Part III: Transportation Funding

Here is our third installment of the five-part legislative update series. Today we will focus on local transportation funding.

Part III: Transportation Funding

With the continued increase in costs associated with construction and maintenance of transportation infrastructure the necessity for local government to be adequately positioned to address the growing transportation needs of their respective communities is equally growing. In 2008, the local government portion of the motor fuel tax covered roughly 50% of the cost of highway construction and maintenance, and with the reduction in motor fuel tax receipts and the growing demand for infrastructure, we anticipate that gap to widen in 2009.

With that dynamic in mind, we are also cognizant that the State of Utah is facing an unprecedented economic downturn that will inevitably limit the state’s ability to enhance the current revenue sharing arrangement that exists for the current motor fuel tax. As both the state and local government grapple with shortfalls in their respective general funds our ability to continue to subsidize transportation construction and maintenance with general fund revenues is diminishing significantly. While we all recognize that with a downturn in the economy it is difficult to look at revenue enhancements as an acceptable solution to the problem, we are anxious that if we do not get in front of this issue the cost to retrofit and repair dilapidated roads when the economy recovers will cost the taxpayers significantly more money than staying on top of the issue from the outset.

We would like to explore the opportunity of pursuing authorizing legislation which would allow counties, with the endorsement of the cities within the given county, to pursue a local option user fee revenue source to address critical transportation needs within the county. There are several facets to the concept that are outlined below:

1. Pursue legislation that would allow the county to adopt an additional local/county option user fee (motor fuel tax/sales tax) to address transportation infrastructure issues within the county.


2. Require that a majority of cities within the county must affirmatively request the county to examine the local option authority prior to implementation by the county.


3. Require that a portion of all proceeds be spent on projects of regional significance within the county where the funds are generated.


4. Require that the remaining portion of funds generated from the user fee be split between the various cities and the authorizing county based upon a statutory formula similar to the current local B&C formula (weighted lane mile).


5. All funds generated within the county stay in the county where the funds are generated.
   

We would like to work closely with the legislature to examine this or other possible tools that may be pursued by local governments to address the important issue.

Part II: Public Sector Retirement Issue

As we continue our five part legislative update, here is part II, which deals with the public sector retirement issues. We will be highlighting transportation funding in part III.

Part II: Public Sector Retirement Issue

As the economic downturn continues to take its toll on general fund of state and local budgets, one of the more subtle, but equally significant effects of the downturn is being felt in public sector retirement programs. The Utah State Retirement System (URS) has seen fund losses for 2008-09 of approximately $5 Billion or 24% of the total URS portfolio value.

For the general health of the State's budget and in order to maintain an actuarially sound retirement system, we are anticipating steady increases in the retirement contribution rates that will be required of public employers to maintain the current benefit package for public employees. At this point we can only speculate about future increases in state and local government retirement funding obligations, but most experts believe we will witness increases for at least the next 2-4 years.

Because the budget impact could be quite large, many state and local government lawmakers have expressed concern about the funding liability that the current system may require. In light of this concern, the Utah League of Cities and Towns, Utah Association of Counties and the Utah Association of Special Districts have been meeting with members of local government employee groups, peace officer groups, firefighter associations, city and county management associations, local government finance officers, and the staff of the URS to discuss possible alternations to the system. We have invited the chairs of the Retirement and Independent Entities interim committee to participate in our effort as well.Local governments see immense value in maintaining a defined benefit system but also recognize that changes are necessary to ensure that the current system does not become an overwhelming liability and the budget priorities of the state and local governments can be fully realized. We have established a set of guiding principles and have begun discussing various alternatives to the current system.

Thus far, two alternatives have come to the forefront of the discussion. They are outlined below:

• Alternative 1: Defined Benefit with Employee Contributions
  This alternative would not reduce any pension benefit for any retirement sub-system, and would allow for the continuation of a defined benefit system for future public sector employees. It would allow the state and local government employers to cap the employer contribution rate at the 2009-2010 rate (11.66% Local, 14.22% State, and 26-30% Public Safety), and require that participating employees contribute the remaining portion of the required, actuarially adjusted contribution rate for the 2010-2011 year (1.7% Local, 2.1% State and 1.8%-3.7% Public Safety) and all future years, where the rate is yet to be determined. This option would allow for all employee contributions to be exempt from vesting requirements, thus increasing employee portability from URS. With the establishment of the employer contribution rate, it is anticipated that the employee contribution amount will float from year to year based on actuarial assumptions that will be made by the URS.
  
