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March 7, 2019 9:22am

GLI Urges Balanged Approach on Louisville’s Budget Shortfall

After several years of forward progress, our city finds itself experiencing a stress test, the likes of which we haven’t seen since the Great Recession — $65 million in additional pension expense phased in over the next four years. It’s an unenviable situation, to say the least.

 

But this is not an insurmountable crisis solvable only by draconian budget cuts or crippling tax hikes. A quick and large tax increase, in particular, would set a poor precedent. Will we simply jump to raise the insurance premium tax, or some other tax, every time dark clouds appear on the horizon? That would not be a sustainable strategy and reflects a lack of consideration of viable alternatives to more taxation.

 

Now is a time for us to hear each other out and approach this problem methodically and strategically by fully considering all possible solutions.

 

The city’s pension costs are going up because the actuarial assumptions previously used to determine how much municipalities across the state must contribute to their employee pension funds were unrealistically high. While the new assumptions are painful, they are finally conservative enough to assure that the employees who earned their pensions receive them.

 

Next, we should reject the notion that Louisville is left with only two extreme options to pay for pensions. There is a lot of room in the middle. Over the past two weeks, GLI and its members have actively weighed in on this issue, researched it and discussed it at length. We have concluded that a truly sustainable and equitable solution is only possible with a combination of sound fiscal management practices, budget cuts and, only if absolutely necessary, a modest tax rate increase.

 

Consider, for example, that if Metro Government just held its spending growth to the inflation rate of the past five years, and general fund revenues continue to grow at the higher-than-inflation rate they have over the last five years, we would find a sizable chunk of the $65 million we need right there. If reduced spending growth is paired with reasonable budget cuts and cost containment efforts such as a thorough reexamination of city contracts, we might even get close to avoiding the need for a tax increase altogether.

 

If a tax increase proves absolutely necessary — and we urge Metro Council to make that a big IF — it should be as modest as possible.  This means raising taxes only if absolutely necessary and only enough to compensate for what regular growth rates and budget cuts can’t cover; spreading the tax out as equally as possible; a  commitment to reducing the tax if pension costs are less than anticipated or if budget cuts or other revenue options become available; earmarking all new revenues solely for the incremental pension costs; and requiring an annual report to update residents and businesses on the impact of the increase on the city’s budget, pension obligations and economy.

 

This is especially important for a tax like the insurance premium tax, which is already an exceptionally terrible tax. For starters, it is incredibly difficult for insurers to administer and comply with. Just take a few minutes and read through the Kentucky Department of Insurance’s many guides to the tax and try to keep your head from spinning. Second, the tax is sneaky. Even though state law requires insurers to disclose the collection of the tax to customers, few are actually aware of it. Third, it’s very unique amongst peer states and makes Kentucky an outlier, which inherently harms our business competitiveness. Finally, it raises the costs of an already costly expense for consumers and businesses alike. Simply put, increasing the insurance premium tax makes a bad tax worse.

 

GLI acknowledges that Louisville Metro Government, which has been recognized as a lean and fiscally responsible operation, has few options available to deal with the new pension costs and other priorities, and all their options are unpopular. This is one reason why we continue to advocate for giving local governments more and better revenue options, including a local option sales tax. We also recognize the paradox between holding the line on taxes and the desire to invest in our civic infrastructure to keep up with peer cities; everyone wants both and that makes the decisions to be taken by local elected officials particularly difficult.

 

The fact of the matter is that the $65 million in “new” pension costs were years in the making and will be with us for a generation or more to come. To adapt to this new fiscal reality, we must take a sophisticated approach centered on sound budget management practices, reductions to spending growth, and only as necessary, limited tax increases. In confronting this challenge, we must protect the economic progress we have made and continue charting a course for future growth.