How Better Land Use Policy Can Help Ease PA’s Pension Crunch

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Next year’s pension debate is mostly going to be about what happens with new public employees, since it would be illegal to break current employees’ contracts. As such, any reforms affecting future employees will not dent the truly massive amount of money PA is going to have to start budgeting for pension payments already owed. Here’s Eric Boehm reporting on the Independent Fiscal Office’s recent statement on pensions:

An annual economic and budgetary projection from the state’s Independent Fiscal Office, a state equivalent of the Congressional Budget Office, forecasts 0.8 percent revenue growth this year and 3 percent annual growth for the state’s revenues in the next five year. Pension costs are projected to climb by 46 percent in this year’s budget and 42 percent in next year’s budget. “The increase in pension contributions is estimated to be about $500 million per year for the next several years,” said Mark Ryan, deputy director of the IFO. According to the report, those costs will consume 9.6 percent of the state budget by 2017 – up from 4.2 percent of the budget this year.

The political issue for liberals should be obvious. If pension payments are going to keep increasing as a share of the budget, then either we need to cut spending from other parts of the budget, or else we need to increase the size of the budget.

There are a few ways to increase the size of the budget. One is tax rate increases. Another is closing tax expenditures and deductions for a net increase in revenue.

The politics of increasing taxes or closing loopholes are going to be tough, which is why we also need to be focusing on a third lever – increasing the rate of economic growth.

Going back to Eric’s piece, you see that the IFO’s doomsday prophecy is based on the assumption that weak growth will continue:

Those low growth rates are the “new normal,” said Ryan, and are due to modest growth of the labor market, declining revenues from sales taxes, demographic trends and the lack of any expected booms in housing or the stock market.

But the weak rate of growth does not have to continue. While it’s debatable as to how much we can increase the growth rate through policy, there are certainly policy levers available to lawmakers who want to try to increase the growth rate for housing construction, services, and migration.

I would argue that the biggest untapped policy lever is land use. Basically, Tom Corbett needs to copy what Deval Patrick is doing:

Last week, Massachusetts governor Deval Patrick announced a new policy initiative designed to encourage diverse, walkable neighborhoods that use land efficiently. If a municipality meets certain criteria, it will become eligible for preferential treatment in applications for state assistance funds.

In particular, to become eligible a municipality must adopt an “as-of-right” zoning district that provides for the following:

  • An “eligible location,” as defined by the commonwealth’s smart growth standards;
  • A minimum density of eight homes per developable acre for multifamily housing, and four units per acre for single-family homes;
  • At least ten percent of homes must meet affordability criteria (unless a project includes fewer than 12 homes in total);
  • A policy of inclusion that does not restrict occupancy due to “age or any other form of occupancy restrictions,” except for projects intended for the elderly, persons with disabilities, or assisted living.

The policy statement released with the announcement says the Department of Housing and Community Development “expects” municipalities creating such zoning districts to include standards requiring or promoting mixed land uses, sustainability, housing for a range of incomes, and homes for “diverse populations,” including families with kids, individuals with disabilities, and the elderly.

Concurrently, Massachusetts governor Deval Patrick announced a new statewide housing production goal of 10,000 multifamily units in the Commonwealth each year. At a conference in Worcester, Massachusetts last week, the governor said that “to meet the needs of our workforce we need more housing for moderate- and middle-income families. We need more multi-family homes, rental apartments, and starter homes and we need these homes near jobs, near transit, and near city and town centers.”

If you look at where the growth is already happening in PA, you’ll see it’s in the top 5 largest metros – Philadelphia, Pittsburgh, Lehigh Valley, Harrisburg and Scranton. That’s where most of the state’s revenue is coming from, and if we want more state revenue from faster growth, then the obvious thing to do is try to grow those metros.

Right now, the incentives are sort of misaligned. Local politicians are not thinking about the state pension crunch when they are deciding on housing, transportation and land use policies. But they should be! How much those metros are willing to grow will affect how difficult a time the state will have paying pensions.

To align the incentives for growth, what we need are state policies to encourage more housing and office construction in those 5 biggest metros – to reduce housing and office prices in those places, reduce the time and money costs of transportation, and attract more people and businesses to live and work there.

One idea is to copy what Deval Patrick is doing – tie state aid to by-right zoning policies at the local level. Even better, the state could tie aid to adoption of comprehensive county-level zoning and land use plans, so that decisions about housing and development are substantially more insulated from the narrow neighborhood politics that lead to underbuilding at the city level.

The state could also adopt weighted student funding, which would reward areas that pursue pro-growth housing policies instead of penalizing growing districts as the current system does. Currently, politicians who are inclined to increase the housing supply are met with resistance from residents who worry that more housing will bring more school-aged children and higher school taxes. That has got to change. State policy needs to reward areas that try to grow their populations, especially in the 5 largest metros.

State transportation funding also needs to be concentrated on the 5 largest metros. It needs to be cheaper and easier to get around within and between them, so that more housing and office construction leads to more real growth and doesn’t get choked off by increased traffic congestion. Harrisburg should pick up the tab for mass transit improvements in the 5 largest metros, with the goal of increasing trip frequency. Bringing Bus Rapid Transit systems to all 5 metros would significantly increase the amount of housing and office growth each could absorb. Extending SEPTA service to Allentown would better integrate Southeast PA’s two largest economies. Subsidizing air travel between Philly and Pittsburgh would better integrate the state’s two largest economies.

There are all kinds of things that can be done to boost the growth rate using state land use and transportation policy, but first state politicians need to stop pretending that PA’s economy in based on fracking and manufacturing jobs in the big empty areas of the state. It is not. The top 5 largest metros are the real economic drivers. If politicians want faster growth to pay for more of the pension outlays, instead of unpopular tax increases and budget cuts, they need to adopt economic policies focused on growing the metros.

(Thanks: Kaid Benfield)

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