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.

16 Comments

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  1. 1 – Thanks for publicizing this.

    2 – I am pretty sure Rep. Kampf’s legislation only moves any new hires into a 401k – not anyone already in the system. I think that is an important point and should always be made clear.

    3 – I give Rep. Kampf credit for this. Mr. Drucker did nothing real to attempt to solve this problem in his two years. The legislation passed during his tenure simply extended the liability over more years, but didn’t get at the root cause.

    I am sure this will open Rep. Kampf to political attacks from special interest groups against this idea. This includes the PSEA, the SEIU and pretty much every other public sector employee union. As Mr. Drucker received nearly $1.5 million in support from these and related special interests in his first two campaigns, I guess we will see another nasty and expensive race this fall as they fight to get him back into office. In fact, it has already started with his SEIU allies sending an attack mailing against Rep. Kampf earlier this week — months before the general election.

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  2. Oops, one more thing…

    I don’t think Rep. Kampf’s legislation is going to be a panacea.

    We did not get into this problem overnight and we won’t get out of it overnight.

    But at least his legislation attempts to deal with the root cause of the issue so that, over time, we can climb out the hole we are in and have a sustainable system.

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  3. Learning from the past is pointless, but this problem with TESD finances AND the state pension plan have been developing far longer than the last contract date. The numbers of reassessments was a huge red flag, and the pension figures have been projected to be at these ridiculously high numbers for several years. And yet — many of the sitting board intentionally kept tax rates artificially low (several times they ignored the act 1 number) knowing they would ultimately be unable to tax to cover programs. They backed this community into a corner with that policy, and yet would not face the fact that they needed to get real about revenue and benefits. How many times do we need to hear them say the state has to fix this before we accept that they NEED the state to fix it. It is unprecedented, but could have been much reduced had they been willing to address it publically instead of deciding to minimize tax increases in executive sessions. It really is like a tea party pledge here….so please ask them why they signed a contract 5 years ago that they realistically could have predicted they could not afford. And why tax increases did not build per the act 1 index…which is presumably a COLA at the most.

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    From The West Reply:

    Great points and great questions. I do find it troubling that te School Board President is going throughout the community blaming Harrisburg when many of the problems originate right here at home. I also notice she didnt start blaming others until she was up for reelection last year.

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  4. One error in my comment — didn’t sign it t five years ago, but I actually have copies of emails I sent to the board in 2004 and again in 2008/09 challenging them to stop doing contracts they could not pay for, and asking why they would pretend to be keeping taxes low without making an equal effort to keeping expenditures low. The automatic cost of the salary schedule before the 2004 contract was 2.89% if everyone just moved. I asked them then why they would not freeze the schedule (which was developed very intentionally as the union had approved parameters and not numbers for a 3 year term, and the major issues with the schedule were addressed). Freezing the schedule does not freeze anyone’s pay except those at the final step, who continue to accrue 2.5% on their pension. SO, this has been true and scrutinized by me and others since the 2004 contract. So our current talking heads can be as articulate as they want to be about what the problem is, but in 2008/09, when I specifically asked them how they were going to deal with what then was projected to be a 16% PSERS assessment for 2013, they knew it all. And battered me for asking the question.

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  5. All school boards in PA have been challenged by three factors outside their control:
    1. the recession of 2008 causing a drop in real estate revenues (assessment appeals, transfer tax decrease)
    2. escalating PSERS expenses caused by the passage of Act 9 in 2001
    3. a cap on RE tax revenues caused by the passage of Act 1 of 2006
    .
    Some school board have been able to balance their budgets and manage their way through the challenges by controlling expenses and modestly increasing taxes. TE has “painted themselves into a corner”.
    .
    The budget can be balanced by limiting salary increases. TE took that option away with the teacher contract signed in 2008.
    .
    The budget can be balanced by increasing taxes to the Act 1 limit plus exceptions. TE took that option away in multiple years by taxing below the Index and by not taking the PSERS exception.
    .
    The budget can be balanced by reducing the number of employees. This is the only viable option available to TE’s board at this time. (a referendum is not viable in my opinion) As much as some people might want to blame the state legislators, TE’s wounds are self inflicted.

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    Township Reader Reply:

    Shouldn’t the layoff issue be examined, publicized and explored so that the teachers who are likely to be laid off are incentivized to move their union to the finish line?

