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Baltimore's road to financial victory

RetirementFinanceBusinessPension and Welfare

The confetti from Tuesday's Super Bowl parade was hardly cleared before Baltimore's fiscal health jolted everyone back to reality. Warning of impending "financial ruin," a new report from the advisory firm Public Financial Management tallied Baltimore's cumulative 10-year deficit at a stunning $750 million, driven largely by the city's pension and retiree health obligations.

While sobering, the report hands city leaders a rare opportunity to remake Baltimore into a championship city. Our nonpartisan research institute believes that five big reforms can help save Baltimore from financial catastrophe, halt the exodus of families and businesses, and kick-start a long-overdue economic renaissance:

•Modernize the pension system. City employee costs are growing nearly three times faster than revenue, largely due to the city's outdated pension system. To halt the runaway train, Baltimore must do what the private sector did decades ago and transition new employees to defined contribution, 401(k)-style plans.

This would drastically reduce long-term taxpayer liabilities, and precedent shows such a move works. In 1997, Michigan shifted all new employees into a defined contribution plan with matching contributions from the state. The move has saved Michigan taxpayers $167 million since inception, according to study from the Mackinac Center for Public Policy.

Despite its flaws, the pension system should remain open for existing employees, but not without significant reform. The city should consolidate the current system's multi-tiered structure to increase investment returns and gradually increase the retirement age for younger workers.

•Cut property taxes. At $2.26 per $100 assessed value, Baltimore's property tax rate is more than twice that of every bordering jurisdiction. Punitive tax rates push families and employers out to the suburbs and shrink the city's tax base, as evidenced by the unacceptably high office vacancy rate. To reverse the flow, we propose that Baltimore adopt the most competitive property tax rate in the region: $1 per $100 of assessed value. History proves that such a bold move could reverse Baltimore's population exodus and substantially increase revenues. San Francisco enacted a 57 percent property tax reduction in 1978 and limited assessment increases to 2 percent annually. Within four years, the city was collecting 66 percent more inflation-adjusted dollars than it had been under the high-tax regime and enjoyed an economic renaissance for the history books.

•Raise retiree health care standards. To their credit, city leaders enacted employee health care reforms this year that will moderate some of the expenses outlined in the report. But more must be done to align city health benefits with those offered in the private sector. The city must follow the lead of countless other state and municipal governments and increase the minimum age and service requirements that trigger eligibility for retiree health care benefits.

•Deliver services better, faster and cheaper. Big-city turnarounds often include the outsourcing of non-emergency government services. Under then-Mayor Ed Rendell, Philadelphia saved $275 million by privatizing dozens of city services. Chicago has generated more than $3 billion in payments from private-sector leases of city assets. It's time Baltimore's leaders commission a "Better, Faster, Cheaper" task force to move some administrative services to the private sector to shed costs and better serve citizens.

•Eliminate wage controls. Construction on city roads, bridges and facilities are a major driver of the city's deficit. To reduce construction costs, the city should repeal or reduce the cleverly dubbed "living wage" requirement that gives high-cost, unionized construction companies an unfair advantage over lower-cost rivals. This requirement forces the city to pay more for construction work, but it does nothing to close the city's wage gap. Since wage controls were enacted in the 1990s, Baltimore has lost nearly 100,000 residents, and median household income remains 45 percent below the state-wide figure.

These reforms will not be easy, but they are necessary if Baltimore is to avoid the "financial ruin" independent experts now predict.

Thanks to the Ravens, Baltimore has shown America what championship football looks like. With these reforms, combined with uncommon political leadership, Baltimore can show America what a championship city looks like.

Christopher B. Summers is president of the Maryland Public Policy Institute, a nonpartisan public policy research and education organization that focuses on state policy issues. His email is csummers@mdpolicy.org.

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