Public pensions depend on full funding in order to succeed. More than anything else, public pension plans need to receive their full contributions each and every year. Public employees contribute to their pensions with every paycheck and they never miss a payment. State and local governments, on the other hand, do sometimes skip, defer, or otherwise miss payments they should be making to public pension funds. One reason that governments sometimes miss payments is because of artificial restrictions on their ability to collect revenue. When states are restricted from collecting the appropriate amount of revenue, it can be difficult for them to fully fund public policy priorities.
One prime example of an artificial restriction on revenue is a so-called Taxpayer Bill of Rights or TABOR. This is a constitutional limitation on the growth of state revenue or spending. It does this by limiting the growth to the sum of the annual inflation rate and the annual percentage change in the state’s population. So, for example, if the general inflation rate is 2 percent and the state’s population grows by 1 percent, state revenue available for expenditures can increase by 3 percent. Any revenue beyond that must be refunded to taxpayers.
Only one state has a TABOR law in effect: Colorado. These laws have been proposed in thirty states. In five -Florida, Maine, Nebraska, Oregon, and Washington- TABOR proposals made it onto the ballot, but were rejected by voters.
The problem with TABOR is that it harms the state’s ability to respond to economic downturns and it limits the state’s ability to adequately fund public priorities. By imposing unnecessary limits on the state’s revenues, it restricts policymakers from being able to fund public needs from road repairs to public schools to public pensions. Once a state government begins falling behind on pension contributions, it becomes more difficult for them to catch up again in the future. States like Illinois and New Jersey are in the situations they are in with public pensions because politicians of both parties have skipped contributions, often for decades. Other states, where politicians do regularly make their contributions, are not in the same situation.
TABOR is not the only kind of unnecessary and artificial restriction on a state or municipal government’s ability to collect revenue. In Houston, TX, a property tax cap severely limits the city’s ability to collect revenue and has contributed to underfunding in the municipal pension plans. In Oklahoma, the state requires a three-fourths supermajority vote to raise revenue, but only a simple majority to cut taxes. Following significant income tax cuts in 2011, Oklahoma has experienced multiple revenue failures and cuts to essential state services. In Kansas, the state passed massive tax cuts under former Governor Sam Brownback. Following the loss of revenue, the state skipped or deferred payments to its public pensions for years. The state fully funded its contribution in 2018 for the first time in years after the legislature voted to repeal the tax cuts in 2017.
Policymakers should have all the tools they need to respond to public needs and concerns. Hiring qualified public employees to perform essential jobs is important. Offering a pension is a proven way to recruit and retain quality public employees. Policymakers need to be able to fund the pensions they are offering these employees and having appropriate revenues is part of that. Restrictions like TABOR prevent policymakers from doing their jobs to the best of their abilities. Cities and states with restrictions like these should consider whether they are truly helping to advance the public good.