WILL PUBLIC PENSION DEBT BECOME THE NEXT TAX PROBLEM FOR ECONOMIC DEVELOPERS?

According to an April 28-29, 2012 Wall Street Journal article, unfunded public pension liabilities are becoming a concern of business – fear of political decisions that may place added burden upon business in the form of higher business taxes.

This is especially important in the Midwest where Illinois is already grappling with increased business taxation.

Laffer & Moore in their 5th Edition of Rich States – Poor States Economic Competitive Index also note government unfunded obligations as one of many governmental policy issues that will soon contribute to both personal and business location decision making.

Based on the theory that people and business “vote with their feet” due to high taxes, the potential for increased taxation will undoubtedly add another location criterion for economic developers to address.

Economic developers know uncertainty is a problem in their efforts to convenience businesses to locate or expand in their community; especially when it could mean paying higher taxes.

While not on the radar screen yet, this issue will become more important as news media messages inform businesses, politian’s and the public of sizeable unfunded obligations and options to counter the financial problems they create.

The PEW Foundation’s Center for the States estimates there is a $1 trillion gap between “what the states set aside for funding and the actual price tag for benefits promised”.

In the Midwest this accounts to $12.8 million in Illinois, $11.5 million in Ohio, $9.9 million in Michigan and $6.5 million in Indiana.  The budgetary impact ranges between $1.2 to $3.7 million annually or $0.13 to $0.29 per capita.  Michigan leads the Midwest states, with Illinois having the higest funding requirement.

What this means to the economic developer is that a new topic of professional conversation is being thrust upon us.

How we prepare responses will be important.

Let me share some thoughts –

1. Unfunded public pension obligations will become a media “buzz”.

There is no doubt the pending $1 trillion unfunded obligation of state employee retirement benefits will cause a political upheaval.  How these obligations will be funded will dominate public government funding discussion.  The allocation of this burden between taxpayers and retirees will be difficult.  This difficulty will result in a media “feeding frenzy” and draw attention to unfunded differences among states. 

Expect “media buzz” to bring the problem to attention of taxpayers and business owners making it an economic development matter.

2.  Unfunded pension obligations will increase business uncertainty.

Taxation makes a difference in business location decision making. Uncertainty in the amount and timing of any increase in taxation is the antithesis of good business or household budget planning.  This uncertainty will be reflected in slower or alternative location decision making by individuals and businesses alike.

Expect potential tax increase uncertainty to be a matter to be addresses during every business expansion or location discussion.

3.  Government actions, or inaction, will increase, or decrease, business uncertainty.

Government response to uncertainty will be important.  Action, or inaction, will drive the question and answers sought by existing and new businesses.

Expect economic developers to become a major source of information and serve as a spokesperson on the subject of potential business impact.

4.  Tax uncertainty will draw attention on total tax burden of business.

While taxes are ranked eleventh in corporate location importance, none the less, taxes do matter.  While Laffer and Moore display convincing data supporting the notion that people and businesses “vote with their feet” and locate in states having less tax burden.  Imposing an additional increased tax burden can contribute to out-migration, or slower growth of population and businesses.

Expect the possibility of increased tax burden upon business due to unfunded pension obligations to raise the subject of business taxation to a higher position in business decision making.

5.  Tax abatement will become of greater important in economic development.

Tax abatements have historically been the counter attack to equalize (or incent) tax burden in competition for new business investment.  Additional tax burden, imposed by unfunded obligations will heighten the demand and need for incentives offered by economic development practitioners.

Expect economic developers to lobby the states for greater use of abatements to offset current higher tax burdens and possible increased burdens imposed by unfunded obligations to continue successful recruitment of business investments and location of new businesses, dressed in the overall goal of community job creation.

6.  Economic developers will be asked about unfunded obligation impact upon business.

Economic development professional are the “go to folks” with the answers.  They are required to have prepared information about almost every topic of concern raised by the existing business or new business seeking to make an investment decision in their community.  Economic developers must be able to speak about everything from local wage rates, spousal job opportunities plus educational, social and religious community opportunities.  Now added to the needed information will be unfunded pension obligations and probable business impact.

Expect new knowledge to be needed for top job performance providing information to address the positive and negative impact of unfunded obligations upon the competitive position of the state in relation to others.

7.  Expect state differences to become a topic of negotiations.

New business location is a competitive decision; how our site compares with others using a score card, most likely unknown to the economic developer.

Where typical location criteria sometimes 100 or more, in number, requires economic developers to prepare and showcase their community’s compliance, a new criterion is now added, the potential impact of unfunded obligations.

Expect to be quizzed on the differences between your state and others – the current obligation, means to fund the obligation, and actions to remedy potential for future deficits.

8.  Inaction by state government will be viewed as anti-business.

Can a state be characterized as “business unfriendly”…..the many varied state economic competitive indices seem to indicate so.  The reality is, where a state is determined to rank low on any competitive score card, it’s viewed as business unfriendly.

Changing competitive ranking is not an easy challenge, typically requiring legislative action sometimes requiring several years’ efforts to achieve.

Sweeping unfunded obligations “under the rug” won’t work this time …somehow pension debt must be liquidated.  As with any government action, it sends a strong message; with inaction being viewed, in this case, as being anti-business due to the uncertainty it communicates.

Expect inaction and delay as governments refuse to address the issue resulting in state to state economic competitiveness rankings to reflect which states have greater probability of imposing greater business impact (higher taxes) and being noted as less business friendly.

9.  Expect pension value reduction to elicit union backlash.

Pension reform is inseparable with unionism.  Changes to existing pension and future pension benefits will be a “hard fought” battle between union and government leaders.  Union contact litigation will follow along as governmental leaders seek to balance government revenues with demands seeking greater worker pension contributions.

Expect union states vs. right-to-work state differences to become a major union vs. right-to-work tax discussion point as solutions asking for greater union concessions and higher business taxes are offered as solutions to unfunded obligations.

10.  Union backlash will favor states having right-to-work preference.

One of the most pressing issues in the Midwest is union vs. right-to-work state economic advantages, with pension benefits being a scared bargaining matter.

Interestingly, right-to-work has become a selling point for economic development advantage.

This presumed advantage will continue to be emphasized with great “fervor” with right-to-work being a solution for future pension reform.

Expect right-to-work to be discussed and treated as a means to temper union demanded direction of the worker pension system in favor of business supported individual employee directed pension programs.

End note –

Times they are a changing so the song lyrics say…so too are the times changing for the economic development profession.

A new business  location criteria is being forced upon the practice of community economic development, one that will drive considerable discussion as state legislatures battle tough entrenched positions on who and how much of the unfunded obligation are to be levied upon the worker and tax payer.

The outcome undoubtedly will effect where both people and business choose to locate.

Smart leadership today to remedy the problem will shape state economic competitiveness for the future.

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