School Boards Association has solution for pension crisis

(OP-ED from the PSBA website)
School Boards Association has solution for pension crisis

By Thomas J. Gentzel, Executive Director

Friday, Dec. 11 began what could be a catastrophic era for Pennsylvania taxpayers. The Board of Trustees of the Pennsylvania School Employees Retirement System (PSERS) voted to increase the employer contribution rate to 8.22% of payroll for 2010-11, a 72% increase from this year’s rate.

Those percentages will continue to climb, reaching a projected rate of near 30% of payroll by 2012-13 and are estimated to remain above 20% for nearly two decades. How much will school property tax bills increase in order to fund this projected spike and ensuing plateau? How could it harm our children’s education, our children’s school environment and other community programs?

How many laptop computers for students will not be purchased? How many new teachers will not be hired? How many new textbooks will not be purchased? How many infrastructure improvements to technology or science labs will be delayed?

PSERS has both long- and short-term deficiencies. On Wednesday, Dec. 16, the Pennsylvania School Boards Association (PSBA) became the first school-related organization to propose a long-term solution to the looming PSERS crisis, earning sponsoring endorsements from both state Rep. Glenn Grell (R-Cumberland) and state Sen. Gene Yaw (R-Lycoming).

PSERS is a governmental, mandatory, multi-employer, defined benefit pension plan for Pennsylvania school employees. It was established in 1917, and is one of the oldest public pension plans in the United States. There are currently 739 school employers enrolled in PSERS (school districts, intermediate units, vo-tech schools, community and state-owned universities, charter schools, special schools and PSBA). PSERS serves more than 547,000 members, including those that are active, retired, vested and inactive.

A number of factors have led the system to the precarious fund balance position it currently holds. Government intervention, declining investment returns and the continued sluggish economy have all contributed to the dilemma. PSERS is funded from three sources: employee (member) contributions, employer (school district and state government) contributions and investment earnings. (The "employer" share is, of course, the taxpayer portion of the cost.)

While contributions on the part of both employers and employees have increased steadily, the investment income the system receives has suffered markedly, especially recently. Legislation enacted that increased benefits and put off paying the bill until 2013 has also had a negative impact.

In 2007-08, PSBA initiated a Pension Study Committee comprised of local school board members from across the state to examine the cost of the program and to recommend solutions. PSERS is a defined benefit plan (DB), different than most private sector plans, which are defined contribution plans (DC). The primary differences between these plans are how the pension benefit is determined and who bears the investment return risk.

In a DB plan, the employer is liable for paying benefits, which are a product of salary, service and a multiplier set by the legislature. This benefit represents costs that must be funded. The employer bears all investment risk. DB plans are mandatory in membership and contribution and have a lifetime benefit.

In a DC plan, which is similar to an individual’s 401(k), the benefit is determined by contributions and the investment performance of the member’s account. The member manages his or her own investments and holds the risk. These plans have a fixed employer cost and assets can be exhausted.

PSBA’s long-term proposal recommends the development of a new hybrid plan that would combine the best features of both the DB and DC plans. This hybrid plan balances everyone’s interests, respects school employees, continues public education as an attractive occupation and makes PSERS a more affordable and fair system.

Highlights of PSBA’s proposal are:

1. Establish a two-tier retirement system, one for current employees and another for those hired after a specified date (preferably as soon as possible).
2. Cap the school district portion of the employer contribution rate for both pension plans at the Act 1 index; the commonwealth would fund any remaining employer obligation.
3. Oppose enactment of any new benefit enhancements for either plan.
4. Assign to PSERS responsibility to administer the benefits for both plans and to manage their assets.

 PSBA’s bill creates a new retirement plan for future school employees. Its enactment must be accompanied by other actions to alleviate the impending dramatic increases in taxpayer-funded support for PSERS. What must not be allowed to happen is simply stretching out the existing debt to lower annual costs. That would only defer the problem. A new, more affordable retirement plan for school employees needs to be created. PSBA’s proposal fits that bill.

If we maintain the status quo, beginning in 2012-13, school boards will be faced with a decade-long string of employer contribution rates averaging between 29-33% a year (compared to 4.78% for this year). Imagine the things we won’t be able to accomplish with that money.