TESD Finance Committee Notes, Including EIT Tax Study Group Members

As I was attending the Board of Supervisors meeting last night, I imposed on friend Ray Clarke to attend the Finance Committee meeting.  Ray graciously attended and submitted his notes from the meeting for our review.  I was pleased to see that the District released the information on the custodial outsourcing bid process.  It is important for the integrity and transparency of the process, that the public receive the information – and I thank the school board members for providing it.
 
As Ray details, the 9 members of the EIT Tax Study Group have been chosen and were announced at the Finance Committee meeting.  The members of the group include Michael Abele, Michael Benning, Rita Borzillo, Marie Falcone, William Mullin, Terri Smith, Andrew Snyder, Edward Stevens and Lauren Walsh.  I am sure that you join me in thanking these community members for agreeing to serve on the tax study group.  
As always, thank you for your notes from the meeting Ray — we are all most appreciative!
TESD Finance Committee Notes – Ray Clarke
 
Some important topics discussed at the Finance committee meeting:
 
1. This year’s projection. Revenues and expense roughly equal, without the budgeted $1.3 million from the Fund Balance. Helped of course by the PSERS rate reduction and internal programs more than offsetting revenue reduction. Somehow the district again manages to extract more money from taxpayers than is needed, and that will be especially true next year, with the just approved budget set for all worst contingencies. (Included is a just-received $225,000 bill from Blue Cross for 2009 expenses – a hazard of self-insurance [previously T/E was with the County consortium] that speaks to the need for long run funding, see later).
 
2. Fund Balance commitments. Regulations require the commitment of the fund balance for specific purposes. Previous designations seem to have been much looser and Finance Chair Mahoney is requiring a thorough analysis of the policy in the new context. The previous policy was to designate 5 years of PSERS increases vs the current year for “PSERS stabilization”. Which arithmetically means that the fund balance can only be accessed for stabilization when the cost starts to diminish (out in 2025 or so). Alternatively, should the balance be used when the increase is in fact ramping up, to mitigate the increase? Alternatively, should we not in fact assume that the state will have to come up with alternative funding anyway, and so return T/E’s money to the local property taxpayer? There is not enough money for the full five-year increase, as it is now anyway. Plus there is a need for a mechanism to smooth out health care costs in self-funded situation. An important issue.
 
3. Custodial out-sourcing. There were four bidders, all of which invested considerable time in their bids. The lowest bidder was Aramark, with a “base bid” of $1.3 million which was at least $500,000 below the others. The Administration concluded that the total cost would have been about $1.7 million, which they compared to the projected in-house cost of $2.6 million. If I have it right, the TENIG overtime changes and salary increase waiver (all TENIG members, not just custodians) closes $450,000 of the $900,000 gap. Of course, in future years as TENIG rates increase and PSERS rates escalate, the cost comparison for the out-sourcing solution will become more compelling. Hopefully all sides will continue to work on a satisfactory long run solution.
 
4. EIT study group. Members announced: Michael Abele, Michael Benning, Rita Borzillo, Marie Falcone, William Mullin, Terri Smith, Andrew Snyder, Edward Stevens, Lauren Walsh. As Pattye has reported, the selection process was based entirely on the demographics. Each applicant assigned a random number (1 to 186 total applicants), then the administration started from number 1 and filled up the various categories (6 T/3 E, 4 EIT/ 5 No EIT, 1 retired, 2-3 with school-aged children, 1 business owner, I renter, plus loose “as many age brackets as possible”, and “both genders”. Apparently they had to get down to #150 to fill all the categories. The essays only used to exclude those who had written “grossly inappropriate remarks” (none of those!). The group will meet six consecutive Thursdays starting the Thursday after Labor Day, and hold two “information sessions” for the public. A consultant from the PSBA will provide “information and data”. All meetings will be open to the public and hopefully will be used to solicit ideas for analysis and issues relevant to the Board’s decision on a referendum.
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  1. I’m confused about the PSERS stabilization fund. PSERS rates are scheduled to go from 5.64% of salary this year to 8%, 12%, 16%, 21% 23%, 24%, 25%, 26% and stay at 26% for an additional 17 years until 2035.
    .
    I can understand the reason for a stabilization fund if rates were jumping up and down year to year, but rates (and the required dollars) are on a steep climb to a long high plateau of 26%. Thus, the PSERS stabilization fund is useless.
    .
    I’m surprised that TE is self-insured for health care, but doesn’t have a reserve fund already established for small unexpected jumps (e.g. a $225K bill from Blue Cross) nor a stop loss insurance policy for large unexpected jumps .

