Sifting Out What’s Important to the Property Tax-Pension Funding Discussion

DeKalb city staff have come up with a proposal to raise the city’s property tax levy by 10%. Daily Chronicle reports that the council gave initial approval on Monday.

Here’s how the city is presenting the recommendation:

City staff want to move away from the current practice of using the general fund to pay for pension obligations property tax revenues don’t cover. Finance Director Cathy Haley explained property taxes currently fully fund police and fire pension obligations and 97 percent of Social Security and Medicare costs. But only 26 percent of the city’s costs for the Illinois Municipal Retirement Fund comes from property taxes, leaving the general fund to cover more than $720,000.

A 10 percent increase would bring in an additional $495,000, fully fund Social Security and phase in fully funding IMRF obligations through property taxes, Haley said.

Council will furthermore consider the recommended hike in a joint meeting with the Financial Advisory Committee tonight.

The most important thing to understand is that the discussion is not just about setting the levy for the upcoming tax year, but about committing to a significant policy change in how the city chooses to fund its pensions — possibly for years to come.

I’ve generated a “Q & A” format for framing some thoughts on these issues.

Q: Where do my city property taxes go now?
A: The city can make property tax levy requests for a variety of reasons, such as corporate purposes and indebtedness. City of DeKalb’s policy has been (with very few exceptions) to collect property taxes exclusively for pension purposes; specifically for police pension, fire pension, I.M.R.F. and Social Security.

Q: Why is I.M.R.F. getting short shrift?
A: It’s not. City of DeKalb is making its pension payments and is doing so via a combination of property taxes and operating funds. Designating a particular pension “covered” or “uncovered” by property taxes is a useful but wholly arbitrary way to organize the information. What you need to know is that total annual pension costs have just about reached $5 million, the property tax levy hasn’t covered the costs in recent years, and city staff don’t want to cover any of these costs with operating funds anymore.*

Q: How’d we get here?
A: The table below illustrates both the upward trend in the city’s annual required contributions (ARCs) to I.M.R.F. as well as the increasing reliance on operating funds to cover the ARC. The question is whether there is a compelling reason to free up operating funds by raising property taxes in DeKalb’s still-stagnant local economy.

[table id=86 /]

Q: What’s wrong with making a shift to one dedicated funding source for pensions?
A: For the sake of openness and simplicity, dealing with one number that matches pension costs to one source of funding is attractive.

However, reducing $500,000 in property tax “shortages” via charging the average DeKalb homeowner $50 more next year would mark only the beginning. These days pension costs often see acceleration, and at any rate tend to rise faster than inflation just as healthcare costs do. Proposals to commit to property tax as the dedicated revenue source need to be accompanied by an honest assessment of the subsequent annual property tax consequences to property owners.

More:

Agenda for Joint City Council and Finance Advisory Committee Meeting
Addition to Joint Meeting Agenda
City Barbs Tag: Pensions

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*You may have seen a statement about the city’s desire to request a property tax levy of just under $7 million. This is because the city makes a levy request on behalf of DeKalb Public Library as well. Levy requests for City of DeKalb pensions plus the library’s came to $6.56 million for tax year 2013 (payable 2014).