Session Odds and Ends

A look at the findings of a couple of recent lower-profile state government reports on tax and fiscal matters of relevance to taxpayers.

The Governor’s budget, federal Covid relief, tax conformity, and the imminent February forecast are dominating the discussion, but hearings on a few other reports have caught our attention over the last few weeks.    Here’s a brief look at a couple lower-profile reports on tax and fiscal matters of relevance to taxpayers.

The 2021 Homestead Property Tax Burden, a.k.a “Voss,” Report (for taxes payable 2019)  -- For folks like us, the one-time appropriation of $200,000 in FY 2009 to reestablish the Voss Report is some of the best money the state has ever spent.  That’s because it fills an absolutely crucial information void regarding the tax taxpayers love to hate (and therefore the tax lawmakers love to flog).   It matches homeowner property tax burdens with their household income to track how big a claim on income property taxes really represent.  To protect taxpayers’ privacy, the report reports aggregates results at 20 regional levels based on distributions from median values, so as the expression goes, “your mileage may vary.”   Nevertheless, it’s by far the best information source available on what property tax “ability to pay” really looks like around the state.

The report for property taxes payable 2019 is now available.  (As with most all reports of this nature, data must be collected and verified and inaccurate records corrected or eliminated.  This process of “data cleaning” results in a time lag of around two years before the data is available for use.)   A comparison of 2019 to the previous year’s results finds a slight uptick in the tax’s claim on homeowner income in most areas of the state.  Net tax (after refunds) for the median metro homestead was $2,871, or 75.8% higher than the median Greater Minnesota homestead net tax ($1,603).   Median homestead income in the metro was $100,291, or 34% higher than the median Greater Minnesota homestead income ($74,661).   Median net burdens after refunds range from 1.7% to 3.2% of homestead income.

Longer-term trend information offers the most interesting perspective.  For example, the median tax to income ratio is still lower in nearly every area of the state than it was 12 years ago.   Even as recently as payable 2015, following a period of essentially stagnant local aids, not only was homestead income growth substantially outpacing property tax growth, in several areas of the state the median homestead tax burden had declined over the previous eight years.  But in the last four years of data, the median net property tax growth rate has jumped to around two times the average annual growth rate of homestead income.   As the song goes, there's something happening here, but what it is ain't exactly clear.   Regardless, it’s likely a contributing factor for the burst of interest in revisiting local aid distribution designs and local sales tax authority.

Pension-related reports – The FY 2020 valuation reports are in, and the findings show state plans collectively have largely treaded water over the last fiscal year.  Due to a Covid-induced swoon last spring, Minnesota public plans missed their return target realizing 4.2% for the year.    However, the impact of that investment shortfall, was offset by other factors such as lower than anticipated salary increases and some favorable assumption changes (e.g. lowering price inflation expectations and assumed salary growth rates going forward).   The result is Minnesota’s aggregate unfunded pension liabilities (including St. Paul Teachers) remains right around $17 billion on an actuarial basis based on a discount rate of 7.5% -- slightly higher on a market value of assets basis.

Good news lies in the market’s performance so far in FY 21.   Thanks to an environment of nearly free money augmented by both the TCJA provisions plus COVID stimulus policy that in the words of one investment guru “was like dropping a gasoline truck onto a forest fire,” the SBI is reporting a whopping 22% fiscal year to date return.  

Such is the current context for the digestion of a special report prepared by the Legislative Commission on Pensions and Retirement on annual pension cost of living adjustments or COLAs.  The report was mandated as part of the sustainability reforms of 2018 to examine whether current governing statutes are consistent with the purpose of postretirement adjustments and explore alternative methodologies for determining postretirement adjustments.  

Even small annual COLA adjustments have a profound compounding impact on plan costs. The report offers a comprehensive look at the history of these adjustments, the relationship between these adjustments and senior expenditures, how well these adjustments have delivered on inflation protection in the past, and potential variations on COLA design features found in other states.   Ideally the pension actuaries would now be hired to follow up on this report and undertake some sensitivity analysis of possible reforms to see what kind of cost savings and sustainability gains could be achieved.   However, we don’t expect that to happen anytime soon with the investment environment communicating such a powerful “if it ain’t broke, don’t fix it” vibe.

But it’s important to reflect on the fact that even though we are in year twelve of what might be described as one of most favorable environments for capital markets imaginable and our ten year return has been 9.7%, the trend line of our funded ratios in aggregate continue to look like the topography of Kansas.     It brings to mind George Orwell’s cautionary observation, “whoever is winning at the moment will always seem to be invincible.”