T-E School District has Projected $16 million Budget Shortfall but Underfunded Pension not the Only Factor
Over the next few years, Tredyffrin Easttown School District will be faced with a $16 million budget shortfall; but the pension crisis is not the only contributing factor.
For many years, a growing economy propelled increases in stock prices, enhancing the coverage of many pension plans, public and private. In the old days, the nature of traditional pension coverage in the private and public sector was quite similar; the majority of all employees were covered by a defined benefit plan where the liability of the pension lies with the employer. However, there is a reason why in the last decade that the vast majority of private sector employees have turned away from defined benefit plans to some form of a 401(K) type plan – the challenge of keeping a defined-benefit plan, particularly in our unstable economic climate, has proven too great for most companies to bear.
Defined-benefit plans may provide the best financial safety net for employees, but most private sectors can no longer afford to maintain them – the strain on the company balance sheets has proved too large for firms to withstand. And even in the case where a company struggled to keep a traditional defined-benefit plan in place, the economic downturn has prompted plan changes whether they were preferred or not.
Pennsylvania, like many states in the country, is facing a multi-billion dollar public pension crisis and now is the time for pension reform in Harrisburg. The Public School Employees Retirement System (PSERS) and the State Employees Retirement Systems (SERS), the two systems administering retirement accounts for state and public school employees, are severely underfunded and will become insolvent without an increase in taxpayer contributions.
Pension reform will be to the topic of Rep Warren Kampf’s town hall meeting on Sunday, March 18, 4 PM at the township building. The school district’s public budget workshop on Monday, March 19, 7:30 PM in the Conestoga High School auditorium, will include discussion of the pension crisis and its impact on the school district.
Kampf plans to introduce legislation that would move state workers and school employees to a 401(K) style retirement program. All lawmakers should embrace fundamental pension reform but this type of reform legislation is likely to be met with significant political barriers in Harrisburg. A key driver of ever-rising retirement benefit costs is their hidden nature; it is easier today to promise retirement benefits that will not have to be paid out for years.
The true extent of the unfunded liability of the state pension plan needs to be fully understood. Most of the funding for pension payments – 69% over the last 25 years – comes from investment earnings. The state and school districts combined for 17% over those years, with employees contributing 14%. The causes of the pension-rate jump, PSERS officials say, were pension-payment increases made over the last decade or so that the legislature did not fund adequately, and investment-market declines in 2001-03 and 2008-09. A Pew Center study shows that the Commonwealth has contributed only 40% of what is actuarially required — the lowest percentage of any state government.Pennsylvania’s two major pension funds were 116% and 114% funded in 2001, but dropped to 83% and 79% by 2009.
We can accept that the pension crisis contributes to the projected school district’s $16 million budget shortfall over the next few years but is not the only factor that led to the current economic situation. Because school districts are so reliant on property taxes to fund their respective budgets, the last few years and the next several years will show an ever-decreasing revenue stream as property values and real estate transactions have tumbled. The unfunded and underfunded mandates serves only to exacerbate the already difficult fiscal situation faced in the school district.
Looking back at the last teacher contract, the economic picture in the Tredyffrin Easttown School District was very different in 2007 than it is in 2012 — the school board signed a contract that guaranteed 5%+ salary increases each year. Add to that the rising healthcare costs plus the required PSERS contributions, and the total yearly compensation increase package is much higher. Therefore, it is impossible to balance that increased expenditure when the Act 1 index plus exceptions is below 4%.
Rising healthcare costs and PSERS contributions coupled with decreasing real estate revenues and state and federal support … equals the unprecedented new fiscal reality of our school district.