Taxpayer Issues

Property tax sticker shock

2017 Property Taxes on a West Des Moines Home

Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

Property tax bills are paid twice per year, in September and March. For those who actually write a check, there is always a sense of sticker shock. For example:

  • A property owner in a home valued at $200,000 in Ankeny would pay about $4,600 per year or $2,300 twice a year.
  • An Ankeny business with property valued at $200,000 would pay about $7,700 per year (less its share of a $1,665 tax credit that the state issues for each commercial property “unit,” or building).

Because property taxes are normally incorporated into a mortgage or rent payment, few individuals actually write a check for property taxes. But everyone pays, and everyone can – and should – look at his or her property tax statement.

The Polk county treasurer and assessor’s offices have recently improved their websites, making it easier than ever to quickly research property tax information.

Staying up to date on your property taxes allows you to know things like:

  • What government entities are your property taxes supporting? Many people are not aware of their support of Broadlawns Medical Center, the Des Moines Area Regional Transit (DART) system, or Des Moines Area Community College (DMACC). Your property tax statement tells you what local governments you are supporting, and how much support you are giving them each year.
  • Which local government takes the largest share of your property taxes?
  • Which government had the largest increase in property taxes compared with last year?

Knowing the answers to these questions allows you to hold your elected officials accountable for their decisions.

The Taxpayers Association of Central Iowa reports annually on property tax rates and increases in property tax collections for city governments and schools in central Iowa.

Do yourself a favor and increase your understanding of the community in which you live and pay taxes. If you’re satisfied, that’s great. If you’re not, consider learning more about what it takes to make change – through our organization, or directly by attending one of your local school board, city council, Broadlawns, DMACC or DART meetings.

Don't worry; be happy

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

Since July 1, the news has been full of stories about the poor returns experienced by public pension plans for the fiscal year that ended June 30, 2016. The Iowa Public Employees Retirement System (IPERS) earned just over 2 percent, and the Iowa Municipal Fire and Police Retirement System (MFPRSI) netted less than one percent -- both far short of the 7.5 percent annual average assumed by the plans.

This is the second year in a row for poor pension returns, and once again the standard refrain from the public pension industry is to downplay the results and emphasize the results over the long term. (See: Des Moines Register: IPERS Fund Facing $5 Billion Shortfall - Misses Investment Goal.)

The plans are justified in keeping a long-term perspective, and wise to avoid over-reaction in any given year. Returns are going to be more volatile than they once were because a larger share of plan assets are invested in higher return/higher risk classes. For example, in 2013 the IPERS portfolio earned +15.88 percent! We can expect this volatility to continue.

While volatility creates its own problems (such as a higher risk of another funding crisis), there’s also the big question of whether the returns experienced over the long-term past are actually indicative of what to expect over the long-term (30-year) future. More and more the answer is “no.”

IPERS’ own investment manager, Wilshire, expects the next ten years to return an annual average of 6.27 percent, more than a full point below the assumed 7.5 percent.

According to a May 2016 McKinsey & Company report, “returns on equities and fixed-income investments in the United States and Western Europe over the next two decades could be considerably lower than they have been in the past 30 years.” The McKinsey report cites a variety of causes including aging populations in the developed world and China, and low interest rates and inflation.

Another expert, Alice Munnell from the Center for Retirement Research, said last month: “The consensus among industry officials is that returns will continue to be lower in the future due to a number of factors, including low bond rates and the stock market being at an all-time high.” (See: Washington Budget Finance - Should States Lower Estimates for Pension Investment Returns.)

It turns out the past 30 years have been extraordinary, and unlikely to be repeated.

Some systems have recently been lowered or begun to lower their return assumptions below 7.5 percent. The California Public Employment Retirement System (CALPERS) announced last year it would lower its 7.5 percent rate gradually to 6.5 percent. The Illinois Teachers Retirement System, in a state not known for its fiscal prudence, reduced its rate of return assumption from 7.5 percent to 7 percent, which will precipitate an increase in contributions.

What would happen if IPERS were to reduce its return assumption from 7.5 percent to 6.5 percent?

Payments to erase the shortfall would need to go up by about 50 percent, or rise from around $400 million per year statewide to more than $600 million per year for the next 25 years. Those are big numbers (and they only cover the debt payments, not the cost that accrues with each new year of service) -- more than enough to fund a statewide water cleanup program, for instance.

Few wish to change the return assumption, because it requires more public money at a time when we already struggle to fund priorities like education.

It would make it more painfully obvious that we simply cannot sustain these plans, and that we should be talking about a new structure for future employees.

Instead, the plans hang on to the current assumptions and keep shifting their assets into riskier classes that offer the possibility of higher returns. Of course they also carry the same possibility of larger losses. The public takes on more risk without even knowing about it!

If we wait, and it turns out that 6.5 percent would have been a better number -- or if there is another financial crisis that hits at a time when the plans are already vulnerable -- it will be even more difficult, if not impossible, to dig out later. Then everyone loses.

What is the goal of a minimum wage hike?

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

The Polk County Supervisors appear poised to follow the lead of Linn and Johnson counties in raising the minimum wage from $7.25 per hour. The change, to $10.75 per hour, would take effect on Jan. 1, 2019; the idea being the Iowa Legislature would have an opportunity to act first by raising the rate statewide.

But what is the goal of a minimum wage hike? Because the Polk County task force began its work based on the assumption there would be an increase (the only question being how much), there never was a discussion of goals, or whether a minimum wage hike is the best way to accomplish them. It’s a relevant discussion, even if the Polk County Supervisors don’t have the power to implement other options. Certainly if the Iowa Legislature eventually feels compelled to act, the discussion is essential.

So what is the underlying goal of minimum wage discussions, and what does the research indicate?

If the goal is to reduce poverty, or the incidence of families living in poverty, a minimum wage increase is indeed a blunt instrument, and there is a better tool.

According to data cited in a December 2015 paper by the Federal Reserve Bank of San Francisco, “a sizable share of the benefits from raising the minimum wage would not go to poor families. In fact, if wages were simply raised to $10.10 with no changes to number of jobs or hours, only 18 percent of the total increase in incomes would go to poor families, based on 2010-2014 data.” (1)

According to the paper, this is because:

  • Many nonelderly poor families (57 percent) have no workers;
  • Some workers are poor because of low hours, not low wages; for example 36 percent have hourly wages above $12; and
  • Many low-wage workers, such as teens, are not in poor families.

The paper goes on to point out that 49 percent of the benefits would go to families that have incomes below twice the poverty line. Some 32 percent would go to families in the low-income range, but with with incomes at least three times the poverty line. 

Others, including the San Francisco Federal Reserve paper and a Feb. 6, 2016 Des Moines Register guest opinion written by Steve Hensley (2), suggest a better approach for reducing poverty would be to increase the earned income tax credit (EITC).

A full-time minimum wage worker in Iowa with two children already receives checks from the state and federal governments that together raise family income above the poverty level. The EITC could be increased and potentially expanded to include single-individual households. Because our state and federal tax systems are progressive, these costs would be borne by higher income taxpayers. And all of the benefit would go to the target population.

In contrast, many business owners who employ minimum wage workers are operating close to the margin. They are not well positioned to finance an income redistribution program, especially when so little of the benefit is actually reducing poverty and so much is actually going to higher income families.

