By the numbers: Pennsylvania pensions
Posted: Sunday, October 6, 2013 5:30 am | Updated: 6:45 am, Sun Oct 6, 2013.
Editor’s note: This is part one of a three-part series on Gov. Tom Corbett’s top three legislative initiatives.HARRISBURG — To Ritchie Webb, the trend doesn’t seem to make sense: Even as his school district slashed payroll by $5 million over three years, the amount owed toward employee retirement more than doubled.The Neshaminy School District board president has watched worriedly as his district’s pension contributions climbed from $4.1 million in 2010-11 to $8.3 million in 2012-13.
By 2014-15, Neshaminy’s retirement cost is projected to spike to nearly $16 million.
“You have the train coming straight at you and nobody’s doing anything to solve it,” Webb said. “It seems to me that it’s not being taken seriously.”
School business officials throughout Pennsylvania are struggling to keep up with mounting retirement tabs. Without a boost in state funding or legislative action, school officials say the rapidly climbing costs are bound to lead to deeper program cuts and steeper tax hikes.
“Are we going to have to raise taxes in the future to meet those obligations?” said David Matyas, business administrator for Central Bucks School District. “Yes, there’s no way around that.”
Pennsylvania’s pension problem dates back to the early 2000s.
With Gov. Tom Ridge at the helm and Pennsylvania’s pension funds flush with cash, the state Legislature increased retirement benefits for employees while artificially lowering the amount that the state and school districts had to chip in. The plan was to offset those changes through an increase in employee contributions and future investment returns.
In the 40 years leading up to 2001, the state and school districts put roughly 12 percent of payroll into public pension funds. From 2001 to 2003, the employer pension rate plummeted to 0 percent. The health care contribution rate barely topped 1 percent.
The lower rates freed up cash for schools — but also contributed to an unfunded pension liability in Pennsylvania that’s now approaching $50 billion.
“I’m not sure that anybody can fully fund this retirement cliff that we’re hitting in the state,” Palisades School District Business Administrator Drew Bishop said.
Gov. Tom Corbett has pegged pension reform as one of his “Big 3” agenda items this session, along with transportation spending and liquor privatization.
Many local legislators cite addressing long-term pension problems as the most important of the governor’s “Big 3.” But they’re also skeptical that attempts to overhaul the state’s public retirement systems will make much headway this fall, and some question proposals put forth in the name of “reform” thus far.
Corbett introduced a plan last winter that would move future employees onto a defined contribution, 401(k)-type system.
Rep. Paul Clymer, R-145, West Rockhill, said he thinks shifting toward the type of system commonly found in the private sector is a good start.
But some local lawmakers — on both sides of the aisle — aren’t convinced.
Rep. Madeleine Dean, D-153, Jenkintown, pointed to three actuarial analyses she reviewed as a member of the House Appropriations Committee that found Corbett’s plan could actually cost the state $40 billion over 30 years.
“To me, if new members would stop contributing into the present system, it seems to me it would make the problem of the unfunded liability worse,” said Rep. Gene DiGirolamo, R-18, Bensalem.
The second — and more controversial — part of Corbett’s plan calls for reducing future, unearned benefits of current employees.
“I am wholeheartedly opposed to Gov. Corbett’s attempts to deprive the working men and women of Pennsylvania their hard-earned benefits,” said Rep. Brandon Boyle, D-170, Philadelphia.
Public-sector unions have threatened to sue if the state tries to lower benefits for workers already in the systems.
“This is not fiscal. This is ideological, and this is about the idea that people shouldn’t have secure retirement,” said Sen. Daylin Leach, D-17, Upper Merion. “It’s a Republican effort to take away one of the basic building blocks of our safety net, and I won’t support any part of that.”
The Pennsylvania State Education Association argues that it’s unfair to punish those who’ve been paying into the system at a steady rate, even when school districts and the state got a payment “holiday.” Public employees now put an average of 7.5 percent of their salary into retirement.
“I think that there are serious constitutional and legal restraints as it regards current employees,” said Rep. Todd Stephens, R-151, Horsham. Stephens was initially in favor of a 401(k)-style plan, but he’s since sat down with financial planners who laid out concerns over potential long-term costs of that switch.
