabilities of $19.5 billion entering 2016, more than $4,000 per household.

Everyone who owns property in Pennsylvania is affected because PSERS contributions eat up bigger pieces of school district budgets with each passing year. They accounted for an estimated 11.5 percent this year compared with 2 percent in 2008-09, according to the Pennsylvania School Boards Association. School districts pass those hikes on to taxpayers, who have not seen wages keep up with tax growth.

The trend isn't expected to stop anytime soon. Districts are expected to contribute more than a third of their total payrolls to PSERs by 2021-22. During the same time period, the Independent Fiscal Office projects total school property tax revenue to increase nearly 4 percent annually, by which time it will hit $16 billion.

The Property Tax Independence Act, last introduced in 2015, offers another way to fund schools that's intended to stop the big annual tax hikes. The 2015 bill called for increasing the state personal income tax from 3.07 percent to 4.95 percent and the sales tax from 6 percent to 7 percent. Because total school property tax revenue has grown since then, the replacement fund may require greater income or sales tax hikes.

The income tax hike wouldn't directly affect retirees because Pennsylvania is one of two states that does not tax any retirement income.

The bill also proposed taxing more foods, personal hygiene products including diapers and services such as day care, nursing care and legal, accounting and financial consulting, among many other things.

Such legislation doesn't address the core cost drivers that have caused the perpetual rise in school property taxes and have chased from Pennsylvania, said Bob Dick, a senior policy analyst for the Harrisburg budget watchdog Commonwealth Foundation.

"If we're only focusing on a tax shift, the overall tax burden will continue to trend up, and that will continue to drive people out of the state," he said. "The best course is focusing again on the spending side of the equation."

More people left Pennsylvania from 2010 to 2015 than all but six other states, and Commonwealth Foundation analyses of the domestic migration data conclude the tax burden contributed to the exodus.

A shift might keep senior citizens, whose population is expected to grow by 30 percent in the next decade, from moving south. But opponents say the shift would repel young people. Millennials, who are less likely to be homeowners, would bear a disproportionate share of the burden, paying a greater percentage of their income in taxes. While Kratzer and others might see that scenario as fair, it wouldn't bode well for the manufacturing industry, which needs younger workers.

Factories face a workforce shortage that will worsen as their older employees retire in the next decade, said Carl Marrara, vice president of government affairs for the Pennsylvania Manufacturers Association.

"That workforce gap is quickly going to become a workforce crisis," he said.

He wishes proponents of the bill would channel their zeal toward pension reform, which could at least create a more predictable tax climate needed for economic development.

The Legislature attempted something like that in October with a bill that would have eliminated some future employees' right to a guaranteed pension with a locked-in, market-be-damned rate of return. It failed.

State Rep. Frank Ryan, R-Lebanon, is among those who believe the Property Tax Independence Act would spur the Legislature to not only prevent future additional pension debt, but also reckon with existing debt.

By passing the property tax bill, Ryan and other supporters say, the Legislature would box itself into a corner. It would now be on the hook for funding its own imposed costs, chief among them employer pension contributions. It would face a choice: Force districts to make deep cuts to staff and curriculum -- or figure out a way to reduce employer pension contributions.

Ryan thinks the state should go even further, with a "financial rescue plan" that includes suing the Federal Reserve for diluting pension investment returns by keeping interest rates artificially low in the past decade. It hasn't been done before, but it's worth a shot, he said.

"The structural problems in the commonwealth are mind-boggling and dire," Ryan said. "Band-Aid approaches will not work at this point."

Kratzer, the East Penn taxpayer, agrees with Ryan that the system is broken. But he has little faith that his elected officials will fix it.

He's simply looking for whatever relief he and other baby boomer homeowners can get.

"We are the majority," he said. "And we've been treated like the goose that laid the golden egg. No more."

[email protected]

610-820-6764

___

(c)2017 The Morning Call (Allentown, Pa.)

Visit The Morning Call (Allentown, Pa.) at www.mcall.com

Distributed by Tribune Content Agency, LLC.