If the Iowa Legislature does believe that government should do more to move people out of poverty, let’s hope they begin with the end in mind, and fairly evaluate all options.

Correction: An error in the date and the amount of the minimum wage in this blog when it was first published has been corrected. 

Groupthink and the public pension industry

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

William Whyte coined the term “groupthink” in a 1952 article in Forbes Magazine(1). Whyte felt the pendulum had swung too far in terms of “rational conformity,” or the idea that group values should trump individualism. Later (in the 1970s), research psychologist Irving Janis expanded the concept and conducted research about how cohesive groups of people make and justify faulty decisions.

Groupthink is a term that has been used to describe such various public policy fiascos as the failure to anticipate Pearl Harbor, the Bay of Pigs invasion, the Challenger shuttle disaster, and more recently the collapse of the housing bubble and the handling of the Penn State child molestation case. In each case, even though individual members were brilliant and ethical, group dynamics led to decisions with devastating consequences.

Are U.S. public pensions going to become the next big public policy groupthink debacle?

Clearly there are beliefs and practices unique to the U.S. public pension industry that appear very questionable to anyone looking in from the outside. Yet they are genuinely held, sincerely defended and “generally accepted” by those on the inside.

These include clinging to an unrealistically high investment return assumption; changing actuarial and modeling methods to get the desired results; and taking on increasing levels of risk without even asking whether such risk is acceptable.

Questions about public pension assumptions and practices have been raised by the Society of Actuaries; credit rating agencies; the former head of the Securities and Exchange Commission; and even by Warren Buffett. Accounting standards for public systems in other countries are drastically more conservative(2). If they’re right and the industry is wrong -- and we keep adding more and more employees to systems that may ultimately implode -- it could become the biggest financial and personal disaster in U.S. history.

The U.S. public pension industry is a tightly defined and powerful industry, controlling $3.7 trillion in assets and supported by millions of members and politicians who want in the worst way to believe what they are being told. It exhibits many of the symptoms that Janis described as indicating groupthink(3). In fact, we can go right down the list and provide examples of each as relate to the public pension industry:

  • An illusion of invulnerability – the government can’t go bankrupt; taxpayers have infinitely deep pockets.
  • Discounting of warnings – the assumed high future annual return assumptions (avg. 7.5 percent) can be justified based on history, so we shouldn’t worry about it.
  • Belief in the rightness of their cause – public employees have tough jobs and deserve a great retirement no matter the cost.
  • Stereotyped views of out-groups – people just don’t understand the public sector is different from the private sector; groups that question public pensions are funded by “shadowy” outfits.
  • Direct pressure on dissenters – an actual blacklist has been published by one national organization that exhorts public pension systems to avoid doing business with many reputable entities that have raised uncomfortable questions(4).
  • Doubts not expressed – national organizations provide only confirming information and studies; insiders who raise questions are distrusted.
  • Illusion of unanimity – 42 large public plan administrators signed a letter of complaint to the Academy of Actuaries objecting to a study being undertaken by that group to probe the causes of public pension underfunding.
  • Protection from information that is contradictory – information about the substantial risks imposed by today’s practices is not shared with plan trustees or others who are making decisions by default.

Is it possible to penetrate a group this heavily insulated?

In an interesting recent article(5), one writer called for a sequel to the movie, “The Big Short,” a film that colorfully documents how groupthink led to the collapse of the housing market. The sequel would depict the implosion of the U.S. public pension industry. Re-watching “The Big Short” is an entertaining way to learn how groupthink works, but maybe it will also make it easier even for insiders to identify the warning signs.

Meanwhile, ordinary people – including members of these plans -- need to keep asking the questions, and not assume that everything is okay just because we are told it is, and because we want it to be.

(1) William H. Whyte, “Groupthink,” Fortune Magazine, 1952. Reprinted in Fortune Magazine July 22, 2012. http://fortune.com/2012/07/22/groupthink-fortune-1952/

(2) Andrew Biggs, “U.S. State and Local Pensions Couldn’t Survive Under Tougher International Accounting Standards,” Forbes Magazine, June 2, 2016. http://www.forbes.com/sites/andrewbiggs/2016/06/01/u-s-state-and-local-pensions-couldnt-survive-under-tougher-international-accounting-standards/#3e00ac0c4fb1

(3) Psychologists for Social Responsibility, “What Is Groupthink?"  http://www.psysr.org/about/pubs_resources/groupthink%20overview.htm

(4) National Conference on Public Employee Retirement Systems, Code of Conduct, Appendix http://www.ncpers.org/content.asp?contentid=616

(5) Ed Ring, “We Need a Sequel to The Big Short to Critique Public Pensions,” Reason.com, April 10, 2016 http://reason.com/archives/2016/04/10/we-need-a-sequel-to-the-big-short-to-cri

Asking the right questions

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa

Suppose you set up an automatic withdrawal from your checking account to fulfill a five-year pledge you made to a capital campaign for your church; or to construct the Botanical Center’s outdoor gardens; or to build the University of Iowa’s new Children’s Hospital. In each case it would be something of enduring value – something that will benefit future generations. During these five years, your gift happens automatically each month, and each year, without having to be re-evaluated against other wants and needs in your household budget.

Now imagine it is five years later, and you have just received a notice in the mail asking you to sign and return a form for a five-year renewal. Would you just go ahead and sign it and send it back, or would you ask some questions first?

For example, would you ask:

(1) What has been accomplished with the original funds? Is the project completed?

(2) What is the remaining need, or what is the new need going forward?

(3) Does this cause remain the top priority that it has been before, given the things that have changed in your family over the past five years? What if you now have to pay for long-term care for a family member, for instance?

Most of us would ask the questions before renewing a major commitment. However, in the world of public policy, these questions are too often not asked. Renewal is assumed. Best example: K-12 school infrastructure funding.

For all the value there was in kicking off a conversation about water quality funding, the proposal to extend the sales tax after 2029 and use a tiny share of it for water quality improvement meant there was never a discussion of whether the sales tax for school infrastructure even needed to be renewed.

The discussion went straight to “us” versus “them;” education versus environment; the idea that it is somehow wrong to even dare to propose any change. But the questions need to be asked and the discussion needs to be had. It’s a huge amount of money, and its renewal deserves deliberate, thoughtful consideration.

First some background. In 2008 the Iowa Legislature dedicated a full one-cent increase in the sales tax to fund K-12 school infrastructure needs for 20 years, through 2029(1).

This amounts to about $440 million per year – which is HUGE in the overall scheme of things: large enough that in any given year it could build the equivalent of at least five metro nitrate treatment plants; four brand new metro-scale hospitals; at least ten Iowa Supreme Court buildings; or renovate the State Historical Building as proposed five times over.

Just seven years in, the impact has already been substantial. Looking around the metro area, it’s amazing to see the transformation that has taken place over the past several years.

The Des Moines Schools Central Academy building at Grand and Fleur was once an eyesore, but now is gleaming and beautiful. Des Moines elementary schools, some of which are over 100 years old, look better now than they have in my 60-year lifetime.

In the West Des Moines district, every school has been updated to current code; its high school has been substantially upgraded and expanded, and the Valley High School Staplin Performing Arts Center is a new $15 million, 1,200-seat state-of-the art facility that any metropolitan city, let alone a school district, would be proud to call its own. Iowa students are very fortunate, and I am so pleased that our generation has stepped up to make it happen.

