Clark Hill: The Cannabis Cure for the Public Pension Crisis

Pensions are, and have been, an important compensation component for public employees, including teachers, police, fire, and other municipal positions. However, limited funds and riskier investments are threatening pension funds and those that rely on them. As states search for a solution, the recreational cannabis industry could provide the cure.

Many educators accept lower salaries with the expectation that they receive a pension, which is generally more generous than a typical 401(k) that is offered in a more corporate atmosphere. However, these pensions are at risk due to factors such as underfunding. Pension plans now rely on riskier investments as the contributions from public employers and employees cannot sustain the plans.

Across the United States, municipalities and school districts are struggling with budget deficits, especially in depressed areas and particularly in northeast and upper Midwest states. A Bellwether Education Partner study from 2021 (the “2021 Bellwether Study”) notes various shortfalls of the pension system in the United States including inequitable retirement programs, financial implications for teachers and schools, and political aspects.  As inflation continues to affect the country and schools opt for budget cuts,  there is a serious concern for lack of pension funding and the decrease in pension spending power.

Public Pension Crisis

In Pennsylvania, many state retirees are struggling to afford the cost of living as inflation rises while their pensions remain unadjusted. The 2021 Bellwether Study found that Pennsylvania landed in the bottom five ranking, earning an “F” signifying that the state’s retirement systems are not meeting the needs of its participants and taxpayers.

Pennsylvania’s Financially Distressed Municipalities Act (“Act 47”) empowers the Pennsylvania Department of Community and Economic Development to declare certain municipalities as financially distressed and in turn provide, among other relief, debt restructuring, certain government funding, and the ability to participate in federal debt adjustment actions and bankruptcy actions.  The majority of the counties declared “financially distressed” by Act 47 have medical marijuana dispensaries, including Allegheny, Lackawanna, and Delaware Counties. Tax revenue from medical marijuana facilities is not currently used to fund schools or pension plans. However, this untapped potential revenue stream could provide additional funding that these schools need.

Could revenue from a legal recreational cannabis market aid in the significant funding gap? There is potential if such funds were directed to public school funding, especially to struggling municipalities and school districts. Although legalization of recreational cannabis is relatively new in the U.S., this concept has been used since Colorado and Washington became the first states to legalize recreational cannabis in 2012.

Colorado allocates 12.59% of sales and excise taxes to the State Public School Fund, which includes the Building Excellent Schools Today (“BEST”) Fund. The BEST Fund is used to renew or replace deteriorating public schools via awarded grants. Since 2008, the BEST Fund has awarded more than $3.5 billion in grants. In Oregon, 40% of the cannabis tax revenue is allocated to the state school funding, making public schools the biggest recipients. While these funds are not necessarily directly allocated to state pension plans, other states, like Arizona, have adopted laws which allocate cannabis tax revenue directly to fund state pensions.

Phoenix, Arizona’s City Council adopted a policy to annually direct revenues from the general fund portion of the City’s sales tax of recreational cannabis and a portion of the City’s Public Safety allocation from the State of Arizona related to cannabis revenue collections. These revenues are used to pay down the Public Safety Personnel Retirement System (“PSPRS”) pension liability. Since the 2020-21 Fiscal Year, these revenues totaled $24.1 million. Revenues from these two components total $7.9 million through March 2023. To date, $16.2 million has been used to pay towards PSPRS, above the state’s Actuarially Determined Contribution.

Cannabis as a Cure

In Pennsylvania, school districts are struggling to find financial support. Policies and formulas used to provide funding have created a gap of $4.5 billion in what is needed to provide adequate education to students in Pennsylvania. See Maddie Hanna, et al., See How Much Money Your School District Has For Students, The Phila. Inquirer, Sept. 6, 2023.  The state’s history of unequal school funding throughout the state exposes how new tax revenue could be a benefit to the state. See William Penn Sch. Dist. v. Pennsylvania Dep’t of Educ., 587 M.D. 2014, 2023 WL 1990723 (Pa. Cmmw. Feb. 7, 2023). In the opinion, the Pennsylvania Commonwealth Court ordered lawmakers to resolve this issue.

Currently, tax revenue from medical marijuana sales in Pennsylvania is not being allocated to public schools In its first year, medical marijuana brought Pennsylvania over $2 million in tax revenue. These numbers have continued to increase with sales topping over $900 million between 2020-2021. Tax revenue from this market could provide relief to Pennsylvania’s struggling public school system. Marijuana industry experts have estimated that Pennsylvania’s illicit cannabis market to yield between $3 billion and $4 billion annually. As Pennsylvania lawmakers continue to push for a legalized recreational cannabis, additional funding for schools could be found in such sales and excises taxes.

Yet, tension between state-run cannabis programs and federal law remains at issue. Given that cannabis is still federally illegal, federal courts are precluded from addressing matters involving cannabis. While Act 47, and similar state statutes, allows municipalities and school districts to file for federal bankruptcy protection to adjust debts, the same privilege is generally not awarded to cannabis companies. However, a recent decision by a California bankruptcy court shows a shift in the Department of Justice’s “zero tolerance” policy on cannabis and offered a narrow path for a cannabis company to file for Chapter 11 bankruptcy.

The bankruptcy court’s opinion for In re The Hacienda Company, LLC emphasized that “the mere presence” of marijuana in a bankruptcy case does not automatically prohibit a debtor from bankruptcy relief and the court has some “degree of discretion” in considering dismissal. The decision can be read to support more expansive uses of the Bankruptcy Code by cannabis companies. This raises a significant question as to whether a municipality that receives funding from cannabis licenses, taxes, and similar revenue streams can avail of federal bankruptcy protection. For instance, counties located in states that have legal medicinal cannabis programs that may need to consider filing for Chapter 9 to restructure their debts. These municipalities derive tax revenue from this technically federally illegal programs. Should this be the impetus for meaningful federal legalization of cannabis in order to plug these funding gaps?  This would also avoid the difficult situation of struggling municipalities being unable to avail of Chapter 9 of the bankruptcy code.

The pension crisis is not specific to Pennsylvania. Ohio, Massachusetts, and New Jersey are among the other states that have received an “F” rating from the 2021 Bellwether Study.  Massachusetts and New Jersey have recreational cannabis market where tax revenue goes toward public schools, but not directly to funding pensions. In the November 2023 election, Ohio voters voted “yes” to Issue 2, legalizing marijuana for recreational use. Under Issue 2, revenue generated from the 10% sales tax is set to be directed toward establishing a cannabis social equity and jobs program, designed to provide financial support and assistance for license applications to individuals who have been disproportionately affected by past marijuana-related law enforcement. As Ohio’s market is established, more details will become available.

Pennsylvania has a unique opportunity to address this issue. Union leaders, members, and influencers can join forces to push for state legislators to legalize recreational cannabis and use the tax revenue to fund failing schools and municipalities, especially via pension plans.

Source JD Supra

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William Bogot – Fox Rothschild

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