  2. I wasn’t at the meeting, but the self-insurance didnt’ start in 2009, so I don’t understand that reference. Likewise, they do have a stop-loss policy, and the fund balance was designated for the deductible .

    Maybe there is more to it.

    Cit 1 — absolutely agree. This notion that they will use fund balance in the climb is ridiculous. The PSERS rate (even with the new law for new employees hired after July 1 of this year) doesn’t come back to the level it is today until 2040/2041. This is where UCF made the public statement that the PSERS problem can’t happen, right? They chose to ignore it (or at least defer paying attention to it). So how do the approaches reconcile?

    1. Hi Rest,

      I’m glad to hear TE has stop loss.
      I’m surprised that there is not a designated fund balance dedicated to health care. Maybe there is.
      .
      On the subject of UCF and PSERS: If I remember correctly the statement that “the PSERS problem can’t happen” was made by one uninformed board member. It’s not a view supported by the full board. Here is a comprehensive youtube presentation on the PSERS problem by Dr. Paul Price who is a UCF board member.
      http://www.youtube.com/user/stockdoc9999?blend=1&ob=5#p/a/u/1/Zn3YznWeTBo

  3. Ed Stevens? Is this the same person who ran for school board a few years back? The one who complained that TESD wasn’t doing a good enough job in gifted education, spending too much on special ed?

  4. Downingtown sent out this letter to famlies this week.

    How would TESD families react? Downingtown has about twice as many students as TESD. Their millage for this upcoming school year is 26.7280

    The link to the letter is on the home page of the school district — suggesting that it is necessary to continue to offer these programs. From what I can discern, the max any family will pay would be $225 plus $25 if you are in a club. (regardless of how many kids). Probably could equate to about $2M in revenue.

    http://dasd-sharepoint.dasd.org/Schools/Documents/participation%20fee%20letter%202011.pdf

  5. There’s no question that PSERS isn’t the best retirement system for all but one point is frequently missed here when the topic comes around – the state reimburses the school district for half of PSERS expense. The payroll expense if offset by the PSERS revenue by 50%. Normal DC plans can easily be about 10 – 12% of payroll, net, which is a bit easier to swallow. The better angle to go with this is not to “take” the retirement system from workers but to convince them how mandatory withdrawals into a DC plan is better for them. Going with the first will guarantee resistance, going with the latter could get some support.

    1. Not sure I understand your comment MM — the legislature already changed the plan for any new employee going forward, though it’s still a defined benefit plan — just a bigger contribution. Defined contributions plans are very different, and when given the chance to change the pension plan, they did not opt for that. They did implement a shared risk, and DID cap your pension at your final salary (as the current plan operates, if you work more than 40 years, you can continue to accrue pension benefits at 2.5% a year….) The problem with the state reimbursement is that while it is statutory, the funding for education to districts is not, so splitting the cost of an expensive plan may (and in all probability will) reduce the amount of the general subsidy to districts like ours. State funding is anything but guaranteed. Just like the promised property tax savings from the gambling revenue (which is most likely why the people who voted for it did so), much of it can and might be redeployed.

      Here is a summary of this “new improved” way to save money while still providing a pension to employees hired on or after July 1, 2011:
      Class T-E
      Pension multiplier is 2%
      Effective July 1, 2011 employee contribution base rate is 7.5% (base rate)with a “shared risk” provision that could cause the total contribution levels to fluctuate between 7.5% and 9.5%

      Class T-F
      Pension multiplier is 2.5% Effective July 1, 2011 employee contribution base rate is 10.3% (base rate) with a “shared risk” provision that could cause the total contribution levels to fluctuate between 10.3% and 12.3%

      All new members will automatically become Class T-E members. New members however, will have a one-time opportunity to elect Class T-F within 45 days of receiving written notification from PSERS. Failure to elect Class T-F at time of original eligibility will make the member ineligible for Class T-F forever. In other words, once the election is made either by action or inaction, the election is permanent.

      Class T-E and T-F Members
      *The cost to purchase Non Qualifying Part Time (NQPT) service and most types of nonschool or nonstate service credit (other than military service) will be the full actuarial cost of the service
      *Have a ten year vesting period For normal retirement, employees must work until age 65 with minimum of 3 years of service, or attain a total combination of age and service that is equal to or greater than 92 with a minimum of 35 years of service\
      * No projection of service for determining normal retirement
      *Cannot withdraw contributions and interest in a lump sum when retiring
      * Pension benefit cannot exceed the member’s final average salary

      New employees starting later than July 1, 2011 will contribute based on the “shared risk” rate in effect at date of hire.
      What is Shared Risk?
      With a “shared risk” program Class T-E and T-F members benefit when investments of the fund are doing well and share some of the risk when investments underperform. The member contribution rate will stay within the specified range allotted for Class T-E or T-F; but could increase or decrease by .5% every three years starting July 1, 2015, dependent on investment performance of PSERS. The member contribution rate could never go below the base rate of 7.5% for T-E and 10.3% for T-F members, or above 9.5% for T-E and 12.3% for T-F members.