If all of this has been accomplished in just seven years (albeit using future revenue in many cases), it’s exciting to imagine what might yet be done in the next 13 years. But what will be left to do after that, in the following 20 years? What will remain to be done, so early in the remaining design life of the recently built or restored buildings? Might a 20-year $10 billion program be enough to sustain at least several generations of schoolchildren before a program of such substantial size is needed again?

Our organization held a program at the Staplin Performing Arts Center and the audience was surprised to learn about how education funds are so “siloed.” West Des Moines needed to make budget cuts at the same time it was opening the new performing arts center. As this legislative session ends, more districts are looking at cuts in their operating budgets. Maybe there is a better way to reallocate resources within the education system. Or imagine directing these funds to other goals within education. For example, what if we decided to do whatever it takes to get every third grader reading at grade level? Don’t we want to opportunity to think about such possibilities in 2029?

Over 20 years, needs do change. Since the school infrastructure program was enacted, the State has expanded the Medicaid program to assure 100,000 more Iowans have access to health care. It is 90 percent funded by the federal government now, but that share will decline and the state share will grow. This will place a tremendous strain on resources in the future.

If the stock market experiences another downturn, pension costs will explode. It hard to imagine what the pressures for funding might be by 2029.

Or think about the far future, 2049, the final year of the proposed extension. Are we being presumptuous to think that we know better how to spend half a billion dollars per year in 2049 than will the generation of decision makers of the day? My 6-year-old granddaughter will be 39 years old by then, and may wish to make her own choices.

While it may be disappointing that funding for water quality improvements was not identified this year, it does provide an opportunity to ask the right questions and make a conscious decision before extending the largest targeted spending program in the State's history.


(1) One might wonder why the tax needs to be extended now, since it’s only 2016 and it runs through 2029. This is because school districts like to borrow money up front, and then repay the bonds with their annual share of the sales tax over a future period longer than the 14 years that are now left.

 

Boom times for city budgets

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa

Property taxes were due on March 31, so for many people, property taxes may be top of mind right now. It’s always a good idea to turn the bill over and look at which local governments receive what share of the total bill, and how much each the tax collected by each local government grew compared with last year.

Meanwhile, local municipalities have finalized their budgets for the upcoming year, which begins July 1, 2016. The first payment by taxpayers for that budget will come due next September.

Last month’s blog wondered whether cities would capture this year’s large increases in property values in their budgets for the year that starts July 1, or whether they would allow property owners to keep some of it in the form of lower rates. When property valuations on existing residences and businesses grow substantially, as they have this year, property taxes also grow substantially, even with a constant rate.

City budgets have now been finalized. They show that just three of 15 area cities are reducing their property tax rate for the upcoming year: Ankeny, Bondurant, and Johnston. Congratulations to these three cities!

But in all other cases, as shown below, the property tax rate is either staying the same or increasing. As a result, a lot of revenue will be generated and a lot of property taxes will be paid!

Certainly there are situations that may necessitate a substantial increase in revenue, but it’s hard to see why city property taxes in the metro area need to grow an average of 6.8 percent over last year. And why is general fund spending increasing an average of 7.4 percent when inflation is around one percent? These growth rates are truly extraordinary.

 

Changes in Property Tax Rate, Revenue and Spending
Fiscal Year 2016 - Fiscal Year 2017
  FY 2016
Rate

     FY 2017
       Rate

 Rate
Reduced?

% Growth in Property Tax Revenue* % Growth in General Fund Spending
Altoona 9.9437 9.9437   8.2% 12.0%
Ankeny 11.8500 11.7500 x 10.8% 9.4%
Bondurant 13.9363 13.8862 x 9.4% 6.4%
Carlisle 14.6408 14.6519   3.4% 8.8%
Clive 9.9895 10.1450   7.3% -1.9%
Des Moines 16.9200 16.9200   5.1% 5.1%
Grimes 12.9138 12.9147   12.7% 19.1%
Indianola 12.7000 12.7000   1.6% 13.1%
Johnston 11.5005 11.4000 x 4.9% 7.1%
Norwalk 15.6938 15.6950   5.7% 7.0%
Pleasant Hill 11.6500 11.6500   2.6% -8.5%
Urbandale 9.8200 9.9200   6.7% 6.5%
Waukee 13.5000 13.5000   8.8% 12.1%
West Des Moines 12.0000 12.0000   6.9% 4.9%
Windsor Heights 15.0759 15.0759   7.4% 10.1%
Average     6.8% 7.4%
      
* Does not include utility replacement revenue, nor state backfill.  
Source: Iowa Department of Management   

Over time, local budgets tend to grow much faster than inflation and population. One of the reasons is that it sounds good to be able to say there is no increase in the tax rate in a given year (though there may be lots of growth in the property tax base). And there are unlimited opportunities to do good things when more funds become available with so little political effort. But residents and businesses need to be asking the follow-up questions. How much growth in actual revenue will this rate generate? Why is it needed? Is it sustainable? Or is it being spent just because it’s there?


Our local officials are very accessible, and they like to engage with citizens in substantive discussions. It’s easy, and this year’s budgets provide an excellent starting point for discussion. You can find contact information for your city's elected officials at one the League of Women Voters website to learn what’s happening – and why − in your community.

 

 

Can taxpayers ever get a break?

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa

As the public pension crisis unfolded, the entity that sets accounting standards for governments decided that more disclosure of unfunded pension liabilities was needed. These are huge numbers (almost $6 billion in in Iowa), and, for the most part, have been flying under the radar in government financial reports.

Now, every government that is a member of a state retirement system (including state government and almost all local governments) must reflect its share of the state’s total unfunded pension liability on the face of its financial statements, rather than as a footnote as was past practice. There is no change in the actual liability, nor any change in the way it is being paid off, but the disclosure is different.

For taxpayers, this should be a good thing, right? It should help the public better see the true cost of these plans, which guarantee benefits to retirees at the expense of taxpayers when the stock market tanks. Right now (and for the next 20 to 30 years) taxpayers are making payments of $400 million per year to retire the shortfall arising from the last collapse. The new reporting doesn’t change that; it just makes it more transparent.

Alas, even the best-intentioned measures can be twisted into an argument to compound the taxpayer burden.

The Taxpayers Association of Central Iowa has been working with Broadlawns Medical Center to reduce its property tax asking in view of the impact of the Affordable Care Act in reducing its charity care burden.

Broadlawns, to its great credit, is reducing its rate; but we had urged more. Here’s the great irony. In defending the need to hang on to so much property tax revenue when it appears to no longer be needed, the board chair cited Broadlawns’ new pension reporting requirements

So think about it. Taxpayers are already making the necessary $400 million annual payments to erase the shortfall in pension funding, but now are being asked to pay again because of a change in how it's reported.  Somehow I don't think this is what the Government Accounting Standards Board had in mind. In fact it's almost scary to think what would happen if every public entity were to demonstrate similar confusion.

It’s especially ironic for Polk County taxpayers who, in this instance, are being quadruple-charged:

  • Once to pay for the actual pension shortfall;
  • Again because of new reporting of the pension shortfall;
  • Once via property tax to cover the cost of care for patients at Broadlawns who were formerly “charity care” (non-paying) patients; and
  • Again via state and federal taxes for the same patients who are now covered through expansions of the (taxpayer-funded) Medicaid safety net program.

