Expanded wage tax aiding city pension fund faster than expected

City pension fund expanding faster than expected

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The booming stock market and an unpopular expanded payroll tax enacted by Washington officials exactly five years ago Wednesday are helping to pad the city’s previously ailing workers’ pension fund.


The city’s aggregate pension fund is performing so well that Mayor Brenda Davis hopes the city can permanently remove the additional wage tax nearly a decade ahead of schedule.


State Act 205 allowed the city to levy an additional 0.635 percent wage tax on every person working in Washington to fund its pension program for police officers, firefighters and administrative workers. City Council added a 0.15 percent earned income tax Dec. 18, 2008, before increasing it to the current rate of 0.635 percent in 2010.


The tax was unpopular with both residents and nonresidents working in the city. That’s why Davis hopes the city will be able to remove it in 2019, about eight years earlier than expected.


“I think, for the most part, a lot of people would like to make the decisions on their own of what to do with their money,” Davis said.


However, she added Act 205 is needed because large untaxed entities, such as Washington & Jefferson College and Washington Hospital, have such a large footprint but are exempt from paying property taxes because of their nonprofit status.


When the tax was enacted, the city’s pension account was only 63 percent funded. Earlier this year, the account was 70 percent funded, allowing the city pension status to be upgraded from moderately to minimally distressed. Davis said the account has seen a steady 16 percent growth from its investments, although she expects the city to consider more diversified funds that are deemed less risky.


“We’ve been very fortunate that the market has done really well over the past few years, and that shows in the annual percentage return that we get,” Davis said.


Frank Burnette, the Morrison Fiduciary adviser consulting with the city on its account, said the pension fund’s success has been an equal result of the new tax and stock market’s rise.


“All you can do is broadly diversify and invest for a long-term rate of return, understanding that in any given quarter or year you could have a lower-than-average return,” Burnette said. “I don’t think we’re overly concerned that things are going to fall apart.”


According to 2014 budget figures, the city is scheduled to make $958,859 in contributions to the police pension next year and about $1.017 million to the firefighters’ pension fund. That equates to a 22 percent increase over 2013 for the police fund, but just a 3.7 percent increase for the firefighters’ fund.


Overall, the city’s total contribution to the pension fund has increased from $800,000 in 2008 to $4.7 million in 2012.


Davis said the city might find savings on the expenditure side when the police, public works and clerical staff renegotiate their contracts next year. The union contract for firefighters is set to expire in 2015.


Until then, Davis is adamant that the Act 205 payroll tax has helped pull the city back from financial ruin.


“I think we’re going to be a model for other communities struggling for this very same reason,” Davis said.Disliked payroll provides boost


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