Balancing Act: School districts and the problems with PSERS
As the end of August approaches, so does the deadline for paying your school taxes at a discount.
Still, that’s going to be one large number on the check, thanks to the large numbers it takes to run a school district these days.
“Any increases in the operations and cost of education are borne largely by the taxpayer,” Jeannine French said. “And we have a responsibility to make sure that the people in our community can continue to afford to live in our community and are not unduly burdened.”
The Peters Township School District superintendent summed up one aspect of the balancing act that administrators and elected officials face throughout Pennsylvania each year: how to cover perpetually increasing expenditures using relatively scarce resources, all within the parameters set by state legislation.
One particular piece of legislation, although formulated with the best of intentions, started the ball rolling toward what has become a financial nightmare for school districts.
’Rosy glasses'
Fifteen years ago, Gov. Tom Ridge signed into law Act 9 of 2001, which basically overhauled the State Employees’ Retirement System and the Public School Employees’ Retirement System. Among the provisions for the latter was upping the pension benefit multiplier, which goes into determining how much an employee receives after retirement, from 2 to 2.5 percent for members who opted to pay more into the PSERS fund.
“The increase in benefits for state and school employees … will in effect allow them for the first time to share in the outstanding investment performance of the funds,” the legislation states, referring to the high rates of return that were prevalent in the 1990s.
But not everyone was sold.
“It was a concern for us at the time, for those of us who were a little more conservative in dealing with most of the finances,” Thomas McMurray, who has served on Peters Township School Board since 1984, recalled.
“It was a good time for the market. The pension fund was fully funded,” he said, as the actuarial value of assets at the time exceeded the accrued liability, representing the benefits to which PSERS members were entitled. “And there were some pretty rosy glasses at the time, thinking it was going to continue, and to give that much of an increase.”
The skeptics soon were validated.
”What happened is, the economy turned around, and the investments were not sufficient,” Janice Klein, Mt. Lebanon’s director of business and a 34-year school district official, explained.
“I don’t even know whether they would have been sufficient had that law not been passed,” she said about Act 9, “because the stock fall was so significant at that time.”
And although many employees started paying more into the PSERS fund, employer contributions from the state and local school districts lagged far behind.
“So with the combination of that and the lack of money in the stock market, all of sudden it just became severely underfunded,” Klein said of the assets vs. liability. “We should have always been up closer to what the employees were paying.”
’Home to roost'
Instead, the Legislature took further action with Act 40 of 2003, which spread out the terms of employers’ obligations from 10 years to 30, effectively delaying significant increases in the contribution rate for another decade.
”When you start looking at all of the decisions that were made, they were made in order to keep the rates low,” Klein explained. “And unfortunately, because the rates were low, they couldn’t really make up the difference when the stock market fell.”
Following the economic downturn of 2008, the actuarial value of assets began to drop each year while the liability continued to soar. At that point, school districts started to cope with the realization that they’d bear the brunt of making up the difference.
“It was coming home to roost,” McMurray said, “and there wasn’t anything you could do.”
The employer contribution rate established each year by the PSERS Board of Trustees – representing a percentage of employees’ salaries paid to the fund, combined with contribution for health care – hit a low of 1.09 in 2001-02 and exceeded 7 percent only once in the ensuing nine years.
’Still a challenge'
The Legislature finally took corrective action with Act 120 of 2010, which addressed the liability issue by taking such measures as reducing pension benefits and increasing the retirement age for new employees.
On the employers’ side, the legislation called for ratcheting up the contribution rate. But despite “collars” intended to keep yearly increases reasonable, the rate began to climb precipitously, from 8.65 percent in 2011-12 to 30.03 percent for the current fiscal year.
“We have always discussed the fact that, why didn’t PSERS keep that rate at least at 7 percent?” Frosina Cordisco, Upper St. Clair director of business and finance, observed. “That would have helped offset some of this huge increase.”
In her school district, retirement expenses jumped from $1.81 million in 2006-07 to $6.96 million in 2014-15, with the figure expected to top $10 million for 2016-17. And that’s with the state providing reimbursement for half of the PSERS employer contribution.
“When the state is picking up 50 percent share for 500 school districts, they have fewer dollars to allocate for basic education and special education,” Upper St. Clair Superintendent Patrick O’Toole said. “So not only is it taking away from the local revenues, but it’s taking away from the state revenues that aren’t there to be allocated for basic education services.”
By the way, projections call for the contribution rate to stabilize, but school districts still expect to be on the hook for more than 30 percent annually into the next decade.
“It used to be even worse. The slope was even higher,” Cordisco said about previous forecasts. “But it is still a huge challenge for us.”