Can taxpayers ever get a break? This is the kind of thing that can cause voters to become desperate.  

Bonanza for local governments or savings for taxpayers?

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa

Local governments in central Iowa are putting together their budgets for the upcoming year that begins July 1, 2016. This is known as fiscal year (FY) 2017.

While they’ve been gradually improving, times have been tight for local governments since about 2012, when the 2009 real estate market collapse began to play out on local budgets. Property taxes are based on property valuations, so some local governments actually had to make do with little or no revenue growth in their budgets for these past several years. Costs marched on unabated (or increased in some cases, as for public pensions), so there was stress to make budgets balance.

This year, the story is entirely different. Taxable valuations (upon which the property tax rate is applied to generate property tax revenue) are up substantially for most local governments, and a constant tax rate will therefore yield huge increases in revenue. This means there is opportunity for reduction in rates. (Notes: Schools' rates are largely set through a state formula, so their situation is different.)

Our association is always urging citizens to look at the property revenue generated, not the property tax rate, to see how much money their local government is actually collecting. If ever there was a year to be clear about the distinction, this is it!

Consider the increase in property tax revenue that would be generated in the following selected jurisdictions, just from a flat rate, at a time when inflation is projected to be less than one percent:

Increase in 2015 Taxable Valuation, by Government Entity
For FY 2016-17 Budgets

Polk County

6.2%

Dallas County

6.3%

Broadlawns

6.2%

DART

6.2%

City of Ankeny

11.8%

City of Des Moines

4.7%

City of Waukee

9.2%

City of West Des Moines

6.7%

These are also the percentage increases that taxpayers will be seeing on their property tax bills next September and in March 2017 if downward adjustments in rates are not made.

Local governments have a choice to make. They can build the growth into their budgets and substantially increase their spending, or they can set a more modest spending goal, return some money to taxpayers, and perhaps set a more stable course for the future. The circumstances of each entity are different, but citizens should be asking their local officials what they plan to do, and why, before budgets are finalized on March 15th.

Change is difficult, as failed suburban services merger showed

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa

What we love best about our local government are sometimes the same things that are so expensive and difficult to change. Access to elected officials is direct and easy; voices are heard; decisions are responsive. Yet these same attributes can sometimes be used to block changes that may benefit the community as a whole.

This is our perception of what happened Nov. 2 when the Windsor Heights City Council voted unanimously to stick with the status quo rather than to join forces with a neighboring community to improve fire and emergency medical services (EMS).

Windsor Heights is a suburb with fewer than 5,000 residents. It is an older community filled with unique homes but with relatively little commercial development to help carry its high property tax burden. It’s hard for such a small, established community to continue to meet service expectations with so few property taxpayers to share ever-increasing costs. Windsor Heights' property tax rate for operations is already the highest among all cities in the metro area so it must continuously look for ways to become more efficient.

To its credit, Windsor Heights has already captured substantial economies of scale by contracting with surrounding communities for the delivery of many municipal services. However, the most expensive services (with the fastest growing costs) – police and fire/EMS – are still delivered independently by the city itself. Two years ago it began to explore collaboration opportunities in fire/EMS with neighboring Clive.

Both communities are small, and their fire/EMS units respond to few calls: an average of 1.4 per day (yes, just over one call per day) in Windsor Heights and about four per day in Clive. Both communities wanted to be able to provide professional (full-time) fire/EMS response capability 24/7, 365 days a year, but neither could afford to do so independently.

The concept that was eventually developed called for a combined fire/EMS district governed by a board with equal representation from both communities. There was good public reporting on it as the process moved along, and many Windsor Heights residents and interested outside observers considered it an obvious move. It certainly appeared to be a win/win opportunity.

In retrospect, though, perhaps it should have been obvious this would ultimately have been anything but a routine decision. Changing the status quo is always difficult. Speakers at the November City Council meeting  showed why.

Although there would have been no loss of jobs, the fire station building in Windsor Heights would have closed and staff would have relocated to a station just across the border in Clive. This was significant. Several residents said they would happily pay more in order to “keep our guys here.“

Next, the Windsor Heights Acting Fire Chief reported that service improvements had already been made (24/7, 2-person paramedic coverage and two new firefighters), and response times had already improved. They felt the community would be adequately, and perhaps better protected by keeping things the way they are. (In effect, this meant abandoning the original goal of 24/7, 365 days a year full-time professional fire and EMS coverage.)

From the union we heard about the many wonderful things the members do for the community: the pancake breakfast; the Easter egg hunt, the 4th of July parade; glow sticks at Halloween, to name just a few. (Were we to think they would discontinue this under a merged system?)

The coup de grace came when the mayor read a letter from the wife of the former “much beloved” fire chief. EMS had taken her to the emergency room the evening before, making it impossible for her to be there in person. Yet she wanted the council to know how important it was for them to do the right thing. This was personal.

Meanwhile, the few people who spoke in support of the proposal were not Windsor Heights residents. Residents who may have supported the concept were silent, assuming that based on what they’d read in the paper, it was a done deal. The council members did what, arguably, any reasonable people in their position would have done: they responded to the feedback they received and the perceptions they carried at that point in time.

So what should we (the taxpayers) learn from this experience?

First, never assume anything when it comes to change, even if it seems like reasonable change. Always expect active opposition. When change is contemplated, potential proponents must be as informed and organized as opponents will be. This is difficult because the general public typically isn’t organized. Change initiatives that may benefit the community at large but rock the boat for certain interests will have to be chosen carefully, and be worth the extra effort of informing and motivating the public to be active in support.

Second, good communication must continue throughout a collaboration process. When one party perceives a change in view among key stakeholders, this should be immediately communicated to the other, with reasons explained and opportunity for problem solving offered. The single most unfortunate aspect of this failed collaboration is the loss of trust between the two cities. It will take effort to rebuild, but it will be rebuilt because that’s how our public officials operate here in central Iowa.

Ultimately, communities have every right to make the choices they believe are best for them, and they do the best they can with the information they have. It’s up to us – the taxpayers – to effectively speak up, because others surely will.

Many Iowa public employees are better off in retirement than working

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

Iowa is a great place to retire. After an eight-year phase-out period, Iowa retirees now pay no state income tax on their Social Security income. Retirees also continue to receive a large exclusion of pension income that was first made available in the 1990s. These provisions encourage retirees to stay in Iowa and continue to contribute as volunteers, board members, community leaders, caregivers, mentors, and in all the other ways they contribute to Iowa’s quality of life.

It also reinforces how much has changed in the world of retirement planning since Iowa’s defined-benefit public employee retirement plans were created in the 1950s. Because of these changes, today, many Iowa public pension plan retirees are actually better off in retirement than when they were working. This is an outcome that certainly was never envisioned, but is enormously significant.

The Iowa Public Employees Retirement System (IPERS) was created in the early 1950s, and counts among its 346,000 membership almost all public employees in Iowa (schools, cities, counties, state employees, and others). When this plan and other defined benefit plans like it were created, they no doubt made a lot of sense for the conditions of the time.

For example, people didn’t change jobs much, so they didn’t need portability. Members either made a career of public service or married, so the benefits were weighted heavily to the longest-tenured employees with short-term employees receiving little or nothing. The result today, arguably, is that long-term employees are over-compensated, while those who change jobs (outside the system) more often are not building the retirement savings they need.