The House and Senate have both advanced legislation that stripped out the portion of Corbett’s plan that would roll back increases in benefits to current employees. The bills kept the portion of Corbett’s proposal that would place future employees into a 401k-style plan.
But changes for new employees wouldn’t address the state’s $47 billion unfunded liability, or ease school district concerns about looming rate spikes.
“None of the reform proposals that have been discussed in the General Assembly really result in any tangible savings to school districts,” said Wythe Keever, spokesman for the PSEA. “What’s really needed is a more of a discussion on how to create more revenue for school districts, which this governor has refused to consider.”
Pennsylvania has two public pension systems. The Public School Employees’ Retirement System, with about 273,000 current employees and 202,000 retirees, had an unfunded liability of $29.5 billion in 2012, the latest figure available. The State Employees Retirement System had an unfunded liability of $17.8 billion.
Statewide, the average pension recipient gets about $25,000 annually. A teacher with 35 years of service and a master’s degree in Central Bucks could top out at $68,000 per year, while a principal could get up to $89,000 and a district administrator could collect $97,500.
The funds are supplied by three sources: employee contributions, employer contributions — school districts and the state — and investment returns. The state reimburses school districts for half their pension costs.
Actuaries express concerns when pension funding levels drop below 80 percent. The state’s two systems are now funded at around 67 percent, and the combined unfunded liability is projected to climb to $65 billion in a few years.
When the Legislature axed contribution rates in the early 2000s, lawmakers hadn’t predicted the severe blows to the state’s pension investment funds with the recessions of 2003 and 2008. As Wall Street panicked, pension funds dwindled. After netting 15 percent gains for five straight years in the late 1990s, the state’s two retirement investment funds lost more than $21 billion in 2008-09 alone.
“Certainly, in retrospect, the stock market did not do what was projected for it to do — which was continue to rise at astronomical rates forever — but keep in mind the people who made that mistake weren’t the ones who will suffer if we cut retirement benefits,” Leach said.
Rep. Scott Petri, R-178, Upper Makefield, said that any pension solution is going to have to play out over the long term.
“The only realistic route — no matter who’s paying — is to wait it out,” he said. “You’ve got to grow your way out of it. The question is, can you soften the impact and shorten the time that it’s going to take to grow out of it?”
Most recently, Rep. Glenn Grell, R-87, Cumberland County, unveiled a proposal that uses a combination of borrowing, voluntary reductions to current employees’ plans in exchange for a lower contribution rate and a “cash balance plan” for future employees. The cash balance plan would incorporate elements from a 401(k)-type plan, but also promise employees an annual return of at least 4 percent. Grell announced his proposal at a press conference last week, and he plans to introduce his legislation later this month.
“I don’t know if it’s going to work, but he’s certainly trying to do as best he can,” Petri said.
The Corbett administration has questioned Grell’s proposal to take out up to $9 billion in bonds — a move that would saddle the state with a roughly $500 million annual debt payment.
“I’m willing to consider some level of borrowing, but we need to make sure that we’re addressing this issue for the long term,” said Rep. Stephens, of Horsham. “It can’t just be a Band-aid. We can’t just borrow any money and not make any structural changes.”
The Pennsylvania School Boards Association said Grell’s plan is “worthy of further consideration as discussions on pension reform are renewed this fall.”
But Leach, like most Democratic lawmakers, calls for holding off on another round of pension reforms.
In 2010, the Legislature took action to address some pension concerns with Act 120, which increased contributions for new employees, increased the retirement age to 65 and set a schedule for increased employer contributions over the next several years.
“We already passed pension reform; we passed Act 120, which if funded according to its terms, should solve the pension problem,” Leach said. “At this point we don’t need any other reforms.”
Meanwhile, investment gains are getting better, with PSERS reporting last month that it netted an 8 percent return in 2013, about half a percentage point higher than expected. PSERS CEO James Grossman said the fund would benefit from more dollars to invest.
“The market has been good and the market has really helped to provide the additional funding, although we’re holding our breath because we’re not sure what the end result of Obamacare is going to be,” Clymer said.
Clymer has suggested the state find other sources of revenue to help relieve the pension burden, such as a tax on casino visitors.
