Public Employee Pensions and Benefits
Yet another common refrain—even among those who admit state spending has increased, which it certainly has—is that new expenditures are not "showing up in the classroom." In other words, school districts are hamstrung by pension costs and have to make cuts in other areas.
This point does indeed carry water.
Take a look at how Public School Employees' Retirement System (PSERS) contributions have skyrocketed over the last five years in Philadelphia and Pittsburgh, the state's two largest districts. We can also project the coming costs for 2013-14 and 2014-15 using the mandated contribution rates for those respective years.
In Pittsburgh, pension payments rose from $11 million in 2008-09 to $26 million in 2012-13, and an estimated $45 million in 2014-15. In Philadelphia, payments rose from $42 million to more than $101 million, and will reach $175 million this coming school year.
The statewide retirement contribution trend tells the same story. From 2008-09 to 2012-13—a span of just five years—statewide PSERS costs nearly tripled. Estimated payments for this year are about 5 times what they were in 2008-09.
With contribution rates continuing to rise, the fiscal outlook only grows more ominous in the years ahead.
To put this in perspective, consider how these costs compare to teachers' salaries. Pension costs from all public schools will have risen by approximately $1.9 billion from 2008-09 to 2014-15. Given that the average teacher salary is $63,500, that increase in pension payments equals the salary of 30,400 public school teachers.
The bottom line is that Pennsylvania faces a genuine pension crisis. School districts are simply running out of options. Even increased education revenue will not be able to offset the growing retirement costs.
Responsible pension reform is the best way to ensure that future education funding truly finds its way into the classroom.
Despite the rhetoric of "billions of dollars" in cuts from education, school districts across Pennsylvania have been able to increase their reserve funds. School districts had a combined reserve fund balance of nearly $4 billion as of July 2013, a $445 million increase from the prior year.
Jan Murphy of the Patriot-News reports that several districts have fund balances equaling almost a third of their annual budgets. One district—Valley Grove School District—even has a fund reserve of more than 99 percent of its total budget.
As part of the story, the Patriot-News created a database for readers to look up school districts' annual budget and reserve fund balances.
One school superintendent suggested that school fund balances be considered as a factor in state funding—that is, school districts with excessive reserve funds would receive fewer state dollars.
At the Commonwealth Foundation, we've pointed to the growth in school funding reserves, but also outlined a commonsense way to put those funds to use immediately.
Many school districts have built up funding reserves in anticipation of the coming pension crisis—and yes, there is a crisis, and it is getting worse for school districts. Putting money aside for future pension costs makes a lot of sense.
But it would be better to pay off pension obligations now and earn investment income on those fund reserves. If a school district turned their reserves over to the pension system now, however, it would simply be pooled with other funds, and that district would still have to pay the same contribution rate as other districts next year.
To help alleviate our looming pension crisis, lawmakers should look to change state law to allow districts to use reserves to prepay their pension obligations and receive a credit for doing so.
Readers of PolicyBlog already know that Pennsylvania education spending is at a record high, that state funding to school districts for pension costs is skyrocketing, and that school district spending, revenues and reserve funds are at all-time highs.
That should be enough to stop government union leaders from repeating the $1 billion cut lie...but they're still at it. In fact, a new lie to defend the original lie has emerged.
Talking to Capitolwire (paywall), PSEA spokesman Wythe Keever claims, "No previous administration cited pension funding in order to boost their claims about K-12 funding."
It is preposterous to think that the cost of teachers' pensions isn't part of the cost of education, or that state aid to school districts for pension costs isn't part of state aid to school districts.
Of course, this is far from the first lie Wythe Keever has been caught in.
As we recently wrote, Mr. Keever has denied that union dues are used for any sort of political activity—even as his employer, the PSEA, told its members (as required by law) that 12 percent of their dues go to politics.