Another difference is that in the 1950s public sector pay wasn’t as good as it is today, so back then benefits needed to be higher in order to attract employees. Today, that is no longer the case. At worst, public and private sector wages have evened out (after controlling for higher education levels in the public sector), but public sector health insurance and retirement benefits are still much higher. In fact, public pension benefits have increased substantially since the 1950s even as salaries have caught up.

Another obvious difference is longevity. Today, life expectancy at age 65 is five years longer than it was in the 1950s.

Further, when these plans were first created, investments (of which earnings help pay for benefit payouts) were limited to low-risk fixed income investments, which were well matched with the fact that benefits also had to be paid. Today, most of the portfolios are invested in higher risk equities and alternative investments.This means there’s a lot more risk in the system, and because benefits have to be paid, no matter what, vastly more impact on state and local budgets when the market tanks.

Finally, in the 1950s, Social Security contributions were much lower: 2 to 2.5 percent for the employee, compared with today’s 6.2 percent. Pension plan employee contributions were also lower – for IPERS, about 3.7 percent, while today they are nearly 6 percent. Today, when someone retires, because they no longer have to deduct these sizeable payroll contributions, their post-retirement take-home income feels that much higher.

The cumulative impact of all of these changes on the plans and especially on the pre- and post-retirement comparison is substantial.

We looked at comparisons of pre- and post-retirement net (take-home) income for IPERS members, retiring in fiscal year 2015. These individuals also receive Social Security income. We assumed no other income. It turns out that in our example a 65-year-old IPERS employee with average pre-retirement income who retired in fiscal year 2015 is in a better financial position retired than working, considering differences in required contributions and taxes. Longer-tenured employees do even better.

2015 Ipers Retirement

Sources: IPERS (and Taxpayers Association of Central Iowa estimates based on IPERS data) and Social Security On-Line Benefit Calculator, Age 66 Draw. http://www.socialsecurity.gov/oact/quickcalc/ 

The “average” reflects people who may have left the system long ago with a short tenure and with relatively low income at the time of separation, although they retired and began to draw benefits in 2015. It is also influenced by the extraordinarily high benefits enjoyed by those with the longest tenure. These longest-tenured employees are even better off in retirement than what is shown above. In fact, an  employee who worked more than 30 years with average salary nets 11 percent more take-home income in retirement than working. A 25- to 30-year employee nets 7 percent more in retirement. The average tenure for a 2015 retiree was 21.7 years.

It is doubtful that policy makers intended to create a situation where an employee is financially better off retired than working. In fact, public employees have typically been advised to not rely on Social Security and IPERS alone.

The more favorable tax treatment of retirees in Iowa is yet another reason for a comprehensive review of Iowa’s public employee retirement systems. We would not suggest that retirees should lose what they have already earned, nor what employees are expecting to earn in retirement, especially for those who are close to retirement. However, going forward there should be opportunity to build at least some retirement security for many more employees, while placing what most people would consider reasonable limits on post-retirement net income for those at the top end.

In any case, it’s time for a review to see what kind of plan best fits the world of today and into the future.

 

 

Ask questions about your property taxes

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

With fall property tax payments due last month, property taxes are top-of-mind for many individuals and businesses.   

Whether you write a check directly, or whether it is paid by the bank or mortgage lender, every property owner or mortgagee receives a paper copy of their property tax statement. It's really important to take a careful look at the back side of the tax statement.

There (and only there, by the way, as it isn't available online) you will find the only source of information that the average taxpayer can use to hold their local governments accountable for the property taxes being levied. You can see not only which government authorities are levying what share of the total property taxes you pay, but also which ones are increasing or decreasing, and by how much, compared with last year. 

Often people are surprised when they look at the information. You may not realize you are supporting not only your city, county and school district, but also Broadlawns Medical Center, Des Moines Area Regional Transit (DART) and the Des Moines Area Community College (DMACC).

For instance, 8.6 percent of the property taxes my husband and I pay on our home are going to Broadlawns. The single largest percentage increase in our property taxes (and this would be the case for most everyone in Polk County) is for DART, a whopping 10.4 percent!  The taxes we pay to the city and school district (West Des Moines in both cases) are actually going down compared with last year. This, too, is good to know. 

Each year the Taxpayers Association of Central Iowa prepares tax and spending summaries for local governments in central Iowa. This information allows taxpayers to see how their city and school district compare with others, and how they compare with the prior year.

FY 2015-16 City and School Property Tax Rates

Fiscal Year 2015 City Budget Comparisons

These comparisons do not explain why there are differences, so we would caution against drawing any conclusions based on this data alone. However, along with the information on your property tax statement, it may certainly prompt questions that are good entry points for conversation with your elected officials.

Make this be the year you become an active questioner!

 

- Gretchen Tegeler

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Website: www.taxpayersci.org

 

DART: A property tax funded amenity

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

Last year we looked at DART’s financials, and wondered aloud whether it would be sensible to think about the sustainability of the current funding model before committing to a major new project as represented by bus rapid transit (BRT). (See my January 2015  IowaBiz blog.) This $25 million project would carry an ongoing operating cost of about $1 million per year. 

In May the BRT project was put on hold due to the unavailability of federal funds, but the community is using the time-out to review DART’s fundamentals.

There is now another year’s worth of data and it’s possible to see whether any of the trends identified last year have improved, and whether budget projections were met.

Property tax revenue continues to pay for an increasing share of DART operations, with operating revenues (fares, contracts with major employers and advertising) paying for a smaller share. This is partially by design, as property tax is replacing federal funds that have been phased out.

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At the same time, DART has been expanding service in a bid to connect large employment centers in the city and the suburbs with residential concentrations. Because there’s an 18- to 24-month lag time between when the service is first provided and when the ridership picks up, ridership (and revenue) increases don’t necessarily track with the expense increases. Allowing for the lag time, it does appear the service expansions are generating more ridership  However, as was noted last year, property taxes are basically covering the cost of these additional riders. Total operating revenue was 10.1 percent below projections for the year that closed June 30th, 2015; with fixed route operating revenue being 8.65% percent short of budget.

The overall trends have not changed much from a year ago. Total operating revenue is still less than it was four years ago despite substantial service expansions and improvements since that time. Basically, as it weighs future improvements for DART, the community will need to decide if it is willing to continue to raise property taxes to fund them.

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How much indebtedness does Iowa really have?

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

The Governmental Standards Accounting Board (GASB) is a national organization that sets generally accepted accounting principles (GAAP) for state and local governments.  Among the reasons such standards are useful is for comparability (everyone’s financials can be compared) and transparency (we know what we’re getting).  

This year, new national standards for public pension reporting are being implemented following nearly ten years of development and much controversy. Now, for the first time, its share of total net pension liability (the amount by which liabilities exceed assets) will be reported on the face of the balance sheet of individual government entities as a long-term debt, right along with other long-term debt such as outstanding general obligation (GO) or revenue bonds. In addition, alternative estimates of net pension liability using different return assumptions will be provided. This is important because the estimated return on investment of pension assets has a huge impact on the calculation of total net pension liability.  A small downward adjustment in the assumed return results in a giant expansion in estimated net pension liability.

In requiring governments to disclose net pension liability as a long-term obligation, among other things, GASB hopes to help the public recognize that unfunded pension liability is much like any other kind of debt – it represents an obligation that must be paid off over a period of time in the future for something that has already been purchased/built/consumed, in this case retirement benefits earned for past service.

