Many of the comments lately on Community Matters have centered around the upcoming teacher contract negotiations and a forecasted school district deficit of $3.25 million. The PSERS crisis has reached epic proportions and many are suggesting that the problem needs to get ‘fixed’ in Harrisburg. During the last election, several school board candidates pointed their fingers at the state for help in school district bailout.
A variety of factors, including stock market volatility and a poor economy led to the system breakdown. This should not be a teachers’ union versus taxpayers or school board issue. PSERS is not broken because school districts did not make their fair share of payments to the system. School districts did pay what they were required to pay. It’s the ‘fix’ of the broken system that is difficult.
Over half of the PSERS system is funded by investment returns; the stock market crash in 2003 and the down economy these past two years have been in the primary factors in the PSERS problems. Investment earnings are the primary source of funding the PSERS benefits – not the contributions from school employees and taxpayers.
Again, what is the solution to fix the system? Proposed plans can only impact new school employees, it cannot affect existing employees already in the system.
PSEA teacher union president Jim Testerman, supports the current pension plan, “There are no easy solutions, but one thing is clear: the state and school districts must keep their promise to fully fund school employees’ pensions. The current PSERS benefit plan encourages individuals to become and remain educators, and ensures a stable and highly qualified workforce in our public schools.
There is a naivety to Testerman’s stance – what we want and what we can afford may not line up economically. In a perfect world, we would not be facing this economic crisis, and a funding change would not be necessary.
PSERS Board of Trustees released a press release on Friday which certified the employer contribution rate of 12.36% for FY 2012-13. Of the 12.36% employer contribution, 0.86% is for health insurance premium assistance and a pension rate of 11.50%.
According to the press release, were it not for the rate caps set in the 2010 Act 120 legislation, the employer rate would have jumped to 29.65% rather than the 12.36%. Beginning with the next fiscal year, members of the pension fund will contribute an average of 7.40% of their salary to help fund the retirement benefits.
Investment performance for PSERS for quarter ending Sept. 30, 2011 was posted at (-3.62%); 8.45% for the one year period and 6.95% for the 10 year period ending Sept. 30, 2011. Obviously, the extreme volatility in the markets is cited as the downward trending of performance.
According to the press release, “As of September 30, 2011, PSERS had 12.7% of its assets in non-U.S. equities; 10.8% in U.S. equities; 20.5% in U.S. and global fixed income investments; 21.5% in private markets; 12.0% in real estate; 4.1% in commodities, 11.7% in absolute return strategies, and 6.7% in cash and cash equivalents.”
Monday night is the Finance Committee meeting of the TESD – click here for the agenda. Under budget strategies for 2012-13, there are only two significant cost-savings that remain (other than educational program cuts). The outsourcing of custodial services ($950K) heads the list with a potential savings of $300K in equipment budgets. It is not clear what the equipment budget entails.
Without a T/E School District Public Information Committee any longer, I am anxious to hear the details of the ‘Communication Plan’ listed on the agenda for the Finance Committee. Betsy Fadem has been appointed chair of the Finance Committee; I am hopeful that she continues the district’s recent transparent and open public policy on school board matters.
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As Pattye says, “Proposed plans can only impact new school employees, it cannot affect existing employees already in the system.”
Any proposed new plan should be a defined contribution plan. Why? It’s not because a well managed defined benefit couldn’t work. It is because a public sector defined benefit plan, as evidence has shown over the years, is never well managed. The reality is that defined benefit pension plans are magnets for poor public policy and, as we have seen, any benefit level can be instantly legislated (2001) into a fiscal disaster. Throw in some poor investment results and, yes, you have a crisis and another problem for taxpayers. How many times must we learn this lesson?
Social Security and all defined benefit plans are suffering for a myriad of reasons, but the elephant in the room is that people are living about 20 years longer than any of these plans ever intended….Union workers that retire in their 50s are living 30+ years on pensions….hardly what the system called for. One of the reasons the country enacted social security was the rapid increase in life expectancy in the 20s-30s…
Life expectancy in 1939-41, shortly after the start of social security was 63.6 . Social security was legislated to begin at 65.
Today, life expectancy (all US, all genders) is 77.9 and rising — with women at 80+. Education is heavily weighted to females, so given that a teacher can retire at 55, anyone can do the math.
The reason for the rising rates is actuarily based — and the 25% increase in the pension itself (accrued at 2% and increased to 2.5% per year worked) mean that peole who retired after 30 years now earned 75% of their salary, vs. 60% in prior calculations.
In fact PSERS has been reasonably well managed — but the economy has not. Promises made need to be kept, but considering the fact that teachers are the strongest lobby in Harrisburg, don’t expect much.
I assume Pattye intended to type 2008 for the market crash, not 2003.
The other main problem is actuarial in nature. When solvency is calculated, a major part of the calculation is fixed income rates. With current rates so low, that hurts the solvency calculation. Not all public plans are mis-managed but many are unfortunately.
Some of the problem will be alleviated when rates begin to rise. I know that is the opposite of what many are taught but that is how the math works actuarily. However, a bigger problem is simple demographics. For the next 40 years, there simply aren’t enough workers to fund the needs of retirees. In our case, there aren’t enough taxpayers to continually fund every “promise” made to the baby boomer generation. This is basically the same problem they have in Greece today. The difference is that the US has a large economy and brings in a lot of tax revenue and our currency is the reserve currency for the world.
That has saved the situation from becoming as dire as Greece and now Italy and Spain. However, we are on the wrong side of the curve. It is now simple math. There is simply no way we can go on like this since the crisis is just beginning. Even if you took every $ from billionaires, that would only account for 10% of our national deficit plus unfunded mandates (SS and all DB pensions) for 1 year.
There will be structural changes in the end and the promises will not be kept 100%. The math rules out that possibility. The situation begins to change in 40 years when baby boomers die en masse. That is morbid but true.