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    Keith Knauss Reply:

    By law teachers cannot be furloughed for economic reasons. Let me say that again, because it’s almost unbelievable – By law teachers cannot be furloughed for economic reasons. Teachers may be furloughed if a whole program is cancelled such as Foreign Language in Elementary Schools or the Elementary Music program.
    .
    To reduce the staff the school board has two practical options. One, cancel a program as mentioned above. Two, just don’t replace a teacher if a teacher voluntarily leaves (e.g. retires or moves).
    .
    To complicate the situation, if a program is cancelled, the teacher affected has bumping rights determined by seniority. Because of the bumping process, the teacher that is eventually fired is usually the one with the least seniority and the least influence on “moving the union to the finish line”..

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    From the West Reply:

    And the least savings to the school district

    Dom P Reply:

    I believe they can be furloughed, but last year part of the agreement with the freeze was that no jobs would be furloughed or demoted. What is most likely to happen is that the district will demote contracted full time employees to .5 or lower so that they don’t qualify for healthcare benefits. If they are contracted they must have a job, but it doesn’t guarantee where and fulltime. So what’s possibly is having two half time teachers take a day of kindergarten, one for the am and one for the pm. The combined salary would be similar but they would not have to offer healthcare. Or in the higher levels, the teachers would be demoted and may only have two classes. They would then hope that teachers leave on their own because they don’t have benefits and their salary is cut in half or lower depending on their demotion. The demotions do not have to be based on seniority because technically the teachers are still contracted just at a lower time rate, and any part time people they hire to fill in the needed spots or vacated positions would not receive a contract and not qualify for benefits.

    Keith Knauss Reply:

    DomP,
    Good point on demotions. It will be interesting to see if the widespread use of demotions triggers grievances. North Penn has had that experience. Here is an interesting article on furloughs and demotions.
    http://educationlaw.foxrothschild.com/2011/03/articles/employment/foxs-mark-fitzgerald-provides-testimony-to-pa-house-education-committee-regarding-furloughs-of-school-district-employees/

    kevin Grewell Reply:

    Keith,

    I must respectfully take exception to some of your points. In particular “some school boards have been able to balance their budgets . . . . by controlling expenses and modestly increasing their budgets.”

    Few districts have truly been able to balance their budgets in the way you suggest post Act 1 and the 2008 economic crisis. As time goes on, without some combination of economic recovery and/or legislative assistance from Harrisburg, very few (if any) will be able to do so (without significant program cuts at least). Take your district, Unionville Chadds Ford, for example. Your current budget does not tell the whole story. In recent years, you were behind the eight ball in facilities – you had kids in trailers and badly needed expansion and renovation of your high school, and a 2008 voter referendum to fund the project failed. If memory serves, it was a $60+ million plan. I am not trying to be critical or take a cheap shot. My point is simply that it is not so easy as you imply.

    T/E, by the way, was able (without resort to referendums) to expand and modernize its schools, including the HS, while having among the lowest debt and the same percentage of its budget used to service debt as in 1999 – roughly 6% then and today.

    In T/E taxing to the Act 1 cap and also taking Act 1 exceptions may be just as politically impossible as getting a referendum passed in Unionville Chadds Ford. Given the way the local Republican party behaved in the last election over the mere appointment of an EIT study, it may be difficult to get elected and stay elected while advocating for utilization of all of the Act 1 options.

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    Keith Knauss Reply:

    Hi Kevin,
    .
    Thanks for the conversation. I’m of the opinion that we all have something to learn from each other.
    .
    I’m still of the opinion that balancing the budget is a straight forward exercise of keeping compensation increases (70%+ of expenditures) in-line with the Index + exceptions (80% of revenues). We could get into the peripheral factors of assessment appeals, RE transfer taxes, interim taxes, federal funding and state aid, but let’s save that for a later time. The two districts I closely examined with budget problems (TE, GV) have promised, a few years ago, compensation increases that turned out to be far above the Index + exceptions. What’s the lesson? First, keep compensation increases below revenue increases. Second, don’t do multi-year contracts – we can’t predict the future and school boards tend to be overly optimistic – burdening future school boards with the problem.
    .
    As for the Unionville high school project and failed referendums (2), you may be surprised to know that I was a vocal opponent. In fact, a former school board director and I formed a PAC to oppose the $60M+ project and to promote a scaled down $35M project.
    http://www.efficienteducation.org/pres9_17.htm
    .
    We helped defeat two referendums, but still failed to stop the project. The school board, at that time, ignored the clearly stated will of the community, continued on with a project that provides facilities far in excess of our needs and burdened taxpayers with a debt service that exceeds 11% of our budget for the next 20 years. (no member of that board is in office at this time)
    .
    As for portable classrooms – they should not be considered a “band aid”, but, rather, an integral part of any facilities plan.

