Lunch Box Governance
Recent actions taken by the Ocean City Council will impose two new taxes on businesses and second homeowners. More importantly, the frenzy of gift-giving to our resort employees, who rank among the highest paid across all municipalities, has been put on steroids with the council’s recent adoption of defined benefit retirements (“DBR’s”) for the men and women of the fire departments.
Ocean City is an anomalous community: only 5% of the revenues for government are paid by resident voters. However, with second homes and businesses already paying the lion’s share of OC government’s expense as well as 60% of the county’s expense, it is a risky business to continue to use these huge payers as a “lunch box” to increase the town’s revenues. It is ill-advised because:
Property taxes and increased code requirements, that are like an additional tax, cause flight to Delaware or West Ocean City, so there are fewer people to tax. Residents in Ocean City have not changed in 40 years; however, the Ocean City government has grown 25 times.
Also increased taxes and regulations on second home owners causes all residential property values to go down. The Washington Post reported in 2016 that Ocean City real-estate was priced 15% lower than it was in 2004. So, although you may be gaining a couple thousand a year in tax credit as a resident, like the second home owner, you are probably losing a couple hundred thousand in home value.
As the business community faces increased taxes and regulation two derogatory things occur. First, as prices go up in response to the taxes more middle-income vacationers are unable to visit or shorten their visit. The middleclass with a family used to be our bread and butter. Often the inflated hotel rates cause them to stay in West Ocean City, Delaware or numerous more reasonable resorts and we lose the business. Second, businesses leave, many to West Ocean City, Delaware the Carolinas. This phenomenon has been occurring with increased frequency among old line families in town who are taking capital and business to other locations often in competition with Ocean City.
The council adopted DBR’s for the police in 2012 and recently expanded it to include new hires claiming they were having difficulty hiring new officers. The very first group is starting to retire with those expansive benefits. Mark Paddock is an example. Going forward, the city will allow police and fire to claim defined benefits after 20/25 years of service. Defined Benefit promises a fixed percentage of pay: in Ocean City its 60% of high salary for life in addition to medical. The obligations to the city are often underestimated. Payments by the city can easily extend out for 25 to 40 years after retirement for each individual, as some employees will retire in their early 40’s.
After the adoption by the police, DBR’s were accompanied by an increase in disability claims among police officers. Sure if a guy has a sore back and has a guaranteed income for life he is more likely to call in as unable to serve or go to a doctor to get a pass. This is a secondary unaccountable expense to the DBR pension system.
For these reasons, the United States government reduced all Defined Benefit retirements in 1984 leaving a guarantee of 10%-25% of salary only for federal police, not 60%. All other federal retirement plans today are of the 401K variety, the employee contributes along with the employer and the funds are placed in a vehicle the employee choses at market risk like the private sector. Also all Scandinavians countries exited DBR’s for similar reasons by 1998. Defined Benefit Retirements are an unknowable liability that will invite insolvency decades out. All this material was given to the council in 2012 but they didn’t care.
Two councilmen, Mr. Paddock and Mr. Martin, voted for all three, both taxes and DBR’s for the firemen. Maybe someone should ask Mr. Paddock how his house price is doing since he bought it in 2009? Oh and be sure to ask Mr. Martin if he pays Defined Benefit retirements at his Mother’s 7-Eleven? If it’s so great for the city, why doesn’t he have it.
The city needs to adopt a philosophy that causes its revenues to increase along with its second home owner partners and business partners and stop practicing “Lunch Box Governance.” Our employees are good; however random gifts with unknowable future liabilities are not prudent for government and more often than not will get government in trouble in the future.
Matt James, the youngest member of the council, was the only member to vote no to both tax increases and to the DBR for firemen. I have no doubt that one day he will be our mayor.
Another young politician in the county, Mr. Nordstrom, a county commissioner, is making noises like he might oppose the room tax increase which requires commissioner approval. Good for you, Mr. Nordstrom. It remains to be seen if he has the guts to follow through.