Florida cities and counties will have the option of funding the pension liabilities of government plans via a half-cent sales tax under new legislation that Gov. Rick Scott (R) signed into law.

The legislation, signed March 25, takes effect July 1 and will let municipalities propose a local sales tax to aid underfunded local pension plans, under certain circumstances and subject to approval by a voter referendum. To take advantage of the tax option, the relevant pension plans must prohibit new enrollees into any defined benefit plan, must be below 80 percent funded and must require employees to contribute at least 10 percent of their salaries to the retirement plan.

The bill was drafted at the urging of the mayor and government officials in Jacksonville, which faces a funding shortfall of $2.6 billion across its various pension plans. Mayor Lenny Curry (R) said the new law will help Jacksonville free up more than $260 million annually that the city devotes to three pension funds to spend instead on “public safety, neighborhood improvements and community services.”

“Citizens in every corner of our city should have greater confidence about Jacksonville’s future,” Curry said in a March 25 written statement. “For too many years, pension debt has posed the greatest threat to our city’s future.”

The proposal will go before the Jacksonville City Council to approve a citywide referendum for later this year, the governor said. Other cities and counties with pension plans meeting the new law’s requirements also could take advantage of the sales tax in the future.

Replacement for Infrastructure Tax

According to a January 2016 resolution adopted by the Jacksonville City Council, the local government intends to replace an existing half-cent surtax for infrastructure funding after it expires in 2030 with a half-cent surtax dedicated to pension funding, extending the surtax for up to 30 years.

The provisions of H.B. 1297 also allow the local government to issue bonds secured by the anticipated future sales tax proceeds. Current Florida law allows as many as eight categories of sales surtaxes that counties can enact, including a local government infrastructure surtax and a school capital outlay surtax. Not all counties are eligible for certain categories, such as the small-county surtax.

The new law creates a ninth category, but with certain limits on the total tax rate. Florida’s general state sales tax rate is 6 percent. Currently, the highest combined local sales surtax rate of any Florida county is 1.5 percent, although some counties could charge a surtax as high as 3.5 percent under state law if local voters approved, according to the legislative staff analysis of H.B. 1297.

Source: Bloomberg BNA