Under Act 120, school district retirement contributions are set at 16.93 percent of payroll in 2013-14. The employer rate is scheduled to increase by about 4 percent each of the next three years, up to 28.3 percent in 2017-18.
“Schools are understandably concerned. They’re feeling pressures from so many angles, and it’s of course a set of dominoes, and then it pressures local taxpayers,” Dean said. “Act 120 is tackling, eating away at pension problems, even if it’s not as fast as most people would like.”
Matyas said he thinks Central Bucks is in better shape than most school districts, with the school board focusing on long-term planning instead of just “year-to-year budgeting to get by.”
Central Bucks has expenses over the last five years, such as by eliminating some 600 positions through attrition and outsourcing more than three dozen bus routes. The district has also been raising taxes a “judicious amount” annually, Matyas said.
The Palisades School District has managed to put about $5.4 million in a retirement spike fund, by contributing about $170,000 into the pot each year.
That’s a move a majority of districts have made across the state in anticipation of looming rate increases, Department of Education spokesman Tim Eller said. But it hasn’t been easy for the most cash-strapped districts.
And even for districts that manage to save up, those reserves funds will be a one-time infusion that runs out quickly, Eller added.
“Not all districts are fortunate enough to save the kind of money that we have,” Bishop said.
Charter schools administrators are worried about the problem, too. They get a larger reimbursement in pension costs — the controversial “double dip” that lawmakers are also trying to address — but many say they have lean budgets that will also be hit hard by the rate increases.
“Now instead of spending money on education, I have to spend it on people’s retirement,” said Diane Hedde, business manager at the Center for Student Learning. “I might have to take their job and make a part-time job out of it to cut down.”
School Lane Charter School Principal Karen Schade said it helps that her employees are on the younger side. But one of her points of pride is devoting two teachers to each classroom for at least two hours daily, and she’s not sure she can keep up that kind of ratio if the pension rates continue to rise.
“Something needs to be done because districts can’t afford to fund this whole thing,” Bishop said. “It’s unsustainable.”
Petri said his “gut” tells him it’s unlikely that all the parties involved are going to agree on a pension overhaul, but he’s still hopeful the Legislature will get something done this session.
“The goal is to get something over the finish line if we can,” Petri said.
By 2014-15, Neshaminy’s retirement cost is projected to spike to nearly $16 million.
“You have the train coming straight at you and nobody’s doing anything to solve it,” Webb said. “It seems to me that it’s not being taken seriously.”
School business officials throughout Pennsylvania are struggling to keep up with mounting retirement tabs. Without a boost in state funding or legislative action, school officials say the rapidly climbing costs are bound to lead to deeper program cuts and steeper tax hikes.
“Are we going to have to raise taxes in the future to meet those obligations?” said David Matyas, business administrator for Central Bucks School District. “Yes, there’s no way around that.”
Pennsylvania’s pension problem dates back to the early 2000s.
With Gov. Tom Ridge at the helm and Pennsylvania’s pension funds flush with cash, the state Legislature increased retirement benefits for employees while artificially lowering the amount that the state and school districts had to chip in. The plan was to offset those changes through an increase in employee contributions and future investment returns.
In the 40 years leading up to 2001, the state and school districts put roughly 12 percent of payroll into public pension funds. From 2001 to 2003, the employer pension rate plummeted to 0 percent. The health care contribution rate barely topped 1 percent.
The lower rates freed up cash for schools — but also contributed to an unfunded pension liability in Pennsylvania that’s now approaching $50 billion.
“I’m not sure that anybody can fully fund this retirement cliff that we’re hitting in the state,” Palisades School District Business Administrator Drew Bishop said.
Gov. Tom Corbett has pegged pension reform as one of his “Big 3” agenda items this session, along with transportation spending and liquor privatization.
Many local legislators cite addressing long-term pension problems as the most important of the governor’s “Big 3.” But they’re also skeptical that attempts to overhaul the state’s public retirement systems will make much headway this fall, and some question proposals put forth in the name of “reform” thus far.
Corbett introduced a plan last winter that would move future employees onto a defined contribution, 401(k)-type system.
Rep. Paul Clymer, R-145, West Rockhill, said he thinks shifting toward the type of system commonly found in the private sector is a good start.