Not enough principal has been set aside to pay for benefits already earned in Iowa's four state pension plans: Iowa Public Employees Retirement System (IPERS), the Municipal Fire and Police (MFPRSI), the Peace Officers Retirement System (PORS) and Judicial Retirement System. The shortfall that must be made up through future annual payments into the pension funds amounts to $400 million per year.

In disclosing the sensitivity of pension debt to the choice of investment return, GASB hopes to help policy makers better understand the risk that goes with these plans. Unlike GO or revenue bonds, where the interest rate is known up front, pension debt can be larger or smaller than the estimate depending on whether the assumptions turn out to be correct. So it’s useful to see a range of estimates based upon different return assumptions. In Iowa, the big public pension models mostly assume a 7.5 percent return over the next 30 years. Under GASB rules, the calculation is now also made based on a 6.5 percent and an 8.5 percent return. (No one has suggested that pension models should use a rate higher than 7.5 percent, but many have suggested the use of a lower rate. While its pension model is based on 7.5 percent, the ten-year projection for IPERS’ current investment portfolio is 5.95 percent, meaning the 20 years after that would need an 8.3 percent average annual return.)

While the comprehensive annual financial reports (CAFR’s) for fiscal year 2014 won’t be issued until December 2015, we are now beginning to see the data that each local government is being given regarding their share of total net pension liability. To put the information in perspective, we have made a comparison of these estimates to the total amount of all other indebtedness, or the total debt we thought we had, for a few local governments.

 

Comparison of Net Pension Liability With All Other Long-Term Obligations
(June 30, 2014, $ in Millions)

 

 

            Entity

Treasurer’s Report of Outstanding Debt  
(Does Not Include Pension Debt)
Net Pension Liability
(Assumes 7.5% Return)*
Comparison of Net Pension Liability vs. All Other Debt (7.5%)  Net Pension Liability
 (Assumes 6.5% Return)*
Comparison of Net Pension Liability vs. All Other Debt (6.5%)
City of Ankeny 171.2 11.3 6.6% 21.4 12.5%
City of Des Moines 464.2 105.2 22.7% 200.6 43.2%
City of Urbandale 50.3 11.3 22.4% 21.4 42.6%
City of West Des Moines 75.8 20.3 26.8% 38.7 51.0%
           
Ankeny Community School District 145.0 35.2 24.3% 66.6 45.9%
Des Moines Indep. School District 196.0 121.0 61.7% 228.7 116.7%
Urbandale CSD 93.1 16.5 17.8% 31.2 33.6%
West Des Moines CSD 78.6 34.6 44.0% 65.5 83.2%
           
Total IPERS and MFPRSI (Statewide, Non-Regents)  13,365  4,328  32.4%  8,492  63.5%
 

Sources:
Outstanding Debt: Treasurer of Iowa, Outstanding Obligations Report June 30, 2014
Pension Debt: Iowa Public Employees Retirement System (IPERS) and Municipal Fire and Police Retirement System of Iowa (MFPRSI)

* Pension debt calculations vary depending on the assumption made for average annual return on investment over the next 30 years.  Both systems assume 7.5%.  

Statewide, the total net pension liability for the two largest systems, the Iowa Public Employees Retirement System (IPERS) and the Municipal Fire and Police Retirement System of Iowa (MFPRSI) is $4.3 billion, representing 32.4 percent more than the total of all other outstanding debt for governments in these systems.  In other words, if we thought we had $13.4 billion in total debt, we really have 32.4 percent more than that. 

The chart also shows the net pension liability for the two largest systems assuming a rate of return of 6.5 percent rather than 7.5 percent. The result is nearly a doubling of the net pension liability, in which case it is a 63.5 percent increase compared with all other debt. So our actual level of indebtedness is more than 60 percent higher than what we thought it was.

Individual government entities are also shown in the chart. The figures range from a low of 12.5 percent in the City of Ankeny to a more than doubling of the long-term obligations in the Des Moines School District.

Iowans are traditionally very conservative when it comes to debt. It is typically used for long-lived assets, where the payments are spread into the future but they match the long service life of the asset. In the case of public pension debt, we are in effect borrowing from future generations to pay for past operating costs – services that were rendered in the past by employees of state and local government. And we have a lot more of it than we thought. 

Why priorities don’t get funded

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

With the closing of the 2015 legislative session this year has come a chorus of lamentations about money that didn’t get spent, and how important interests from school children to outdoor recreation and environmental protection will suffer as a result. 

We should get used to it. The truth is, discretionary decision-making – consciously choosing priorities and then funding them -- is becoming a rarity as more and more “built-in” or “automatic pilot” spending items increasingly crowd out state and local government budgets.    

At the state level, many would first think of the Medicaid program, where the crowd-out phenomenon has been in place for many years but was recently compounded by the Affordable Care Act. (At the risk of dating myself, we used to refer to Medicaid as the “Pac Man” of the state budget.) Once the federal funds are accepted, the State is committed to certain actions no matter the cost.

One of the most significant “built-in” spending components affecting all state and local governments in Iowa is public pension debt. Our public pension systems guarantee retirees a monthly benefit for life, the size of which depends on how long they worked and at what salary. The system is built upon a financial model that involves a whole series of assumptions. If the assumptions don’t pan out, taxpayers are still on the hook to pay the benefits.

And the assumptions have not panned out. Changes in life expectancies, the recession of 2001/2002, the market collapse in 2008/2009 and chronic underfunding have caused shortfalls in the state’s four public pension systems. The combined shortfall (in assets set aside to cover liabilities already incurred) for Iowa’s public pension plans is now nearly $6 billion. In addition to sharing in the annual cost that accrues with each year of service, taxpayers must now also make an extra payment to the pension systems each year to gradually erase (or amortize) the shortfall. This is what it will take to be able to pay benefits when due.

The good news is we are now making the minimum payments. Some states aren’t, and they are continuing to lose ground. The bad news? The payments are very, very expensive. Following a long history of stable funding since the 1970’s, required contributions to the Iowa Public Employees Retirement System (IPERS) have now risen 50 percent, and they’ve doubled in the municipal police and fire plan. For the next 25-30 years, the total debt payment alone comes to $400 million each year.  This is 100 percent taxpayer-financed. Even worse, if what many would consider to be more reasonable assumptions and methods were used to calculate the required debt payments, they would be at least 50 percent higher.

To put this payment back in the context of our school funding and outdoor/environmental initiatives, consider these examples.  The debate all session centered on whether the K-12 system should receive 1.25 percent or 4 percent state growth. Meanwhile, the $400 million that will be sent to the pension systems by all public employers -- merely to cover the debt payment -- is the equivalent of 8 percent growth. It does not show up in an appropriations bill. It is not consciously weighed against school funding. But it definitely impacts school funding.

Or consider the 3/8 of a penny increase for conservation, environmental and outdoor recreation that was pushed by a broad coalition of interests. Why does this coalition feel the need for a tax increase to pay for these priorities? Because they have been crowded out of state and local budgets. This major environmental initiative would generate $150 million, less than half of what is being spent every year to pay down pension debt.  

Unfortunately, there is nothing that can be done with the pension shortfall that has already been incurred.  We owe this and must pay it no matter what. But we should be asking if we want to compound our losses by adding new public employees to a system that is already so far out of control. Without change, we will continue to see our true priorities – be they education, environment, or public safety – shortchanged even more in the future.  

