As hopeful signs begin to emerge in the economy, Iowa’s local governments are just now experiencing the brunt of the recession. Lower growth and declines in local property valuation, the chief source of local government revenue, are stressing local budgets. Tax rate increases are being discussed in Des Moines, Clive and Urbandale. Discussion of further reductions in commercial property valuation at the state level compounds the anxiety of local officials.
Should we worry? Could services decline? Could taxes increase? The answer to all three questions is “yes.” But the economy or contemplated state policy changes aren’t necessarily to blame. The fact is, state and local government budgets in Iowa have been and will continue to be stressed, even when the economy rebounds.
Today’s economic climate exposes a systemic problem: Iowa laws place too much public sector spending on autopilot. Public employers have very little control over the near-automatic increases in personnel-related costs, which comprise as much as 80 percent of local budgets, and grow annually at unsustainable rates. Why?
Under Iowa law, a public employer and its unions negotiate changes in pay and health insurance benefits. In the event they cannot reach agreement, a neutral arbitrator chooses one position or the other. There is no splitting the difference; the arbitrator chooses one or the other. Arbitration is a risky proposition for the employer because unlike private employers who might go broke, public employers are viewed as always able to pay for the increase by raising taxes. This places our cities and school districts in a difficult bargaining position.
This system has driven up the cost of public employees. Today, the combined salary and benefits cost per full-time equivalent employee in our largest central Iowa communities has risen to between $95,000 and $102,000. Often the annual increases take up more than annual revenue growth can cover.
Des Moines is a good example. Over the past decade, even as local revenue growth has exceeded the combined growth in inflation and population, it still has not been enough to pay for the growth in salaries, health insurance and pensions. To cover these “built-in increases,” the city cut $24 million from its operating budget over the past five years and reduced 275 positions over the past ten years. It has privatized mowing, custodial and animal control services. Now, the economic downturn makes what has always been difficult, seem almost impossible.
State pension laws are another huge cost driver. Police and fire employees in the state’s largest cities belong to the “411 Retirement Plan.” Thirty-year employees are eligible to retire at age 55 with 82 percent of their salary for life. The employer – that is, the taxpayer – pays a minimum of 17 percent on top of police and fire salaries to finance the plan. What’s more, during a market downturn in which the trust funds have lost significant value, Iowa law requires the public employer to pick up 100 percent of any contribution increases necessary to keep the plan solvent.
Over the past few years, the employer contribution has grown to 26 percent with further increases to come. Des Moines, for example, had to find an additional $2 million this year just to cover its increase in police and fire pension costs. For perspective, consider that closing every Des Moines library one day per week for the entire year saves less than $500,000, or about one quarter of that pension increase. This is simply unsustainable.
Local governments have been creative in the pursuit of economies, and are far from exhausting their options. Each community is at a different point in that process. The Taxpayers Association of Central Iowa is helping all become more aggressive in finding ways to control costs through collaboration and use of alternative staffing models. Nevertheless, our current system still makes it too easy to fall into a victim mentality and default to a tax increase without really looking at all of the options. This needs to change, too. Taxpayers, many of whom are struggling with job loss or living on fixed incomes, depend on it.
While public employees and unions are beneficiaries of the current system, they didn’t create it. It’s not constructive or fair to criticize them. But as citizens and taxpayers, we do need to understand the system, examine its reasonableness, and determine if this how we want our government to work. We should not be afraid to talk about it – or change it.
Iowa needs to reduce its commercial property taxes to make our state competitive and drive economic growth. Let’s make sure we give our public employers the tools to control spending while we’re at it. It’s time to re-examine the laws that really drive drive government spending and taxes.