But some local lawmakers — on both sides of the aisle — aren’t convinced.
Rep. Madeleine Dean, D-153, Jenkintown, pointed to three actuarial analyses she reviewed as a member of the House Appropriations Committee that found Corbett’s plan could actually cost the state $40 billion over 30 years.
“To me, if new members would stop contributing into the present system, it seems to me it would make the problem of the unfunded liability worse,” said Rep. Gene DiGirolamo, R-18, Bensalem.
The second — and more controversial — part of Corbett’s plan calls for reducing future, unearned benefits of current employees.
“I am wholeheartedly opposed to Gov. Corbett’s attempts to deprive the working men and women of Pennsylvania their hard-earned benefits,” said Rep. Brandon Boyle, D-170, Philadelphia.
Public-sector unions have threatened to sue if the state tries to lower benefits for workers already in the systems.
“This is not fiscal. This is ideological, and this is about the idea that people shouldn’t have secure retirement,” said Sen. Daylin Leach, D-17, Upper Merion. “It’s a Republican effort to take away one of the basic building blocks of our safety net, and I won’t support any part of that.”
The Pennsylvania State Education Association argues that it’s unfair to punish those who’ve been paying into the system at a steady rate, even when school districts and the state got a payment “holiday.” Public employees now put an average of 7.5 percent of their salary into retirement.
“I think that there are serious constitutional and legal restraints as it regards current employees,” said Rep. Todd Stephens, R-151, Horsham. Stephens was initially in favor of a 401(k)-style plan, but he’s since sat down with financial planners who laid out concerns over potential long-term costs of that switch.
The House and Senate have both advanced legislation that stripped out the portion of Corbett’s plan that would roll back increases in benefits to current employees. The bills kept the portion of Corbett’s proposal that would place future employees into a 401k-style plan.
But changes for new employees wouldn’t address the state’s $47 billion unfunded liability, or ease school district concerns about looming rate spikes.
“None of the reform proposals that have been discussed in the General Assembly really result in any tangible savings to school districts,” said Wythe Keever, spokesman for the PSEA. “What’s really needed is a more of a discussion on how to create more revenue for school districts, which this governor has refused to consider.”
Pennsylvania has two public pension systems. The Public School Employees’ Retirement System, with about 273,000 current employees and 202,000 retirees, had an unfunded liability of $29.5 billion in 2012, the latest figure available. The State Employees Retirement System had an unfunded liability of $17.8 billion.
Statewide, the average pension recipient gets about $25,000 annually. A teacher with 35 years of service and a master’s degree in Central Bucks could top out at $68,000 per year, while a principal could get up to $89,000 and a district administrator could collect $97,500.
The funds are supplied by three sources: employee contributions, employer contributions — school districts and the state — and investment returns. The state reimburses school districts for half their pension costs.
Actuaries express concerns when pension funding levels drop below 80 percent. The state’s two systems are now funded at around 67 percent, and the combined unfunded liability is projected to climb to $65 billion in a few years.
When the Legislature axed contribution rates in the early 2000s, lawmakers hadn’t predicted the severe blows to the state’s pension investment funds with the recessions of 2003 and 2008. As Wall Street panicked, pension funds dwindled. After netting 15 percent gains for five straight years in the late 1990s, the state’s two retirement investment funds lost more than $21 billion in 2008-09 alone.
“Certainly, in retrospect, the stock market did not do what was projected for it to do — which was continue to rise at astronomical rates forever — but keep in mind the people who made that mistake weren’t the ones who will suffer if we cut retirement benefits,” Leach said.
Rep. Scott Petri, R-178, Upper Makefield, said that any pension solution is going to have to play out over the long term.
“The only realistic route — no matter who’s paying — is to wait it out,” he said. “You’ve got to grow your way out of it. The question is, can you soften the impact and shorten the time that it’s going to take to grow out of it?”
Most recently, Rep. Glenn Grell, R-87, Cumberland County, unveiled a proposal that uses a combination of borrowing, voluntary reductions to current employees’ plans in exchange for a lower contribution rate and a “cash balance plan” for future employees. The cash balance plan would incorporate elements from a 401(k)-type plan, but also promise employees an annual return of at least 4 percent. Grell announced his proposal at a press conference last week, and he plans to introduce his legislation later this month.
