Franklin Regional maps possible routes through PSERS increases
By Daveen Rae Kurutz
Published: Thursday, Feb. 7, 2013, 7:14 a.m.
Preparation by Franklin Regional officials could help soften the blow of an anticipated $5.1 million increase in pension contributions over the next five years.
State-mandated annual pension contributions will double during that time, to fund a shortfall in the Public School Employee Retirement System of more than $26 billion. But a savings account Franklin Regional officials established in 2008 will ease some of the burden on taxpayers, though taxes almost certainly will increase, as well.
“This is not a one-year problem,” said Jay Hines, executive director of the Pennsylvania Association of School Business Officials. “It's a multiyear problem that is getting worse year-by-year.”
The district set aside about $2.6 million for the retirement contribution. Administrators recommend using that over five years to soften the blow of tax hikes, beginning next school year. The district would use tax increases and reserve money to tackle the burgeoning payments, said Jon Perry, its director of financial services.
“The overarching goal of these funds is to mitigate the impact of the significant increases,” said Perry, who estimates the district will need annual tax increases of about 1.16 mills in each of the next five years.
Franklin Regional officials took a wise approach, Hines said.
“You don't want to use it all in any one year,” he said. “That might be a good short-term fix, but this is a long-term problem and a significant one.”
How did we get here
The state pension crisis dates about 25 years, when the system earned more than expected from investments in the 1990s. State officials used that surplus to increase benefits to teachers, administrators and other public school employees.
As time went on, returns on the investment weren't as high as officials anticipated. To pay retirees, the system borrowed money. Unlike private-sector employees who invest in a 401(k) or similar retirement account, PSERS members have a guaranteed, defined retirement benefit — no matter what happens in the stock market. The annual pension is derived from the years a retiree worked and his or her highest years of salary.
Every school district is required to contribute a percentage of its payroll to the pension system. For years, that amount was under 5 percent, equating to slightly more than $1 million for Franklin Regional.
This school year, Pennsylvania districts are paying a little more than 12 percent of payroll to PSERS; state projections show that amount will grow for at least 10 years, topping out at 31 percent in 2023-24. Perry estimates Franklin Regional's payment that year will be about $10.21 million.
Though the state reimburses districts half of that contribution, it's still a hefty sum, officials said.
No real solution
The pension situation befuddles many school administrators, Hines said. Because Act 1 — the 2006 law that distributes gambling money — limits how much school districts can raise property taxes, about 70 percent of the state's districts can't raise enough money from taxes to cover increased pension contributions, Hines said.
Many districts dipped into reserve accounts during the past two years to help pay for retirement contributions, Hines said. About two-thirds raised tax rates.
In the past, Franklin Regional tackled the problem with tax increases. That won't be enough anymore. Perry projects a need for tax increases just to cover retirement costs during the next 10 years, despite spreading reserved money out over the next five budgets.
If the district used its entire reserve fund during the next three years, it would avoid a PSERS-based tax increase for the next two school years. However, that would necessitate two steep increases — 3.08- and 3.65-mill increases — in the following two fiscal years to make up the difference.
It's unlikely the state would permit such an increase. Since 2010, the law has limited Franklin Regional to tax increases of less than 3 percent, and the increases it would need would be 3.5 percent and 4 percent, respectively. In the scenario that would have the district burn through its reserves in the next three years, the tax rate would increase by 7.4 mills — $259 for the owner of a home with a $35,000 assessment — during the next five years.
By spreading out the $2.6 million over the next five years, the district likely would need to raise taxes by smaller annual rates: 1.15 to 1.17 mills. That means the tax would increase by 5.8 mills, or an extra $203 for the district's $35,000 median assessment.
Perry said his recommendations would fluctuate because of staffing, salary levels, operation costs and changes in state pension projections.
Daveen Rae Kurutz is a staff writer for Trib Total Media. She can be reached at 412-856-7400, ext. 8627, or firstname.lastname@example.org.
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