Public sector health plans are costly for taxpayers

Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

In Iowa, state law (Chapter 20) provides that public salaries, health insurance benefits and various work rules be set through collective bargaining agreements negotiated between employers and employee representatives (unions), where they exist. 

Most of the cities in central Iowa have at least one employee organization, and larger cities such as Des Moines have up to nine different organizations. Each one negotiates a different set of salary, health and work-rule provisions for contracts that extend from one to five years.

Through this process, in place since the 1970s, benefits have gradually expanded.  Once benefit provisions are in place, they cannot be changed or removed except explicitly through a trade for salary or other benefits deemed to be of equal or greater value.  Health care inflation has fallen almost entirely on the employer (taxpayer) because employees typically pay such a low share of the premium charge.

What do these plans look like today? How do they compare with yours?  How do they compare with the plans available to the general public via the new health insurance exchange?

The Taxpayers Association of Central Iowa surveyed local governments to acquire some basic information about the most popular health plan in each jurisdiction and here’s what it shows:

There have been some inroads in terms of employees paying a share of the premium cost. These shares are still very small (from 2.5 percent in Des Moines for a single plan to 11 percent in West Des Moines for a family plan), but at least they are not zero. Employees subscribing to the most popular plan in state government still contribute nothing for their premium (nor for services, for that matter).

For plans purchased on the insurance exchange, the federal government subsidizes premium payments based on income. All purchasers pay something, and some pay 100 percent.

As the table shows, the biggest difference between a public employer plan and a health exchange plan has to do with what employees pay when they actually use services.  Health exchange plans try to encourage members to be conscious of the cost of services.  They require subscribers to pay 100 percent of the cost of nearly everything, up to the deductible. The deductibles are set deliberately high -- $3,750 for a single plan and $7,500 for a family plan in our example. Public employee plans, on the other hand, which already cost employees very little in premiums, tend to have extremely low co-pays and deductibles. So employees have minimal exposure to the actual cost of services, and minimal incentive to stay healthy.

Of course, this aspect of the Affordable Care Act intentionally aims to make people more attentive to their health and health care, which is by and large a good thing. On the other hand, Iowa’s collective bargaining laws are set up to protect the status quo. Employee organizations may think they have done a great service for their members by keeping health care essentially free. But when the world changes, and public employees are locked in an alternate universe, does anyone really win?  FiscalYear201415HealthPlans

There’s more to the story than tax rates

This is the time of year when local governments finalize their budgets for the coming year (starting July 1). One of the first things people look at is what’s happening with the property tax rate. Often a city will proudly announce its property tax rate is staying the same for the upcoming year. Sounds good, doesn’t it?  Holding the line on property taxes, right?

Well, it depends. 

Property taxes are a combination of the property tax rate, applied to the portion of a property’s assessed value that is taxable. Even if a city keeps a constant rate, it may be collecting a lot more property tax revenue (with property owners paying a lot more, too), if there’s more valuation to tax.

Increases in taxable value can come from new construction and revaluation of property, and/or from the operation of state formulas that control property taxes. While for the past several years there wasn’t much movement in taxable values (with actual declines in some cases), this year’s budgets are once again reflecting growth, in some cases significant growth. 

When this happens, cities face the question of whether to hold on to the additional dollars generated from a constant rate, to reduce rates and return some of it to taxpayers, or use some combination of the two approaches.

The approach an individual city chooses to take will be based on the unique circumstances in that city. Often there are good reasons for keeping the revenue in the city budget.  Perhaps the city wants to replenish reserves. Perhaps it has new debt for a recently completed building. Or maybe it held off on hiring during the downturn, and now wants to move forward.

Whatever the case, a city should not hesitate to explain what it plans to do with an extraordinarily large increase in property-based revenue.

The chart below shows the revenue increase that each city will see from property taxes, and the increases they will see when combined with “backfill” revenue from the State. As a part of the property tax reform that cut property taxes on commercial and industrial property, the State pledged to replace the property tax revenue that local governments would have otherwise collected. Even without backfill, most cities (Des Moines a notable exception) would have seen an increase in property tax revenue. When backfill is considered, the increases are even more pronounced. In fact, even the four cities that are reducing rates will see an increase in property tax-based revenue when backfill is considered.

There's More to the Story TableWith the Federal Reserve projecting inflation to be between 1 percent and 1.6 percent in 2015, every city but Windsor Heights will be working with property tax-based revenue growth that is above inflation. Some will be working with double-digit increases.

Why is this level of growth needed in local budgets?

Next time your local elected official talks about holding the line on property taxes, make sure you get all the facts. You may need to ask why the rate wasn't reduced, or why the rate wasn't reduced even more.

There’s usually much more to the story.

How bright is the sunshine in your community?

This week is “Sunshine Week,” which celebrates access to public information and promotes understanding of the importance of open access in making democracy work.

After working several years in the local government arena in central Iowa, we've learned there are differences in the culture of transparency among the various local governments. As a “taxpayers” organization it is interesting to experience the differences in interpretation of what that term means, and how it influences our relationships and access. 

We’re mostly concerned with fiscal information – how money is collected and spent, and the value obtained. As a rule, local governments want the public to be aware of how well they’re managing the taxpayers’ funds. Today, the larger public entities have professional chief financial officers (CFO’s) who welcome the interest that is shown. They produce “Comprehensive Annual Financial Reports” (CAFR’s) which are prepared according to strict governmental accounting standards, then audited. Such consistency in reporting has gone a long way to splash sunshine on government finances. Any citizen can look at a CAFR and know they are getting information that is consistent, true and meaningful, at least according to generally accepted accounting standards.

Perhaps the differences are demonstrated more in the extent to which the local public entities go the extra mile to share and explain information. Here, the truly proactive entities separate themselves from the pack by embracing transparency – inviting us right into their processes.

For example, Broadlawns Hospital, the fifth largest property tax-supported entity in central Iowa, presses us to regularly attend and participate in its monthly Finance Committee meetings. We receive the same information as do board members, and we’re welcome to access any other information that may be needed or desired. Similarly, the Des Moines Independent Community School District (largest taxpayer supported entity) convenes a citizens budget advisory committee, on which we are invited to serve, each year during the budget development process.

CFO Thomas Harper provides access to subject matter experts and will help explore any topic in which the group has interest. These sessions are extra work for the district but the trust and shared understanding that is developed pays dividends for all parties. We have a better understanding of district finances; they have people who can support them when tough decisions need to be made.

Today there is more visibility than ever before to agendas and supporting documents for local board and council meetings. Most of the larger local governments (and some of the smaller ones) post this information online, making it easy for anyone to see the details of what is happening in their community or school district. But it is not universal yet even among the largest entities, for example the Polk County Board of Supervisors posts agendas and brief minutes, but none of the supporting documents.

One of the more mundane but critical aspects of transparency has to do with the ease of contacting people (who in turn, of course, have information). It’s frustrating when you need to call or e-mail someone, but can’t access a directory with individual phone numbers and e-mail addresses.

This is simple, but it might be the most fundamental piece of transparency: can you get to the real person who you believe is accountable for your issue?

Even in 2015 we still have local governments that try to control access to elected officials.

