Pension Problems: A City Tax Increase is Needed to Cope With Recurring Costs

The City of Knoxville has got to come up with an additional $10 million a year to cover annual increases in its required pension fund contributions. And there are only two legitimate ways to do so:

1. Increase city taxes; and/or,

2. Reduce city services

A third way to which Mayor Madeline Rogero resorted in the current fiscal year is to tap the city's fund balance, which—despite a $10 million pension draw down—is still a robust $65 million. But as Rogero recognized at the city's recent budget retreat, "You can't continue to make up for this by spending out of your fund balance. You could for a couple of years, but in the end it's not the right thing to do."

Amen. Using a non-recurring source of funds to cover a recurring expense can lead to what Finance Director Jim York characterized as a "death spiral." And the city's pension costs, which are projected to keep on rising for the next decade, are most certainly recurring.

The City of Chattanooga is attempting to pursue a fourth way: namely, cutting pension costs by reducing retirement benefits. The city's Fire and Police Pension Board has recommended cutting the cost of living adjustment to which retirees are entitled to an average of 1.5 percent a year from 3 percent presently, with resultant annual savings of $5 million. However, any such reduction is certain to be challenged in court and is ever so likely to run afoul of a Tennessee Supreme Court decision that "no accrued or vested rights of members or beneficiaries [can be] impaired" by a pension plan modification.

Rogero rightly spurned this slippery slope two years ago when she guided a pension overhaul through City Council and voter approval in a referendum—but only for city employees hired after it took effect.

At the budget retreat, Rogero told City Council that her budget hearings with department heads next week "will address how a 6 percent budget decrease would affect the services we're providing. Then, as a community, we have to decide: Do you want to cut back or do you want to raise revenues to continue the services and continue to be able to do capital investments?"

A 6 percent reduction from this fiscal year's $183 million budget would approximate the $10 million that is needed. But it would almost inevitably mean cuts in police and fire protection, which account for nearly half of the budget total.

Anticipated revenue growth from existing taxes doesn't begin to close the gap. York projects little more than a 1 percent increase in this fiscal year's $79 million in property taxes and even a 3 percent gain from the year's expected $36 million in sales taxes would only boost the combined growth to about $2 million. That's more than offset by the $2.2 million cost of mandatory 2.5 percent pay raises plus $1 million in health cost increases.

Rogero is a master of process, and I'm reluctant to get ahead of her in letting it play out. But it's already clear to me that a property tax increase is needed. The city has gone without one for 10 years since Bill Haslam raised the rate by 35 cents to $3.05 during his first year in office in 2004. That's the longest stretch in my memory, looking back over four increases during Victor Ashe's 16 years in office between 1987 and 2003.

As it's been adjusted downward to reflect subsequent reappraisals, the present rate of $2.39 is by far the lowest it's been in the past 25 years. Even with the 24-cent increase needed to raise revenues by $10 million, the resultant $2.63 rate would still be lower than at any other point during that span of time.

It's true that the city reaped an $8 million windfall last year from its share of the state's Hall tax on dividend and interest income that tripled expectations—courtesy of the tax on an enormous dividend paid by Pilot Corp. to fund Jimmy Haslam's acquisition of the Cleveland Browns. But that's precisely the sort of one-time revenue that should be applied to one-time outlays rather than to put a temporary patch on a recurring drain.

Rogero made a good start in that direction at the budget retreat by recommending allocation of $3.9 million of the money to worthy public improvement projects. These include: 1.) $1.2 million to enhance the covered pedestrian bridge over Henley Street that connects downtown to the convention center and to extend it over Clinch Avenue to provide covered convention center access from the Holiday Inn and new Tennessean hotels; 2.) $870,000 to bring the decrepit streetscape on the 700 block of Gay Street between Church and Cumberland up to the same standard as the rest of downtown's main thoroughfare; 3.) $650,000 for sidewalks and street work to support the $30 million, 238-unit apartment complex that's due to go up on the swath of downtown that's been rechristened Marble Alley. And the list goes on.

Beyond these, there are many other worthy projects that aren't presently included in the city's Capital Improvement Plan for the next five years. Foremost among them, in my view is the funding it's going to take to prepare the city-owned site of the erstwhile McClung Warehouses for redevelopment. And the city also needs to make a start toward transforming the magnificent site of the former Lakeshore Mental Health Institute into the crown jewel of Knoxville parks it can and should become.