Districts look for pension solution
Last year at this time, nine of the Alle-Kiski Valley's 15 school districts raised taxes.
This year, it's 10.
Next year and beyond, all 15 will conceivably hit up taxpayers for more cash to run their school districts, and the biggest reason is an acronym: PSERS.
It stands for Pennsylvania School Employees Retirement System, the umbrella under which all school employees are covered by pensions.
But the umbrella has some serious financial holes, 36.2 percent of it, in fact. That's how much state officials say it is underfunded. Patching those holes and getting it back to 100 percent is the task faced mainly by the school districts. It is something they are required to do by law, and it could result in more tax increases over the next 10 years.
In a corner
When it comes to fixing the school pension fund, school boards and administrators have little to work with in their tool kit. Ryan Manzer, Freeport Area's business manager, was asked whether he thinks the districts are being painted into a corner.
“Oh yeah, that's exactly what it is,” Manzer replied. “Our options are limited.
“There are no easy answers at this point,” he said. “We have to look at all the angles. We have very little federal funding here, so that pretty much is not going to change. You look at local funding and nobody wants to increase taxes there, so you have to evaluate all your options at the end of the day and be responsible.”
The only method that districts have to raise revenue is through two taxes: real estate and wage. Wage taxes are paid at a rate of 1 percent, set by law, and the districts have to split that with their member municipalities.
Real estate taxes are the main vehicle for raising school district revenue. That, and paying the costs of numerous unfunded mandates from the state and federal governments, is why school taxes are higher than municipal taxes in most Pennsylvania communities.
Still, the districts do not have a blank check when it comes to raising taxes.
When the Legislature enacted its last version of tax reform, it limited how much a school district can raise taxes by setting an index for each one calculated through a formula. For example, Freeport Area was limited to increasing taxes by a maximum of 2.8 percent of its millage rate this year.
Manzer said the school board voted to raise it to the index, which brought in $360,000 primarily to help with debt service for a building project, but PSERS was still a factor.
“Our increase related primarily to debt service, but it didn't help that we had a $250,000 increase in PSERS,” he said.
Brad Rau, Allegheny Valley School District's business manager, said his district's net PSERS payment for the 2013-14 school year was $714,000 and, in 2014-15, it is expected to jump to $936,000.
“It was the largest increase percentage-wise in our budget this year by far,” Rau said. “The increase was 29.5 percent.”
In Jay Himes' mind there is no doubt as to the source of the increasing financial pressure on school districts.
Himes has a good overview of the situation as executive director of the Pennsylvania Association of School Business Officials.
“I think pensions are the single largest driver of property tax increases,” Himes said. “Our (districts' pension) costs will go up at least $250 million next year (2014-15), possibly as high as $300 million.”
Unless the Legislature comes up with a new way to fund pensions, school districts are looking at pension payment rates that will climb to as high as 33.27 percent of their payrolls in 2035.
Evelyn Williams, spokeswoman for the school retirement system, said the pensions also are funded by employees, who contribute 7.43 percent of their wages. The state chips in as well. Employee contributions are slated to rise gradually to 7.5 percent by 2022 and then top off at 7.51 percent in 2029.
She said the state does not contribute directly. Rather, the school districts have to front the money for the state, which later reimburses the districts for half the amount. The net figure is that which the school district contributes after getting its reimbursement.
For the 2014-15 school year the school districts' rate was 21.4 percent. In 2015-16 it will be 25.84 percent, followed by 29.27 percent in 2016-17 and then 30.25 percent in 2017-18.
The rate increases begin to level off after that, going up by 1 percent or less per year until 2035-36. Only then does it show a significant decrease, dropping to 19.46 percent in 2036-37 and then continuing to decline each year.
Cost vs. percentage
“The percentage isn't the issue, it's the cost,” said John Pallone, New Kensington-Arnold's superintendent.
He referred to the pension costs as part of the puzzle his school district faces in considering fluctuations in operating costs, government mandates and revenue sources when it comes to constructing a budget.
It becomes even more salient regarding economically distressed districts such as New Kensington-Arnold, which has seen its tax base erode significantly during the past 30 years.
“We raised taxes 5.142 mills, but keep in mind that in every year in property assessment appeals, we lose about $100,000,” Pallone said. “We lose that in buildings that are torn down and taken off the tax rolls and when people win their property assessment appeals. So we have to raise taxes about 1 mill every year just to break even.”
Pallone said the net payment to PSERS went up by $173,000 for the district but, when you look at assessment losses, it makes the shortfall $273,000. In five years, he said, the New Kensington-Arnold contribution went from $330,000 to $1.1 million.
“That's almost an $800,000 increase,” Pallone said. “The increase doesn't go away next year; we still have to cover it.”
A tidal wave
Himes said such significant increases could be easier for districts to absorb if they occurred over a longer period.
“The fact that it will go up by about 4 percent, that's harder to adjust to in a year,” he said.
However, Williams said the districts have known what was coming.
“Our executive director has been meeting with the districts for over 10 years,” she said.
Himes was unswayed.
“It was advance notice of a tidal wave,” he said. “Everybody knew it was coming, and I believe that is why districts were able to put away money in fund balances. Yes, they knew it was coming, and they were able to plan for it.”
He said that planning didn't change much. According to Himes, there were “counter forces” at play that posed an obstacle to preparing for PSERS because of other financial pressures. They included revenue cuts in state subsidies and funding, property assessment appeals, low tax indexes and then increased costs such as health, transportation and payments to charter schools.
“So even districts that were raising property taxes were doing it at the lowest rate since Act 1 (tax reform) was passed in 2006,” Himes said.
Many of the fund balances held by districts, long a hedge against raising taxes, are decreasing rapidly.
“We are putting a million-and-a-half in from the fund balance,” Pallone said of his district's budget. “In another year or so, if we keep going the way we are going, we are not going to have any fund balance left.”
Kiski Area School District 'Business Manager Peggy Gillespie said the district squirrelled away $1.4 million in a PSERS reserve fund but is afraid to use it now.
“We can't afford to draw on any of it,” she said. “The problem is the rate is still spiking. If we start using that now, we will never be to where we need to be on revenue to sustain it.”
She said using the fund will be the board's decision but waiting until the increases level off before drawing on that money would be the best option.
Noting that her district's PSERS payment mushroomed by $445,000 for 2014-15, Gillespie said, “It's just horrendous. Nobody can keep up with that.“
Kiski had to revert to a tax increase.
“We're at the point this year where we had to look at a tax increase; we couldn't depend on the fund balance anymore,” she said.
While they wait for a solution to emerge from Harrisburg, school officials are trying to cope and find their own financial solutions.
Pallone said New Kensington-Arnold hopes to maintain its level of education by saving money through consolidating facilities, establishing energy-efficiency programs, getting lower rates by joining utility consortiums and simply cutting back wherever possible.
But he, Manzer, Gillespie and other school officials know that, as finances continue to tighten, concern about the effect on education programs is likely to grow.
“There are only so many things you can cut out of your budget that are not contractual,” Gillespie said. “At some point, this is all going to go to the classroom unless there is reform.“
Himes noted, “They are absolutely in this financial vise, and there is not an easy way out.”
Tom Yerace is a staff writer for Trib Total Media. He can be reached at 724-226-4675 or firstname.lastname@example.org.