Basic education funding for 2017-18 is increasing by $100 million statewide. Meanwhile, pension payments for districts are rising by $144 million.
That imbalance, which ultimately shrinks money for the classroom, wasn’t fixed by the pension reform that state officials have described as “historic” and “meaningful.”
It’s not until 2034-35 when funds needed for the Public School Employees’ Retirement System, expected to approach 40 percent of payroll, “are projected to begin to decline,” according to an actuarial note by the Independent Fiscal Office on Act 5 of 2017. The result of Senate Bill 1, which was signed by Gov. Tom Wolf, the legislation shrinks the defined benefit and combines it with a 401(k)-type plan for school employees hired after July 1, 2019.
“It’s controlling every single thing we do,” Stephen Pirritano, of the Neshaminy school board, said of growing retirement costs. “The amount of stress that’s being put on our district is forcing us to make educational choices. There’s no relief from collective bargaining. There’s no relief from state mandates.
“Payroll and benefits are 72 percent of our budget. We continue to squeeze that other 28 percent. I don’t know where the relief is going to come from.”
Locally, Pirritano’s words have been echoed by school directors from the Bristol Borough to Quakertown Community districts in Bucks and the Upper Moreland to Souderton Area districts in Montgomery County.
Neshaminy’s pension costs have gone from $8 million to more than $25 million in the past five years. Council Rock’s scheduled contribution is almost $36 million — an increase of $3.4 million from this year and $23.8 million higher than 2010-11, when the PSERS bill was 5.64 percent of salaries. In 2017-18, it’s 32.57 percent.
In North Penn, pensions have cost taxpayers $150 million in the last five years, growing from $6.1 million in 2010-11 to $39.7 million in 2017-18. North Penn business manager Steve Skrocki has used terms like “mind-boggling” and “unsustainable” to describe the state’s pension problem.
The state pays half of the bill, meaning 39 percent of North Penn’s state subsidy is eaten up by pensions, nearly double the 20 percent that goes for basic education. “I think that’s a sad commentary,” he said.
“The whole five years spent talking about pension reform was a bait and switch,” said Stephen Herzenberg, executive director of the Keystone Research Center. “This does nothing about the unfunded liability.”
Still, advocates of the new law — and there are many — praised it as a game-changer for achieving full funding of the state’s pension system, significantly reducing taxpayers’ risk and preserving a path to retirement for public workers.
“Our research indicates that this would be one of the most — if not the most — comprehensive and impactful reforms any state has implemented,” The Pew Charitable Trusts, an independent global research and public policy organization, stated in its analysis of Senate Bill 1, the legislation that lessens the retirement guarantee for future employees.
“It’s a significant step to fixing our pension problem,” said Elizabeth Stelle, director of policy analysis for the Commonwealth Foundation. “It is truly historic, and goes far beyond savings or the impact on property taxes. It’s a significant transfer of risk to teachers and state employees themselves. This is definitely significant. We shouldn’t underestimate how much of a stepping stone SB 1 is.”
Steve Robinson, spokesman for the Pennsylvania School Boards Association, called the retirement system for future employees “a long-term solution.”
“I don’t think any of us see it as a short-term fix,” he said. “That still needs to take place. This is not an easy problem to solve. Probably the biggest thing that might help is a large infusion of money to provide more immediate relief to districts. I’m just happy to see some kind of pension reform passed. But school boards are still looking at difficult budgets today, next year and the year after that.”
Peter Calcara, vice president for government relations for the Pennsylvania Institute of CPAs, called the pension conundrum “a political tug of war.”
“There’s not a politically easy way to address the issue in an immediate fashion,” he said. “You’ve got to take whatever successes you get, as minor as they may be in the long-term. You try to take one step forward in this political process.”
The unfunded liability for PSERS and the State Employees Retirement System stands at approximately $60 billion, most of it coming from PSERS, with its nearly 500,000 active and retired members.
Part of the funding problems began in 2001. PSERS was flush with money when lawmakers hiked the multiplier used to calculate their pensions from 2 percent to 3 percent, for a 50 percent increase, and to 2.5 percent for teachers and state workers, up from 2 percent, for a 25 percent increase. They also sliced in half the number of years needed to qualify for a pension from 10 to five.
On top of that, the increase was applied retroactively, so a worker with 25 years on the job would have accrued 62.5 percent of his or her salary in retirement as opposed to 50 percent.
The next year, lawmakers increased benefits for teachers who had already retired and so were left out of the 2001 pension enhancements, and they put off paying for the whole package by reducing a district’s pension contribution from 5.64 percent to 1.15 percent and spreading out payments over more years.
When the stock market was performing well, school districts were allowed to lower their contributions. In 1998, for example, districts paid nothing into the fund. In 2001, the rate was 1.9 percent; the following year, 1.1 percent. School employees, however, continued to contribute 7.5 percent of pay, mandated by the state, into the pension fund. In 2002, districts contributed $539,000 to the fund, while employees paid $662.6 million.
These days school board members are desperate, many raising taxes and cutting programs to pay for retirees. That 1.1 percent contribution of employee salaries by taxpayers in 2002 is 32.5 percent next year, and scheduled to sit in the mid to upper 30s for more than a decade.
“Whatever they thought in 2001, hindsight has proven they didn’t know what they were doing,” said Pirritano, the Neshaminy director.
In 2010, the Legislature, through Act 120, reformed public pensions for future employees and new lawmakers. All have to pay more money into their plans, while benefits were rolled back 25 percent to pre-2001 levels and the vesting period for both school and state employees increased from five years back to 10 years.
The deal lessened the impact of a near-term property tax bubble, but cost homeowners more money down the road. It’s been described as going from a 15-year to a 30-year mortgage. Your monthly payments are less, but you’re paying for a longer period of time.
Act 5 of 2017 gives future employees three options: The first two include both a pension and 401(k)-like investment. The pension’s multiplier is either 1 percent or 1.25 percent. Option three does not include a pension.
“While they’ve taken steps, they’ve nowhere come close to solving the problem,” Pirritano said of state lawmakers. “They’ve taken a few baby steps in a marathon. Nobody should be congratulating themselves. They should be saying sorry it took this long to start the process.”
Stelle, the Commonwealth Foundation’s director of policy analysis, said the law will “get the politics out of pensions. … Lawmakers no longer have the ability to dramatically increase or ignore payments to the plan.”
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