Cities all over the country (and the rest of the world) are grappling with pension fund problems. Every year, pension obligations increase, and city officials have to come up with ways to meet those obligations.
One of the most common ways cities fund pension payments is by increasing property taxes. In fact, over the last decade, citizens in many cities have seen their property taxes go up every year. And judging by the state of many pension funds in many parts of the country, it looks like property tax hikes of varying degrees will remain the norm for many for the foreseeable future.
Property tax rates and pension funds in Illinois
In Illinois, a growing list of cities and municipalities have been seeing rising property taxes, with officials struggling to pay for pensions. In the city of Quincy, for instance, homeowners will see a higher property tax rate in 2019. The increase is geared towards meeting the surging cost of pension obligations
According to Illinois Policy, Quincy officials agreed to up the property tax by 5.25% to fund police and fire pensions. The city was originally supposed to impose a 13.8% tax increase for this fiscal year but managed to lower the rate by transferring $600,000 in surplus revenue into the public safety pension fund.
Property tax rates and pension funds in Chicago
While all but one mayoral candidate in Chicago has voiced support for property tax hikes, Bloomberg reports that an increase is inevitable. The surge in payments implemented by Mayor Rahm Emanuel to cover mandatory pension payments will continue until after he leaves office.
In addition, mayoral candidate Paul Vallas is proposing collecting $250 million more in property taxes in the next five years. The rate will be capped at either 5% or the inflation rate, whichever is lower.
Is it fair to taxpayers?
Increasing property taxes year after year is hard enough on homeowners and business owners. But when the unfunded liability is still increasing, it becomes doubly unfair. In the town of Normal in Illinois, for instance, there are still deficits in the police and fire pension funds. This despite years of increasing the funding for the pensions through property tax hikes.
One suggested solution for the town and others struggling with the same problem is setting up retirement plans similar to a 401(k) for new employees. With residents bracing themselves for higher taxes in the years to come, this type of property tax reform is badly needed.
In 2016, financial writer John Mauldin warned against using property taxes to pay for pension promises in an article in Forbes. According to the author, higher taxes reduce property values, which eventually drives away homebuyers and even homeowners.
When property taxes rise, homeowners can opt to sell their property at a lower price and move elsewhere instead of staying and paying the higher taxes. The writer warns that while governments can try to squeeze out pension funding from taxpayers, those taxpayers could also simply leave. What happened in Detroit, he said, could also happen in Illinois and many other places in the US.
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