02NOV2009

Questions, Misconceptions About the Sales Tax

As we approach Election Day, we thought it would be worthwhile to address a handful of the lingering questions and concerns we see popping up repeated in our conversations and correspondence with citizens. We’ve answered many questions about the sales tax referendum for the Police-Fire Pension Fund over the last few months via phone calls, e-mail, our online forum and the media and we’ve noticed that a few topics seems to come up repeatedly.

So here's a rundown of some of those pressing questions.

Ballot Language

First, here's the official ballot language voters will see on Tuesday:

City of Springfield Question 1 -- "Shall the City of Springfield impose a sales tax at a rate of three-quarter of one percent (3/4-cent) solely for the purpose of providing revenues for the Springfield Police Officers’ and Firefighters’ Pension System, with said tax to sunset upon the Pension System fund reaching a fully-funded (100%) status as determined by an independent actuarial study conducted for the Pension System Board of Trustees?” 

There are three things in the ballot language that are either causing confusion or have been misconstrued. They are:

• Mention of “100 percent”

The 100 percent language was included on the ballot as an early sunset trigger. Currently, the tax will expire after five years as required by state law. But in no way does the inclusion of this phrase mean the plan is required to reach 100 percent funding. Most pension plans are not 100 percent funded — usually 80 to 90 percent is regarded a good, solid level of funding.

The ballot language ensures the tax will end one of two ways – either it will end after five years, or it will end if the pension plans gets to 100 percent funding BEFORE the five-year mark. State law ensures the five-year sunset. The inclusion of the 100 percent figure in the ballot language ensures it will end if the plan becomes fully funded before that time. Remember, this tax revenue can be used “solely for the purpose” of funding the plan, and so anything collected above and beyond 100 percent funding could not be spent anyway, so the tax would have to cease at that point.

• Sunset provision

Again, the state law that allows Springfield to ask for a Public Safety Sales Tax requires any such tax to sunset after five years. At that time, City Council will have a choice: either put the tax up for renewal or don’t put it on the ballot at all and let it expire. However, no one who has studied Springfield’s situation believes a 3/4 cent tax will bring the plan to a solid level of funding within five years. All signs point to at least one renewal to bring the plan to a secure level of 80 or 90 percent funded, for example. The Police-Fire Pension Fund Citizens’ Task Force, the City Council, the Mayor and City Manager have all been forthcoming about the fact that a five-year tax likely won’t fully fund the plan. However, state law expressly forbids a longer timeframe.

• Where the money goes

All money collected from the Public Safety Sales Tax will go into the pension plan. This is not only the stated intention of the City Council, which ultimately makes all funding decisions, it is bound by law because of the ballot language: “solely for the purpose of providing revenues for the Springfield Police Officers’ and Firefighters’ Pension System.” Diverting money for other reasons, even those related to other Police and Fire matters, would be illegal.

Some confusion has arisen because City Council has said that if the tax passes, its first priority will be hiring more police officers and fire fighters to correct the current shortage in those departments. However, the money to do this wouldn’t come from the tax. The revenue generated by the tax means the City will no longer have to drain its General Fund budget making ever-increasing payments to the pension fund each year. The City’s contribution to the fund will continue, even after the tax passes, but it will come down to a sustainable level (35 percent of police and fire payroll, versus the current 52 percent). This will free up funds for other core services such as hiring more first responders.

Where Did the Money Go?

This question gets to the heart of one of the biggest misconceptions about the pension shortfall. There was never a stack of money that was taken from anywhere, by anyone. While that would make for an interesting paperback novel, the real answer is much less sensational. The plan is more than $200 million underfunded due to several factors: 



• Changing actuarial assumptions based on longer lifespans and retirement years.


• Changes in benefits made in lieu of salary increases.


• Poor market returns due to a relatively conservative investment strategy. This strategy was changed in 2006, as noted above. It's worth noting that the returns we are talking about here pre-date the current recession by several years.


• During four fiscal years in this decade, the City did not contribute its full recommended level of funding. This equates to about $10 million in today’s dollars for the total of those four years. It's also worth noting that the City has now contributed the full $10 million amount back into the fund, using money it recently received from settled lawsuits with telecomm companies.

Why a Sales Tax?

All parties who have studied this problem — including and especially independent actuaries and the 16-member Citizens’ Task Force — agree that an infusion of revenue is needed to keep the pension plan solvent. The plan is more than $200 million underfunded. Even with a hiring freeze and extensive cuts during the last two budget years, the City cannot make up the shortfall by cutting alone. The revenue generated by the sales tax — along with continued contributions by the City and police and fire employees in addition to the new tax money — means the plan will get to a sustainable level. With the plan closed and an end in sight, the plan can be managed to completion in the future.
 
The sales tax is just one key component of an overall plan to make the fund whole and, as the Mayor says, “get the City out of the pension business.” The other components include: closing the plan and moving all new employees to LAGERS; continue to contribute 35 percent of payroll to the plan in addition to the tax revenue; restructuring the Pension Board of Trustees; put all proceeds from future telecomm lawsuit settlements into the fund; and, when possible by law, put proceeds from the sale of excess City properties into the fund. The current Council has also pledged not to bring any new City-wide taxes before voters during the five-year lifetime of this tax.

Won't People Simply Shop Elsewhere?

At 6.85 percent, Springfield currently has the lowest overall tax rate (combined city, county and state) among a number of surrounding communities large and small, and Missouri metro areas. With the 3/4-cent increase, Springfield would move into the upper third of that list, but would remain competitive given that the difference in overall rates would be no more than about four tenths of a percent. Springfield’s overall rate would be 7.60 percent. Compare that to: Marshfield at 8.058 percent; Republic, Ozark and Joplin at 7.725 percent; Branson at 7.6 percent; Willard, Rogersville and Bolivar at 7.475 percent; Nixa and Lebanon at 7.225 percent. Kansas City’s sales tax rate is 7.975 percent, while St. Louis’ rate is 8.241 percent.

posted by Mike Brothers, Public Information

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