Teacher Pensions in Peril
Maria Martino Evans
by Maria Martino Evans

The looming rise in teachers’ pension costs looks to strain taxpayers and add new expenses to local school budgets for generations.

Next year alone, more than $1 billion will be needed to cover payments into the Public School Employees Retirement System (PSERS) that were deferred from earlier in the decade. Unlike a private-sector employee’s 401(k), when the economy tanks, public-school employees’ retirement security doesn’t take the hit.

By 2012-13, legally mandated school-district payments to PSERS are expected to increase more than 25 percentage points. Districts will pay 8.22 percent of payroll this school year—up from 4.78 percent a year ago—and by 2012-13 they will be just below 30 percent.

That rate will peak at 33.8 percent in 2014-15 and stay above 30 percent through 2020, according to projections. That means districts, which pay $1.1 billion this year, will pay $4.1 billion two years from now.

“This is an issue that should have been addressed many years ago,” Timothy Anspach, Spring-Ford District’s business manager told The Mercury. “But as the years have gone by, more damage has been done, compounding the effect.”

The district will have to pay an additional $2.1 million to PSERS for the 2010-11 school year. And by 2014-15, it’s estimated 33.6 percent ($6.9 million) of salaries will go to PSERS in Spring-Ford.

Districts Reach Out for Answers
During the budget process last spring, the Pennsbury School Board expanded its community-outreach efforts to allow local community groups to schedule board members to address their members, according to Ann Langtry, coordinator of communications for Pennsbury School District. At these meetings, board members stated that the district will: continue to carefully weigh all budgetary decisions; seek alternative methods of revenue, such as district-community partnerships; continue to communicate with state legislators; listen to constituents; and strive to develop a “contract for today’s reality” with the teacher’s union.

Pennridge School District anticipated the upcoming shortfall and, unlike other districts, “put away more money for retirement than was required by the state,” says Joe Ferry, the school’s public information officer. “We put the extra in reserve so we have about $500,000 set aside for increased contributions in the future. We know that won’t cover the whole amount needed, but it will be a start when it comes due.

“And now the state Legislature made some changes, which will put this off for a couple more years. Of course, that’s what they did in 2001, and the bill was coming due now.”

To address the future shortfall, some want to replace the current defined-benefit plan that, like Social Security, promises a set level of payments to the retiree with a defined-contribution plan, in which employees pay into a fund such as a 401(k), as is done in the private sector.

The Pennsylvania State Education Association (PSEA) maintains that cost reductions won’t come from moving to a defined-contribution plan but from a reduction in benefits. In fact, for the same level of benefits, as West Virginia learned, defined contribution plans are actually more costly.

The school-boards association suggested that a compromise could be a blend of both plans. PSEA disagreed, adding that its members kept their end of the deal over the last decade, paying in their share, which turned out to be more than their employers, who deferred their payments.

“PSEA believes the commonwealth needs to keep the promise of a secure retirement for public school employees,” says Wythe Keever, PSEA’s assistant communications director. “The current defined-benefit pension plan is critical for recruiting and retaining quality public-school employees, which benefits students, their families, and their communities.”

Other states, he adds, found that less secure retirement benefits led to severe teacher shortages in key subject areas, which hampers the ability of local communities to provide a quality education.

Plans like PSERS also reduce turnover, which means a more stable learning environment for children, Keever says.

The Size of the Shortfall
A recent report put Pennsylvania’s adjusted funding gap at $43.2 million, while PSERS estimates the gap to be only $9.4 million. Why the difference? One report says the funds are overestimating the future value of the stocks when it comes time to pay out benefits. When pensions were increased in 2001, the pension funds were performing well and had a state surplus of $1.3 billion. But with the economic downturn of 2008-09, money was lost, and it would be risky for pension funds to assume the economy will regain the strength it had in 2001.

Amid the current recession, many taxpayers believe defined-benefit plans such as PSERS are unsustainable. Not so, according to PSEA’s Keever: “Defined-benefit plans have long investment horizons. As long as cash is flowing into the plans, the pension funds can ride out a down market and stand ready to participate in the next recovery.”

Defined-benefit pension plans, such as PSEA’s, are not just better for the employees, they are also better for employers, Keever explains. Investment returns cover a large portion of retiree-pension obligations (nearly 60 percent in Pennsylvania) so employers—the commonwealth and school districts—can pay a smaller share.

Also, the plans cost half as much to administer as defined contribution plans.

Where Pennsylvania Stands
Every state struggles with how to pay for teachers’ pension plans. The authors of a Manhattan Institute for Policy and Research study titled, “Underfunded Teacher Pension Plans: It’s Worse Than You Think,” wrote that “retirees have a legal claim on promised pension benefits that supersedes schools’ budgetary needs.”

Authors Josh Barro and Stuart Buck claimed that all 59 pension funds are facing shortfalls, with California facing the largest unfunded teacher-pension liability at nearly $100 billion. Their research found West Virginia had the worst-funded plan, estimated at 31 percent. Furthermore, the report said U.S. taxpayers owe $932.5 billion to teacher-pension accounts, or nearly three times the amount stated by the retirement plans.

“The Dow Jones Industrial Average would have to nearly double overnight to make up for the underfunding of the 59 pension funds that cover most of America’s teachers,” according to findings in the report.

A recent study by the Pew Center on the States rated 16 states as solid performers in how they fund pensions. Fifteen others, including Pennsylvania, needed improvement, and 19 more states were facing serious concerns. The Pew study blamed a decade’s worth of poor policy decisions for leaving pension plans short-funded, according to Keever.

Legislators Take Action
Retired and current teachers, who have been paying into the system, have a legal claim to what they were promised. That’s why, to some, the only option seems to be changing pension plans for new hires.

And what would happen if Pennsylvania did both—put all new employees in a defined-contribution plan, with a greatly reduced level of benefits? “Any savings would be 30 years away,” PSEA’s Keever says. “Meanwhile, the additional cost of running two separate plans would start immediately.” And the changes would apply only to new members.

In December, legislation was brought to the state Senate to reduce pension benefits and provide individual retirement accounts for school employees hired after July 2010.

Some predict lawmakers will have to re-amortize the pension debt, similar to homeowners refinancing a mortgage for a longer term, to give ailing school districts relief. Without such a move, one study concluded, property owners could face school-tax increases averaging about $558 in 2012-13, just to cover increased pension costs.

Meanwhile, this spring and summer, citizens in Bucks and other counties have been signing petitions to cap school-tax increases—anticipating that the pension crisis will not be resolved permanently anytime soon. 

Maria Martino Evans is a writer and PR professional in Pipersville.