Pension Costs to Contribute to Economic Slowdown

Higher costs and lower predicted tax revenues combine to dampen economic forecasts for cities.

ARTICLE | Sep 29, 2017
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The average pension required contribution as a percentage of payroll was 16.5%, a number that has been trending upward for over a decade, according to Joshua Franzel, President/CEO of the Center for State and Local Government Excellence (SLGE). Franzel was part of a roundtable on the National League of Cities’ City Fiscal Conditions 2017 report. The report covers the findings from NLC’s annual survey of finance officers in cities across the U.S. and asks questions about the fiscal positions of cities, revenue and expenditure trends, and fiscal policies, among other related topics. The report suggests an economic slowdown is on the horizon for cities.

“The report noted that over 80% of respondents answered that benefit costs related to pensions and health care had increased from the previous year. This aligns closely with trends SLGE is seeing via the Public Plans Database,” Franzel said. He pointed out that the number has been trending upward for over a decade. In addition, based on SLGE analyses of US Bureau of Labor Statistics compensation data sets, it is clear that health and retirement benefit costs are making up an increasing portion of overall employment costs.

On the revenue side, budget officers’ expectations regarding property tax revenues are divergent to those for sales and income taxes. Property tax revenues are projected to increase in 2017, while the other two categories are expected to decrease. The report aptly notes that negative growth rate expectations for sales taxes likely are linked to decreased activity in brick-and-mortar stores, while online sales (often not taxed by local governments) are increasing. If the tax treatment of online sales by locals continues as is, it is likely that longer-term sales tax expectations will be negatively impacted as well, regardless of the overall health of local economies. Also, Franzel notes that it will be important to further study the impact on sales and income tax revenues and related fiscal policy responses as various metropolitan areas experience a continued uptick in the number of real estate transactions with buyers that do not expect to be full or part-time residents, decreasing demand for local goods and services.

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