Tax hike may finally settle police pension problem: Measure could end 30-year battle over public safety

June 25, 2007

The Indianapolis-Marion County City-County Council is considering a proposal from Mayor Bart Peterson to raise at least $85 million annually for public safety through an increase in local income taxes. Since Democrats control the Council 15 to 14, the measure is expected to pass by the end of July and take effect Oct. 1.

The tax hike would finally settle a 30-year battle that constantly pitted public safety's immediate needs against its longterm pension obligations.

Much of the revenue generated by the tax hike would be used to underwrite Peterson's plan to permanently stabilize the city's police and firefighter pensions. Pensions for those hired after 1977 are funded by the state's $16.4 billion Indiana Public Employees' Retirement Fund, but pre-1977 pensions aren't covered by that fund and have been underfunded for decades.

The state has repeatedly coughed up subsidies to help the city meet its pre-1977 pension obligation. Even so, Indianapolis owes $450 million for its share. And the city's annual payments to service the debt that funds the obligation have increased steadily every year, continually reducing resources available for cops on the street. The debt payments now cost Indianapolis well over $50 million annually, and won't peak until the mid-2020s.

"We need to do whatever it takes. This is beyond worrying about political considerations or trying to cover things up with Band-Aids," Peterson said. "We're in a battle, and it needs every tool we can bring to the table. And that is going to cost money. I'm going to ask for the money we need, and not one penny less."

In addition to the tax increase, Peterson sought-and received-authority from the General Assembly this year for a massive bond issue to settle Indianapolis' pension debt once and for all. The $85 million in new income taxes will underwrite the bond issue, simultaneously shore up what Peterson calls "structural deficits" in the public safety budget, and provide some new money for community crime prevention efforts.

But the plan has its critics, led by Peterson's mayoral-election challenger Greg Ballard. The Republican candidate would rather delay dealing with the pension problem and focus on the Indianapolis Metropolitan Police Department's immediate lack of personnel as a way to battle the city's rising crime rate.

"The mayor says it's a public safety tax increase, but it doesn't put another cop on the street. Do we need to deal with the pensions? Yes. But what's the immediate need?" Ballard asked. "At every neighborhood or business association meeting, I'm hearing worries about crime on the street."

It's a debate Indianapolis has heard many times before. The Legislature originally authorized the County Option Income Tax as a solution for the pension problem. And from 1985 to 1992, Indianapolis set aside $7.8 million annually in a trust, which, at its peak, had $32 million. But Peterson's predecessor, Steve Goldsmith, stopped making trust payments after 1992. And by the end of 1999-the year before Peterson took office-the entire trust had been spent on other city priorities.

Peterson claims that won't happen again if the income tax hike is approved. That's because the increase would be earmarked specifically for the $450 million in pension bonds and the public safety system. Legally, it couldn't be spent elsewhere.

The political downside of Peterson's plan is that the tax would be raised both inside and outside the old Indianapolis city limits. Republicans long resisted that sea change to the distribution of Indianapolis' tax burden. But geographic concerns aren't so easy to justify following the Marion County Sheriff's Department merger with the Indianapolis Police Department at the beginning of the year.

The local business community supports Peterson's tax increase plan. Roland Dorson, president of the Greater Indianapolis Chamber of Commerce, said the choice is clear.

"We salute the mayor for what he's tried to do with the modernization of local government, and realize the complement to that is you're going to have to find some additional money," he said.
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