“I don’t know if it’s going to work, but he’s certainly trying to do as best he can,” Petri said.
The Corbett administration has questioned Grell’s proposal to take out up to $9 billion in bonds — a move that would saddle the state with a roughly $500 million annual debt payment.
“I’m willing to consider some level of borrowing, but we need to make sure that we’re addressing this issue for the long term,” said Rep. Stephens, of Horsham. “It can’t just be a Band-aid. We can’t just borrow any money and not make any structural changes.”
The Pennsylvania School Boards Association said Grell’s plan is “worthy of further consideration as discussions on pension reform are renewed this fall.”
But Leach, like most Democratic lawmakers, calls for holding off on another round of pension reforms.
In 2010, the Legislature took action to address some pension concerns with Act 120, which increased contributions for new employees, increased the retirement age to 65 and set a schedule for increased employer contributions over the next several years.
“We already passed pension reform; we passed Act 120, which if funded according to its terms, should solve the pension problem,” Leach said. “At this point we don’t need any other reforms.”
Meanwhile, investment gains are getting better, with PSERS reporting last month that it netted an 8 percent return in 2013, about half a percentage point higher than expected. PSERS CEO James Grossman said the fund would benefit from more dollars to invest.
“The market has been good and the market has really helped to provide the additional funding, although we’re holding our breath because we’re not sure what the end result of Obamacare is going to be,” Clymer said.
Clymer has suggested the state find other sources of revenue to help relieve the pension burden, such as a tax on casino visitors.
Under Act 120, school district retirement contributions are set at 16.93 percent of payroll in 2013-14. The employer rate is scheduled to increase by about 4 percent each of the next three years, up to 28.3 percent in 2017-18.
“Schools are understandably concerned. They’re feeling pressures from so many angles, and it’s of course a set of dominoes, and then it pressures local taxpayers,” Dean said. “Act 120 is tackling, eating away at pension problems, even if it’s not as fast as most people would like.”
Matyas said he thinks Central Bucks is in better shape than most school districts, with the school board focusing on long-term planning instead of just “year-to-year budgeting to get by.”
Central Bucks has expenses over the last five years, such as by eliminating some 600 positions through attrition and outsourcing more than three dozen bus routes. The district has also been raising taxes a “judicious amount” annually, Matyas said.
The Palisades School District has managed to put about $5.4 million in a retirement spike fund, by contributing about $170,000 into the pot each year.
That’s a move a majority of districts have made across the state in anticipation of looming rate increases, Department of Education spokesman Tim Eller said. But it hasn’t been easy for the most cash-strapped districts.
And even for districts that manage to save up, those reserves funds will be a one-time infusion that runs out quickly, Eller added.
“Not all districts are fortunate enough to save the kind of money that we have,” Bishop said.
Charter schools administrators are worried about the problem, too. They get a larger reimbursement in pension costs — the controversial “double dip” that lawmakers are also trying to address — but many say they have lean budgets that will also be hit hard by the rate increases.
“Now instead of spending money on education, I have to spend it on people’s retirement,” said Diane Hedde, business manager at the Center for Student Learning. “I might have to take their job and make a part-time job out of it to cut down.”
School Lane Charter School Principal Karen Schade said it helps that her employees are on the younger side. But one of her points of pride is devoting two teachers to each classroom for at least two hours daily, and she’s not sure she can keep up that kind of ratio if the pension rates continue to rise.
“Something needs to be done because districts can’t afford to fund this whole thing,” Bishop said. “It’s unsustainable.”
Petri said his “gut” tells him it’s unlikely that all the parties involved are going to agree on a pension overhaul, but he’s still hopeful the Legislature will get something done this session.
“The goal is to get something over the finish line if we can,” Petri said.
4 comments:
Isn't the Morrisville School District immune to this because of the leadership of Bill Hellmann, CPA? I mean, that's what he promised.
The less said about that arrogant charlatan the better.
you had to relect him to get that.
you would have been immune to it but you also would have had a k-5 district.
A K-5 district would be better. Then the children would get a chance to not turn out like their parents.
Have you not looked at your neighbors lately?
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