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Decisions in early 2000s created today's pension woes

| Wednesday, June 11, 2014, 9:01 p.m.

“Pac-Man” is poised to gobble a larger chunk of school district budgets starting next month.

The state's pension crisis, which Gov. Tom Corbett once likened to the insatiable video-game character, is among the reasons 14 of the 17 Westmoreland County school boards — including Penn-Trafford — advertised proposed millage hikes in 2014-15.

Higher pension payments from all districts are necessary to help feed the Public School Employees' Retirement System, or PSERS, which state officials project to be malnourished by $38.6 billion in the upcoming fiscal year, which starts July 1. Barring immediate legislative action, state-mandated contributions from districts will increase from 16.9 percent per employee in 2013-14 to 21.4 percent next fiscal year.

And, it only is going to get worse for districts where enrollments fell across the county since 2002-03 — everywhere except for Norwin — while pension costs spike.

An employer-contribution rate that was as low as 1.1 percent in 2002 is paced to leap to 25.8 percent in 2015-16 and average 31.4 percent from 2016-17 through 2023-24.

“They've kicked the can down the road, if anything,” Penn-Trafford business manager Brett Lago said last month about legislators. “They've not done anything to address future employees. Nobody wants to touch this issue and, quite honestly, it should be a no-brainer, at least for new employees coming in. Change the system so that it's manageable down the road. But they're just not there yet.”

Problem's origins

The pension problem has its origins in the early 2000s. When the new millennium dawned, both the PSERS and State Employees' Retirement System funds were more than 100-percent funded, and the economy was strong.

Then came Act 9 of 2001.

Things were rosy enough at the time that the politicians gave themselves 50-percent increase in their pensions while awarding a 25-percent increase in retirement benefits for public-sector employees. Though the lawmakers made new state hires pay more toward their own benefits, they didn't boost the contribution rates from state employees who already were paying into the system.

Then 9/11 happened.

As the global economy reacted to the terrorist attacks and subsequent war, the return on pension investments — which state officials assumed would be 8.5 percent — tanked. The politicians, who had just sweetened the retirements benefits for themselves and state employees, responded with another law that cut a break for school districts' mandatory pension contributions.

As a result, the standard contribution rate that peaked for districts at 11.7 percent in 1996 dropped to less than 2 percent a year from 2001 to 2003.

Just like a worker who fails to pay into a retirement fund during her 20s and then must pour a disproportionate amount of salary into savings later in life, the state and school districts have been trying ever since to make up for the missed-out compound interest from those years of short-term relief.

Fourteen years after being 123-percent funded, the PSERS account has enough to pay only 60 percent of its obligations.

Proposed solutions

Proposals in Harrisburg to fix the problem are varied.

Corbett, who suggests giving districts the same basic-education subsidy as last year, has proposed halving the districts' contribution increase to 2.25 percent — totaling 19.15 percent — for 2014-15.

But state Rep. George Dunbar (R-Penn Township) said lawmakers already have enough tough decisions to make in their next budget, which has an estimated billion-dollar deficit, without shortchanging PSERS. “I, personally, would still want to put all the money in,” Dunbar said. “That's kind of what got us into this mess in the first place.”

Dunbar said he is open to considering a “hybrid plan” that is gathering steam, although he acknowledged it wouldn't be a panacea that would fix everything immediately.

Under the House proposal — which would affect only new state employees — workers would accrue traditional pension benefits up to the first $50,000 in annual salary. Any salary above that amount would be eligible for a 401(k)-style plan.

Meanwhile, the Pennsylvania School Boards Association supports a Senate bill that would remove all future employees from the PSERS system.

Teacher Shaun Rinier — who says teachers feel like scapegoats for a problem they didn't create — said ideas like those rob the pension system of the revenue it needs. This school year, teachers statewide contributed an average of 7.4 percent of their pay to the pension system.

“You need the young teachers to pay for the older teachers,” said Rinier, the president of the Penn-Trafford Education Association, the teachers union. “If you take the new teachers out of the system, that will probably make things worse.”

Likewise, Stephen Herzenberg, executive director of the Keystone Research Center in Harrisburg, said the state needs to raise more tax revenue after a corporate tax cut a decade ago that has cost the state over $3 billion.

“In the end, an unfunded liability is an unfunded liability,” Herzenberg said. “It's pretty hard to address it without more money, right?”

Trickle-down to taxpayers

If no reforms kick in soon, the burden will continue to fall on officials of local districts to decide whether to raise the property-tax rate or make spending cuts. And when taxes go up, they hit homeowners' pocketbooks.

That's why Nathan Benefield of the Commonwealth Foundation in Harrisburg suggests that legislators develop a formula so public districts can use their reserves to “prepay” their pension contributions to benefit from compounding interest and receive a credit for future costs.

Across the state, public schools increased their combined fund balance by $445 million to $4.2 billion in the last fiscal year, he said.

“It's much better to pay now than to pay later,” said Benefield, the group's vice president of policy analysis.

Meanwhile, the Pennsylvania Coalition of Taxpayer Associations supports Senate Bill 76, which would replace the property-tax system for funding schools with a 1-percent increase in sales tax and 1.27-percent increase in the state's personal income tax.

A local proponent is Catherine Fike, a former school board member in the Southmoreland and Yough districts. Both of those districts are proposing tax increases.

“There's no relationship to your ability to pay,” Fike said about property-tax hikes. “You could have nothing, but you have to pay or they'll throw you out of your home.”

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