For example, the Dallas Center-Grimes Community Schools is running a bond special election on April 7, yet school board members cannot be contacted directly – they must go through a district-controlled filter. It’s hard to imagine why any elected official would wish to be so insulated from constituents, or why a superintendent would wish to keep them so insulated.

One easy way to celebrate Sunshine Week is to check your local government websites and see if you can find a directory with real people (both key staff and elected officials) and their contact information.

Or see if you can find the agenda and all materials from the next or the last council or board meeting. If you can, then call your board or council member to introduce yourself and say “thanks.”

If you can’t, ask for it.

'Just the facts, ma'am'

Benefits and Costs of DARTing Forward 

Last month, members and guests at the Taxpayers Association of Central Iowa’s “Ideas on Action” series were given an overview of the benefits of the Des Moines Area Regional Transit (DART) in central Iowa, and about the future of DART services. 

The group learned that DART has made some impressive gains in service and ridership over the three years since the DART Forward 2035 plan was adopted, and it heard about even more ambitious plans for the future.  Specifically, a $25 million project called “Bus Rapid Transit” is planned to improve frequency and shorten travel times along the University Ave./Ingersoll/downtown loop route. 

But the value of DART cannot be understood without also looking at both sides of the ledger, and by looking at the question of who pays.

All transit systems depend on revenue sources beyond what users alone can pay, both because of user needs but also because of the extra benefits that public transit generates for the community as a whole.  For example, in comparison with automobile travel, public transit confers public health benefits.  It requires more exercise, may generate less pollution, results in fewer traffic injuries, and provides improved mobility for non-drivers.  And surveys have shown that millennial workers believe a good transit system is an important community service. 

But are these extra (beyond the user) benefits worth the extra cost?

Let’s look at the financial model on which DART has been operating since 2011 (when DART Forward 2035 was adopted):

  • Annual operating costs have risen by 37 percent (to $28.5 million);
  • Annual operating revenues have remained constant (at $7.8 million); and
  • Annual property taxes have doubled (to $13.1 million). 

Slide2

Despite a nearly 20 percent increase in ridership over this period, there has been no associated increase in fare-based revenue.  If more millennials are riding the bus, why aren’t we seeing an increase in operating revenue?  The absence of growth in operating revenue suggests that all of the recent improvements in service and ridership have been funded by non-users, i.e. from increases in property taxes.  Are we okay with this model? How far should we go with it?

State legislation in 2008 gave DART the authority to raise property tax rates in every community in Polk County (and in rural Polk County) up to a maximum of 95 cents per thousand dollars of taxable value.  We’re about half way to the maximum compared with where we started, so we can expect property taxes in most communities to continue to go up for the next several years until they reach about $20 million per year (in today’s dollars).

With several years of experience to review and certainly before such a large financial commitment is made to Bus Rapid Transit, now is a good time for a gut check.  Are the additional benefits to the community at large from increased transit ridership sufficient to justify additional community investment by property taxpayers?  In this day of UBER and apps that can make it easier to use alternatives to single-occupant vehicle travel, do we know that public transit is the most efficient and effective way to promote the use of alternative transportation in a lower density city like Des Moines?  Perhaps the answer to both questions is “yes,” but we should ask and answer the questions explicitly.

These and other questions like them will be considered as the DART Board reviews its progress this fall.  It will be important for the broader community, including property tax payers, to weigh in.

Gretchen Tegeler is President of the Taxpayers Association of Central Iowa.

 

 

 

Fallout from Iowa public pension shortfalls

Gretchen Tegeler is executive director of the Taxpayers Association of Central Iowa.

Public pension funds around the country have fallen trillions of dollars behind in the amounts that should be set aside to pay pension benefits when they come due.  Such shortfalls have arisen from many years of inadequate contributions, compounded by huge investment losses. Because benefit payouts are guaranteed no matter what happens with investments or prior funding, the shortfall becomes a debt that must be covered by you, the taxpayer.

Like a mortgage, taxpayers are now scheduled to pay off this debt over the next 25 to 30 years.  This is being accomplished through higher pension contributions on the public payroll.  Here in Iowa, payments on the debt are about $380 million per year, just for debt service on public pensions.  This is on top of the cost of the new benefits that accrue each year, of which taxpayers are financing another $380 million.  In total, Iowa taxpayers are spending about three-quarters of a billion dollars each year for state and local defined benefit public pensions.

The increase in public spending for pensions has impacted the ability of our state and local governments in Iowa to pay for other services.  The result is a decline in the quality of public services and an increase in property taxes.  For example, all Des Moines libraries have closed an additional day each week just to help cover the cost of police and fire pensions.  Urbandale is raising property taxes.  Some have questioned whether it’s worth the substantial public cost to pay such a generous benefit to so few individuals.  Police and firefighters in our largest 49 cities can retire at age 55, and receive 82 percent of their highest salary each year for the remainder of their lives.  Almost all of the retirees in this system will have a higher standard of living post-retirement than they did during their highest earning years.

Now there’s an additional cost associated with public pensions in Iowa.  Moody’s Investor Services has changed the way it evaluates municipal credit risk, now giving explicit consideration to the amount of public pension debt a government entity carries and its capacity to fund it.  Using the new methodology, Moody’s has downgraded 8 of the last 12 cities it has reviewed in Iowa.  Lower ratings mean higher borrowing costs for these entities.   Cities with rating downgrades by Moody’s are shown below in red.

 

Rating

City

Pop Rank

Last Update

AAA

Iowa City

5

04/29/2014

West Des Moines

9

07/24/2014

Aa1

Cedar Rapids

2

05/06/2014

Ames

8

03/21/2014

Urbandale

12

07/24/2013

Marion

14

10/21/2013

Aa2

Ankeny

11

04/16/2014

Des Moines

1

06/19/2014

Dubuque

10

04/11/2014

Waterloo

6

05/30/2014

Sioux City

4

02/25/2014

Cedar Falls

13

03/03/2010

Bettendorf

15

03/27/2014

Council Bluffs

7

03/13/2014

Aa3

Davenport

3

02/05/2014

Moody’s uses its own methods and assumptions to estimate the amount of pension debt carried by each government entity.  State government’s Iowa Public Employees Retirement System (IPERS) debt is estimated by Moody’s to be more than twice as much as is reported by the system.  And while the Municipal Fire and Police Retirement System of Iowa (MFPRSI) reports a funded ratio (ratio of assets to liabilities) of 77 percent (with 100 percent being fully funded), Public Financial Management estimates the funded ratio to be only 55 percent – a truly alarming figure -- using Moody’s methods and assumptions.  In this plan, taxpayers are already paying 30 percent on top of salaries for pension contributions, with the associated budget and service impacts, but should probably be paying much more. 

Moody’s understands the crowding out effect that a heavy debt burden can have on city budgets.  Heavy debt means less is available to sustain city services, which can, ultimately, lead to a downward spiral as people leave and the tax base erodes.  They have seen it happen in Detroit and elsewhere, with the result that bondholders and pensioners both lose.  In recent reports, a typical comment from Moody’s would be, “The downgrade is a result of an elevated debt burden, due in part to retirement pensions for full-time firefighters and police officers.  City XYZ has moderately elevated exposure to two statewide cost-sharing pension plans.” 

Besides the additional cost of borrowing, Iowans should be concerned about the rating downgrades because they mean an independent entity is basically waving a red flag.  Will we see it in time?  

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