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School taxes in Pennsylvania may soar to pay for pension promises

Debra Erdley
| Sunday, Nov. 1, 2009

Think your school taxes were high this year• Start saving for 2012-13.

That's when Pennsylvania property owners will pay a lot more money to cover the generous pension bump state lawmakers awarded themselves, school employees and state workers in 2001.

The money, an estimated $558 per property owner, won't build classrooms, pay teachers or buy textbooks.

And it's only part of the bill. Lawmakers will have to come up with an estimated $4 billion to cover the state's tab -- the entire employer pension contribution for state employees and half of the employer contribution for school workers.

Actuary Rick Dreyfuss, a senior fellow with the Commonwealth Foundation, calculated costs for taxpayers at every school district in Pennsylvania based on numbers supplied by the school pension system and the Department of Education.

Although the local obligations in individual districts might be slightly higher or lower because of state subsidies, taxpayers will pay for the local obligation one way or another.

Spokesmen for the pension systems don't dispute Dreyfuss' numbers.

Jeff Clay, executive director of the school pension system, has been traveling the state for 18 months warning school superintendents about the looming payment.

Jay Himes, executive director of the Pennsylvania Association of School Business Officials, estimates as many as 25 percent of the state's 501 school districts have saved money to help blunt the blow. But many haven't.

"There's no silver bullet," Clay tells school officials.

Unlike private employers who shed pension obligations with bankruptcies, state taxpayers are locked into paying pension obligations. The state constitution prohibits reductions to pension benefits for public employees.

Future hires could be placed under a different plan, such as a 401(k)-type plan. But Clay and Dreyfuss say that won't reduce the payments due for pensions for current payrollers.

"It's a matter of 'pay me now, or pay me later,' " Dreyfuss said.

The only option to avoid the spike is to string out payments into the future, a move akin to taking out a second mortgage for 30 years to refinance the obligations on your 10-year mortgage.

It's a frightening prospect to homeowners, economists and school officials alike.

Kathy King, 60, of McCandless was stunned to learn about it. King and her husband, Jim, 62, a telephone company lineman, are living frugally to prepare for retirement.

"I would so love to clean out Harrisburg and put in housewives and people who have to run homes and live on a budget. This spending is so out of whack, it's unreal. ... It's very hurtful. You just can't take those kind of taxes," King said.

School officials likewise are worried.

"I was in the Erie area the other day, and one school district there calculated they would have to raise taxes 14 mills on top of their 48-mill taxes to cover it. That's a 25 percent property tax hike just to cover retirement costs. I don't think the property owners will stand for it. Something absolutely has to happen," Himes said.

"It's not a pretty picture," added Brian Jensen, senior vice president of the Allegheny Conference on Community Development and the Economy League of Southwestern Pennsylvania.

The looming pension cost increase wasn't unanticipated.

It was built into the law by the same lawmakers who awarded themselves a 50 percent pension boost and then extended a 25 percent raise to 340,000 state and school workers in 2001.

At the time, the State Employees Retirement System and the Public School Employees Retirement System had multibillion-dollar surpluses. Instead of saving that money, lawmakers decided to spend it on raises. At the same time, they decided to vest employees at five years' rather than 10 years' service.

It wouldn't cost taxpayers a penny, legislative leaders boasted, because of the surplus money. Gov. Tom Ridge's administration reiterated the claim, saying the pension boost would have no financial impact.

Four months later, with the 9/11 terrorist attacks, financial markets plummeted dramatically, erasing the surpluses that were supposed to finance those pension increases. In a matter of weeks, it became clear taxpayers would have to pick up the tab.

Jolted back into action by schools scrambling to meet higher pension obligations in 2003, lawmakers acted. This time, in a move described by experts as out of the ordinary, they recalculated payment obligations, spreading the payments out over time and creating a spike in payments 10 years down the road.

Kil Huh, project director of research for Pew Charitable Trusts, said the last time his group looked at Pennsylvania it noticed the state began ratcheting back pension contributions after 2004. Until that time, it had met the full contribution recommended in a formula established by the General Accounting Standards Board.

In recent years, state contributions averaged only 30 percent to 40 percent of the recommended level. The contributions met requirements set by state law. But Huh said the accounting standards board number exists for a reason.

"The assumption for each of the plans is, over a 30-year period, if you pay (the full recommended level) every year, you will be able to meet your pension obligations," he said.

Despite the lower contributions, it looked as though Pennsylvania's gamble with lower payments might work. Robust investment returns in the middle of the decade began to chip away at the size of that 2012-13 balloon payment.

But last year markets tumbled again.

The spike ballooned with a vengeance. Now, both pension systems project they'll need to boost employer contributions to about 30 percent of payroll in 2012-13 in order to meet obligations.

Shortly before the market decline, Gov. Ed Rendell's administration issued a call to action on the pension issue. Former Budget Secretary Michael Masch warned that even minor market declines could trigger dire consequences and soaring pension fund payments. He issued recommendations that gained little traction with lawmakers.

Rendell spokesman Gary Tuma said his boss had hoped the Legislature would address the issue.

"The governor is very concerned about it, and any time the budget staff does extended projections for several years out, he insists that they include the cost of the spike. He believes we have to address it," Tuma said.

A few lawmakers have studied the issue for the past several years, but it's not one that's easily explained or legislated away.

"People tend to glaze over when I speak of these things. But given the situation now, more members who are working on this issue and members of the public are paying attention," said Sen. Pat Browne, chairman of the Senate Finance Committee.

Rep. Sam Rohrer, minority chairman of the House Finance Committee, said levying new taxes to pay for the obligation is not an option.

"I don't think the people of the state will sit for it, not when in some cases they've lost their pensions entirely or seen them diminished greatly," he said.

Rohrer and Browne said it's likely lawmakers once again will consider reamortizing the state's pension debt. But they insisted additional changes will be considered.

It's likely lawmakers will consider increasing the number of years employees must work to be fully vested in the plan and reducing the multiplier the state uses to determine pension benefits. There's the possibility of looking at a defined contribution program.

"It's an enormous challenge. We don't want to begin reclassifying our payments to the schools from education subsidies to pension payments," Browne said.

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