How could Allegheny Co. tackle its $1.5B pension crisis? 4 tax options explained

Officials weigh possible sales, property, payroll and earned-income taxes.

By MEGAN TROTTER
TribLive

Allegheny County’s pension crisis comes with a daunting price tag – roughly $1.5 billion in unfunded liabilities and a need for as much as $100 million in additional funding every year for the next two decades.

Property owners could shoulder the cost through higher real estate taxes. Workers could pay through a new earned-income tax. Private employers could face a payroll tax and shoppers — including people who live outside the county — could pay more on taxable purchases.

Allegheny County Treasurer Erica Rocchi Brusselars, who is president of the county’s retirement board, convened a working group that examined more than 20 potential revenue sources, ranging from taxes on sugary drinks and rideshares to parking fees and payments from tax-exempt nonprofits.

The working group’s report, prepared by public policy and finance consultant Sarah Emmans of SME Consulting, was released in July. It showed that only sales, property, payroll and earned-income taxes would have tax bases large enough to generate more than $100 million annually.

So how would each of those four options work, and what would they mean for taxpayers?

Introducing a countywide sales tax

The Retirement Board’s working group report showed a sales tax could provide a relatively stable source of funding.

This option would increase the county’s sales tax and use the additional revenue to fund the pension. A 0.4% sales tax is estimated to raise about $109 million and revenue is projected to grow by about 3% over time, the report said.

For example, on a $100 taxable purchase, the additional tax would be 40 cents.

Other municipalities have solved their pension problems this way.

Philadelphia levies a 2% local sales tax on goods and services, in addition to Pennsylvania’s 6% state sales tax. The 2% local portion is split evenly between the School District of Philadelphia and the City’s Pension Fund, which was required under state law.

In 1994, Allegheny County instituted a 1% sales tax. Half goes to the Regional Asset District, which funds civic and cultural organizations, and half goes to local government, including the county.

Introducing a new county sales tax would require new state legislation — as the RAD tax did — and take time.

“If we were to proceed with something that needed a tax or a revenue stream that needed the state’s enablement, then the state would also be pricing it out through their policy staff there. So I think these numbers are intended to be a starting point for discussions. I think they’re reasonably accurate for that purpose,” Brusselars said. “I could imagine some fine-tuning as things got closer.”

A drawback is that sales taxes may place a greater burden on lower-income households, since they typically spend larger portions of their incomes on taxable purchases, the report said.

However, some of the tax would be paid by visitors in the county, which the report said would help spread the cost beyond local residents.

Increased property taxes

According to the report, raising county property taxes and dedicating the proceeds to pensions could generate an estimated $130 million with a 1.25 millage increase.

Unlike the sales tax, however, the property-tax base would have slow and constrained growth, which makes it less attractive as a long-term revenue source. Using property tax to support the pension could also leave the county’s broader funding problem unresolved over the long term, the report said.

The county last year raised property taxes by 36% (a 1.7 millage increase), which generated an additional $132 million in revenue.

In June, Allegheny County acting Controller Amy Weise Clements released a warning that the county faced “considerable fiscal concerns” despite the recent property tax increase.

The retirement system’s deficit grows with each year and the working group estimated that the pension system could become insolvent by 2043 without changes.

One major advantage of this option is its feasibility, because raising property taxes does not require state legislation.

However, Allegheny County Executive Sara Innamorato has repeatedly stated she is not seeking a property tax increase in this year’s budget.

Allegheny County spokeswoman Abigail Gardner maintained this stance on Wednesday.

Gardner said the Executive’s Office does not currently have a preference or alternative funding source in mind to fix the fund. She also said that much of the conversation will require action from the state.

Create a payroll tax on employers

Another option would be for the county to create a new countywide tax on the taxable payroll of private employers.

The report estimates that at 0.2%, the tax could generate $101 million annually, with about 2% annual growth.

While the report says payroll tax would be a shared solution to a shared problem, it also points out “generational unfairness” because today’s private employers would be paying for public employee retiree benefits that are already earned.

The report also warned that implementing a payroll tax could negatively influence hiring or business location decisions.

Similar to a sales tax, a countywide payroll tax would also need approval by the state.

A new earned income tax

A countywide earned-income tax could also provide a dedicated source of revenue for pension funding.

This option would create a new 0.25% countywide tax on taxable wages earned by employees working in Allegheny County. It is estimated to raise about $109 million per year, with revenue growing about 2% annually, the report said.

Local municipalities already use earned-income taxes, but Allegheny County would need authorization from the state to create this tax.

An earned income tax could also be viewed as unfair — like the payroll tax option — because current workers would be paying for retiree benefits that are already earned.

At a 0.25% rate, someone earning $50,000 in taxable income would pay $125 per year. Someone earning $100,000 would pay $250, while someone earning $200,000 would pay $500.

No set solution selected

Earlier this month, Armstrong County Common Pleas Senior Judge Kenneth Valasek ruled the county was legally required to keep its pension system actuarially sound. (Allegheny County judges are recused from cases in which they have an interest, such as the pension system that serves them, and outside judges are brought in.)

Valasek gave county and state officials 12 months to come up with a solution, but finding that money could affect nearly everyone who lives, works or spends money in the county.

Conversations are ongoing among county delegation, unions, county council and other groups about the best path forward. Discussions have occurred weekly since the report was released, but officials have not yet settled on a single solution or a combination of revenue sources.

That was still the case Wednesday, when Brusselars said there was still no set solution for addressing the pension shortfall. The discussions are expected to take time as the county weighs the available options and work toward a common approach before seeking any necessary action from lawmakers in Harrisburg.

“I don’t have a clear expectation at this point as to if it’ll be one revenue or a combination,” Brusselars said.