  6. A couple of comments requesting clarification while I’ve been away.

    To the extent that the district has money in a fund balance that can be put towards the PSERS expense for some albeit limited period of time, it is clearly not useless.

    If the fund balance can be applied while the state legislature is coming to grips with the fact that school districts in general lack the taxing capability to solve the problem, and thus the state has to find another solution, then that fund balance becomes very helpful indeed. (Maybe that UCF school board director is not so completely off the mark; time will tell).

    T/E’s previous healthcare plan was provided through a consortium with other Chester County school districts; the consortium as a whole was self-insured and the costs were somehow divided up based on both the district’s and the overall consortium experience.

    With a relatively small population now that T/E is on its own, it is possible that claims experience will vary from year to year. This year has been relatively good. The thinking is that it would be helpful to have a mechanism to cope with years when experience is not so good.

    1. Ray,
      .
      I overstated my position when I called the fund balance “useless”. It does have some limited use, but let’s try to quantify the fund balance’s usefulness. Let’s assume the maximum amount that can be used from the fund balance is $20M. Let’s compare that to the PSERS payment forecast over the next 25 years until the rates come back down below 25% of salary.
      .
      Here are the yearly PSERS payments in millions of dollars which have to be covered by local taxes.
      2012 $2.5
      2013 $3.6
      2014 $4.9
      2015 $6.2
      2016 $6.9
      2017 $7.2
      2018 $7.4
      2019 $7.7
      2020 $7.9
      2021 $7.9
      2022 $7.9
      2023 $7.9
      2024 $7.9
      2025 $7.9
      2026 $7.9
      2027 $7.9
      2028 $7.9
      2029 $7.9
      2030 $7.9
      2031 $7.9
      2032 $7.9
      2033 $7.9
      2034 $7.9
      2035 $7.9
      I’d be interested to know how the $20M in the reserve fund might be applied in which years to “stabilize” anything related to PSERS. (I do see a use for a heath care stabilization fund, but not PSERS)

      1. Thanks C-1. I don’t think anyone is paying attention. You cannot stabilize something that isn’t a temporary spike, but since most people don’t understand the issue, and some “publicity” regarding it (e.g., the UCF comments) are that the state has to fix it anyway, maybe heads in the sand have the best view.
        I know I approached the board 3 years ago when this PSERS thing was firrst coming to a head — they didn’t have an answer then except that they had it covered….they attempted to charge me excessively for a RTK request, and they “deliberated” the budget increase by having an executive session and then “ta dah.” So It is what it is….. if the State passes legislation that removes “exceptions” from tax increases, the only way to control increases will be to cut programs. You have continually assured me that spending is not associated with quality….I respectfully disagree because I think there is a level of quality that has a price, and since it’s largely “labor dependent” with a contract that cannot by law go down, I don’t see any way to reduce spending to offset PSERS and any other increase. But I’m moving. No doubt about it.

        1. Hi Rest,
          .
          Don’t move. In the long term things will work out without a noticeable change in education. The legislature has noticed some things are out of whack with education and they have a way to address them.
          .
          What’s out of whack?
          – teachers are paid for more than is necessary to attract and retain them. I estimate about 20% more than necessary based on salary schedules from MD.
          – the growth in district staff has grown far above the growth in students
          .
          Why?
          – It is too easy for well meaning school directors to raise taxes in the name of “better education” rather than make the tough trade-offs necessary for an “efficient eduction”.
          – It is too easy for school directors to give large raises to the unions when the bill comes due several years into the future
          – It is too easy to give large raises to the unions when school directors are find raising taxes easier than facing labor action
          – It’s too easy to hire additional personnel to implement the next wonderful new program without cutting one of the old marginal ones.
          – It’s too difficult for school directors to resist the loud voices of special interest groups.
          .
          What’s the fix?
          – taking some of the financial decision making power out of the hands of school directors and placing it with the voting public via the “no exceptions” Act 1 Index. (HB1326)
          – allowing economic furloughs (SB612)
          – preventing lame duck boards from approving unpopular measures such as large building projects and lucrative contracts. (SB1127)
          – providing some competition to public school via vouchers (SB1)

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