  This option would limit the amount of employee contribution to not allow an increase of over 2.5% year over year (smoothing), thus limiting employee exposure. This option would also require that the employer make a 401K or 457 payments to the employee if the actuarial assumptions require less contribution than what has been established as the capped employer rate, which would be based on the 2009- 2010 rate (11.66% Local, 14.22% State, and 26-30% Public Safety) . This option would not preclude the employer from “picking up” the employee’s required contribution as a part of an employee compensation package.
  
  Fiscal Implication: This option would eliminate the need for additional state and local government appropriations for the 2010-11 fiscal year, but would require the employee to either take a compensation reduction commensurate to the employee contribution match or payment of the additional contribution could be negotiated with the employer as a part of the municipal or state compensation arrangement.
  
  
• Alternative 2: Prospective Defined Contribution Option
  This alternative would guarantee existing public employees a defined benefit system as currently constituted and not require any additional employee participation in the defined benefit system. This option would, however, not allow new employees employed after 2010 to participate in the defined benefit system. Instead, a defined contribution system would be offered to all “new hires”. The defined contribution amount would be negotiated by the employer and employee at the time of employment. It would also require that a portion of what otherwise would have been paid into a defined benefit system under the current system be set aside by the employer for all “new hires” to underwrite the cost associated with phasing out of the current defined benefit system for existing employees.
  
  In essence, this proposal looks at moving toward a Defined Contribution plan for all new employees while guaranteeing the current benefit package for all existing employees.
  
  The ULCT is working closely with legislative leadership and members of the Legislative Retirement Committee to evaluate these options and others that may be contemplated. This process is still very fluid, and we will continue to provide periodic updates as they become available. The next legislative meeting on this issue is scheduled for November 12, 2009.

Legislative Update: A Five-Part Series

As we prep for another legislative session, we thought it would be helpful to highlight some key issues we have been working on over the interim period. To avoid an overly-long posting, we thought we would break the issues into five separate posts -- I know you can hardly wait to read them all. Today we will focus on our first issue -- General tax policy and budget review:

PART I: General Tax Policy and Budget Review

Well, there isn't much to say about the state budget, other than it is not looking any better as we begin to approach the 2010 legislative session. We are currently staring an $850 Million dollar shortfall in face and don’t anticipate any improvements prior to the session -- in fact, many are bracing for an even wider state funding gap. This year there will be no federal stimulus funds to back fill cuts to critical programs and, as of now, there is little or no momentum to look at revenue enhancements. State appropriations committees are beginning discussions on how to cut roughly 15% from each department of the state, and some of those cuts will obviously have a trickle down effect on local government programs that utilize state funding.

We are keeping a close eye on most of these discussions and will continue to keep you updated as committees make recommendations on budget cuts. In addition to budget cuts we do anticipate discussions to begin on revenue enhancements at some point. The likely candidates at this point include the tobacco tax, alcohol tax and possible reinstatement of sales tax on food, but as mentioned earlier those discussions are still appearing fairly premature. We will keep you up to date as they proceed.

On another tax note, the Revenue and Taxation Committee of the legislature is also examining a few issues of general interest. There will be a recodification effort on the code sections dealing with transportation taxes. We have been heavily involved in this effort to ensure that the recodification did not inadvertently harm current local option transportation tax authorities, and those discussions have been very successful. The effort will simply look at “cleaning up” the code with no real substantive changes. In addition, there has been some discussion regarding statewide equalization of the basic property tax levy for education. While the ULCT has not engaged on this issue due to conflicting points of view among the various cities, we did want to make you aware that the discussion is occurring, and if it is of interest you should make sure you are contacting your legislator to articulate your opinion on the equalization effort.

As always there are likely to be additional tax bills of note, but this at least captures some of the very general concepts that are being discussed.

Look for Part II to this legislative update tomorrow, where we will focus on the public sector retirement issue.