No letup seen as Pa. school pension costs soar

Passage of Pennsylvania's education budget for 2012-13 is months away and the legislature likely will make significant changes to the spending plan Gov. Corbett proposed Feb. 7.

But it's almost certain that one very sizable proposed expense won't change: contributions to the Public School Employees' Retirement System (PSERS). Payments for 2012-13 from the state and school districts will rise steeply, by about 45 percent.

The $1.7 billion combined state and local PSERS payments for next fiscal year is locked in under a pension-overhaul law passed in 2010 that averts an even steeper increase. The state share of that contribution is $916 million; barring new legislation, that figure will be in the budget that will be passed about June 30.

This school year, the state made a $600 million pension contribution, about $316 million less than for 2012-13. That's about 6.7 percent of the total state K-12 public school budget. In 2012-13, the state PSERS payment will be more than 10 percent of the proposed K-12 total.

The increases will continue; the combined state and local contribution is projected to be almost $2.5 billion in 2013-14. By 2019-20, it would more than quadruple, compared with this school year, to almost $5 billion.

In recent state Senate testimony, Jay Himes, executive director of the Pennsylvania Association of School Business Officials, said a "financial tsunami" was on the way, with "the makings of a financial crisis in every school district across the state."

He said the rising PSERS payments, combined with recession-related decreases in local school district revenue and state and federal budget cuts, would be devastating.

Some district budgets in the area already reflect that. The Philadelphia district's PSERS payments will increase by $13 million in the coming school year - part of a $269 million budget shortfall it faces. Chester Upland's increase will be about $550,000, with the district facing a shortfall of $10 million next school year, plus a deficit of about $30 million this school year. Bristol Township will have to pay about $1.2 million more; the district has a gap between revenue and expenses of $12.6 million.

State payments average about 56 percent of the total employer contribution to PSERS; districts incur the rest. Poorer ones pay a lower percentage. School employees contribute, on average, about 7.4 percent of their salaries.

PSERS has 279,000 active members and 194,000 retirees and pays out about $5.6 billion a year. The average annual pension is $23,897; payments range from a few hundred dollars to more than $100,000 for a handful of high-paid superintendents.

Most of the funding for pension payments - 69 percent over the last 25 years - comes from investment earnings. The state and school districts combined for 17 percent over those years, with employees contributing 14 percent.

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.

PSERS investments have, overall, done quite well; in the last two fiscal years, for example, PSERS earned 14.6 percent and 20.4 percent. But in 2000-01, it lost billions - 7.4 percent of its value - and 26.5 percent in 2008-09.

A bipartisan legislative majority contributed to the current shortfall when, in 2001, it increased benefits by 50 percent for lawmakers and 25 percent for school employees and later added a cost-of-living increase for retirees. The actions came with assurances that PSERS was flush with money and the increases would not lead to higher state and school district payments.

The stock-market decline of 2001 changed that. Had PSERS payments been made according to the rules at that time, state and district contributions would have more than doubled, then increased more than eightfold over the next nine years. Lawmakers responded by changing the rules, underfunding the system for the next 10 years.

In 2010, faced again with huge rate increases and with the 2008 market losses wiping out most gains since 2003, the legislature passed a bill slowing the rate of increase and spreading it out over a longer time. If the bill had not been enacted, pension contributions for 2012-13 would have been $2.5 billion more and the employer rate at 29.6 percent of payroll, instead of the current 12.4 percent.

Still, contributions will increase sharply until 2015-16, then gradually increase until 2035. Those estimates are based on earnings and payroll estimates that could change, especially farther down the road.

The system, which next fiscal year will be funded at only about 64 percent of the amount it needs to fulfill its obligations, would be fully funded by 2045.