CHATHAM – If the town continues to sock away $150,000 a year toward its post-employment benefit (OPEB) liability, it will take more than 110 years to meet its full obligation of more than $16 million.
Selectmen are eyeing a somewhat shorter timeline; they want to full fund the OPEB trust in 10 to 15 years, less if possible.
To meet that goal, the board last week instructed staff to prepare town meeting articles to authorize home-rule legislation that would create a 1.5 percent property tax surcharge and a half-percent real estate transfer tax. Combined, the two could raise as much as $1.9 million annually, enough to fund the OPEB obligation in less than a decade, after which both would disappear.
“That combination seems to me to make the most sense,” Selectman Dean Nicastro said after the board reviewed a number of options for funding the OPEB liability.
But a real estate transfer tax is likely to create a backlash. Ryan Castle, chief executive officer of the Cape Cod and Islands Association of Realtors said both his agency and the state real estate lobby would oppose the proposal, both on the local level and at the legislature.
“It's an unstable and unreliable source of revenue and is discriminatory in nature, as it makes a small subset of people pay for what is a community responsibility,” he said.
Other post-employment benefits are essentially the health insurance payments towns must make for retired town employees. The Government Accounting Standards Board required towns to disclose unfunded OPEB liabilities in 2007, and last year issued an updated statement requiring that the liabilities no longer be noted in footnotes but that they be listed prominently on balance sheets. Most towns don't fund their future OPEB liabilities, but, like Chatham, pay annually; the town's annual cost of retired employee insurance is about $700,000, paid out of the operating budget. The total unfunded liability is $16,826,522, according to a memo by Finance Director Alix Heilala, determined through an actuarial formula, and takes into account 208 retired town employees and future benefits of 123 current employees.
In 2012 town meeting voted to establish an OPEB trust fund, overseen by trustees that include the chairman of selectmen, chairman of the finance committee, the town's finance director, treasurer and a second selectman. Through annual appropriations, the fund has grown to $818,773.
The $150,000 annual appropriation from the town's overlay surplus account is clearly not enough, and the trustees recently approved a more aggressive funding strategy. Heilala outlined a number of option for selectmen last week, all of which require town meeting approval.
The current 3 percent land bank surcharge expires in 2020. This could be reallocated and dedicating to OPEB, Heilala said. To provide some relief to taxpayers, the reallocated surcharge could be 1 or 1.5 percent. She estimated the latter would raise $5.8 million in 10 years. Doing so requires town meeting approval to file home rule legislation with the General Court. Even though the land bank doesn't expire for two years, the town could begin the process with a town meeting article this May, she said.
A real estate transfer tax would also require town meeting to petition for special legislation. Heilala suggested that the first $425,000 of every sale as well as transfers of property between family members be exempted. Last year's 215 sales totaled $234 million; after the exemption is applied, the total that would be subject to the tax was $148,521,350. At half a percentage point, that would yield transfer tax proceeds of $7,426,067.
Other options require only town meeting approval. They include raising the hotel/motel tax by 2 percent, which would raise $3.8 million over the next 10 years based on recent receipts; using one-time revenue, such as the $2.2 million Harwich has paid the town to date under the intermunicipal sewer agreement or selling town land; raising estimates for local receipts, which could yield $3 million over the next decade; using the town's excess levy capacity, essentially the difference between the amount raised through property taxes currently and the amount that the town could legally raise if property is taxed at its fullest (that could add up to 32 cents to the tax rate, Heilala said); or continuing to use the overlay surplus account, a fund used to cover money lost through property tax abatements. That fund currently holds nearly $1 million.
Board members didn't favor raising the hotel/motel tax because of its impact on the tourist industry. Increasing the tax levy would be “undesirable,” said Selectman Shareen Davis.
Using half the land bank surcharge would be a “relatively pain-free approach,” said Selectman Jeffrey Dykens. “I think that's a very sensible way to go, from a taxpayer's perspective.”
A real estate transfer tax is a creative approach to funding the long-term OPEB liability, he said. There's likely to be push-back from the real estate industry and could be a hard sell at, Chairman Cory Metters said. Half a percent, however, “might be less painful for the real estate industry,” Nicastro suggested.
No matter what approach the town takes, “somebody's going to squawk,” said Finance Committee Chairman Stephen Daniel, who came up with the 110 year figure to reach the OPEB goal based on the current contribution. But he said there's some latitude with the real estate transfer tax, since the buyer and seller can negotiate who pays the tax.
Castle said a real estate transfer tax won't just impact people buying second homes, but will also hit seniors who are downsizing. “It's not just the rich people moving here that are going to be paying this,” he said.
No other Cape town has a real estate transfer tax, Castle said, although both Nantucket and Provincetown have tried but failed to implement such a measure. While the real estate market is healthy now, if conditions return to the way things were in 2008 to 2010, the revenue would not be sufficient to meet the board's goals. Limited inventories and rising interest rates may lead to sales declines near term.
“I think it's really disheartening to say a responsibility the entire town has...is targeted on specific people,” he said.
Selectmen agreed a combination of the 1.5 percent property tax surcharge and the half-percent real estate transfer tax, which could raise up to $1.9 million a year, would be the best approach, though some board members favored lowering the property tax surcharge to 1 percent. The board asked staff to prepare town meeting articles authorizing special legislation for both approaches, and agreed the percentages could be adjusted when they review the language.
Meanwhile, selectmen voted to support seeking another $150,000 for the OPEB fund from the overlay surplus account at May's annual town meeting.