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    kevin Grewell Reply:

    Thanks Keith – after I wrote my comment above, I thought I remembered that there were in fact two referendums, and I did some internet research. I ran across your “efficient education” web site and some articles on the high school project. I also read some old meeting minutes from the UCF web site. It is very interesting reading to be sure.

    I was not taking a position on the referendums one way or the other, I was simply pointing out the difficultties which I believe will continue to plague all or nearly all districts in the state as time goes on – unless something in the equation changes. That something could also be much more favorable teacher contracts. Given current economic conditions, I do expect some of the ground will be made up on that front. However, I think it is unrealistic to expect that it will all be made up that way. The deck is stacked too much in favor of the unions due to the legislative structure under which we operate.

    I will not argue what was and was not forseeable in 2008 when the current T/E contract was signed, although at the time the housing crash had not yet happened and the district had the projected revenue for the life of the contract. I was off the board before the 2008 contract was negotiated. I served 1999 – 2007, and when I was elected, we were under a six year contract signed in 1998. The only contract during my time was 2004. I was not on the negotiating team but I voted for it (I think we all did). It was a very different time. At the time the current situation was not forseen or forseeable, and the kind of union concessions now contemplated were simply not in the cards. My point being that it is a little too easy to look backwards and blame past board decisions for the current situation.

    During my time, our fund balance – one of the largest in the state today – was even larger. One problem we had was real estate transfer tax revenue exceeding projections year after year despite our efforts to change our forecasting to be more accurate. Our teachers had just delivered several years of exceptional performance, ranking from #1 to the top few districts in the state in every category. Our budget hearings were attended in those days by an average of (and I’m being generous) of maybe 15 -20 people. We heard from larger numbers of parents who wanted something more (often hundreds of them) and very little from taxpayers upset at the taxes. We had then, and still have, some of the lowest porperty taxes in the state, ranking aout 470 to 480 out of 501 school districts.

    I think we did make some sound forward-looking decisions such as committing to a single high school when there was a fairly large and vocal group calling for two smaller schools, which would have required construction of a second school. As a result, as I pointed out above, our debt is among the lowest in the state and consumes 6% of the budget, the same as in 1999.

    Keith Knauss Reply:

    Kevin,
    .
    I can understand how easy it was for the TE board to sign an unaffordable contract in 2007. The economic downturn was not evident. The Act 1 Index only took effect in 2006. Prior to that, boards could raises taxes as much as they wanted to cover any contracted increase. The ramifications of the Index were not apparent to most boards. TE was not alone. As of October 2009 (well into the recession) there were 256 districts that had contracts calling for average salary increases of 4.1% for the 2010-11 school year. This goes to show that it was usual for districts to promise raises they couldn’t afford. Our board might have done the same thing except they had two noisy, conservative, numbers oriented, ex-board members in the audience.
    .
    It will be interesting to follow the contract negotiations of TE and other Chester County districts. Oh, don’t forget to tune into Neshaminy. I think we’ll see a slow movement to where contracts are affordable under the Index.

  6. KK
    Sad as I am to agree, you are absolutely correct. And it predates the 2008 contract — in fact began with the 2004 contract. In 2004 I had extensive correspondence with the board about the poor philosophy to their compensation model and their tax approach. I was told they knew what they were doing and there were factors in play “I was not aware of” — which in my opinion was nothing more than admitting that the tax decisions made in executive session were misguided.
    For many ,many years, TE’s philosophy closely followed the model of taxing to cover expense increases. Fund balance was used for one time only expenses. This was directly a result of an issue in the early 90s where TE had bragged of years of “zero tax increase” and had a major correction year where the increase was double digits.
    So the board can give us all the platitude about no crystal ball and the state problems, but they absolutely are obfuscating what many, including me, warned them of almost a decade ago.
    But all that aside, the teachers state-wide have to get real about health care INSURANCE — not benefits. I don’t think it can change until districts stop negotiating plans and instead negotiation contributions. If you read the PSEA web on Benefits, you will see that they advocate a state-wide plan. Well — that cannot happen until the PSEA itself is committed to negotiating a plan on behalf of members, the most efficient way to get to that is for districts to negotiate contributions.

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