Wythe Keever also once denied to a reporter that the PSEA was behind mysterious ads claiming school choice would require a tax hike. We later uncovered that the PSEA spent $575,000 from union dues to fund those ads.
That a spokeman for PSEA consistently resorts to outright, provable lies is a telling commentary on how far government union executives are willing to go to advance their policy agenda.
For the third time in two years, a major bond rating agency gave Pennsylvania a downgrade.
The most recent downgrade, courtesy of Moody’s, has real implications for taxpayers. Moody's points to "one-time measures", a "structural impalance," and "large and growing pension liabilities" as reasons for their downgrade.
This has been a long time coming. For seven straight years—dating back to the Rendell administration and reliance on temporary stimulus funds—Pennsylvania has spent more than revenue. The most recent state budget, while avoiding raising taxes and doing well to keep spending under the rate of inflation and population growth, did not fully fix this structural deficit.
In addition, past decision combined with poor investment performance have resulted in a massive, and still growing, unfunded pension liability. This pension liability and lack of meaningful reform was the primary impetus for Moody’s downgrade.
Due to the downgrade, creditors may require higher interest rates for state and local debt, leaving you to pick up the tab. This threatens taxpayers with future tax increases, and makes Pennsylvania a less attractive state for investment or new businesses.
Moreover, neglecting pension reform could result in the commonwealth, not to mention cities that have their own pension problems, facing Detroit-like insolvency. This month, Detroit workers and retirees voted to accept a 4.5 percent cut in their pension benefits. Such a cut—particularly for retirees—used to be unthinkable in the public sector. But today's pension crisis represents a triple threat to state and local governments, taxpayers, and employees.
But Detroit's fate need not be our destiny. By continuing to practice fiscal restraint and addressing long-term cost-drivers via meaningful reform, we can build a Prosperous Pennsylvania.
PolicyBlog readers will be well-familiar with the fact that Pennsyvlania state funding for public schools is at a record high.
So why do government union leaders and some politicians still repeat a lie about multiple-billion dollars being cut from public education? Simply put, in some cases they refuse to count state funding to school districts for teachers' pension costs as part of education funding.
As the chart below shows, state aid to public schools for pensions has increased more than $1 billion since 2010-11 (this includes a $225 million transfer from the Tobacco Settlement Fund, not counted in the General Fund total).
Note that this $1 billion increase in state pension aid only covers about half of school employees' pension costs. School districts have had to match this increase with a billion dollar increase in payments from local property taxes.
It makes it easier to say that "there isn't a pension crisis" when you completely ignore a dramatic increase of more than $2 billion in public school pension costs.
Unfortunately, that pension crisis is only going to get worse. Costs will continue to rise over the next few years. The required increases under Act 120 of 2010 are equal to about $900 per household. The costs increase for school districts for required pension payments would be the equivalent of laying off one out of every three teachers in the state.
The fact is this: We are spending more on public education than ever before (see chart below as a reminder of that), but more and more education dollars are going to pay off pension debt created by past political decisions.
On Friday, CF President Matt Brouillette joined The David Madeira Show to talk about Pennsylvania's looming $50 billion public pension crisis and the biggest obstacles to reform: government union leaders.
Listen to a portion of the show below:
The David Madeira Show airs weekdays from 6-9 a.m. on 94.3 FM in northeast PA and can be streamed live at http://thedavidmadeirashow.com/
Lawmakers may have agreed on a no-new-taxes budget, but the cost drivers behind this year’s budget shortfall and Pennsylvania’s annual budget crisis remain unchanged. Chief among those cost drivers is the state’s ailing pension system, with our pension plans more than $50 billion in debt and warnings from all three bond rating agencies.
With such a serious fiscal crisis why has nothing been done? The answer lies with public sector union CEOs who have for years denied a pension crisis, supported underfunded pensions for teachers and state workers, and lobbied against any reform.
The PSEA, for example, sent over-the-top emails to teachers saying a new pension reform proposal is “a new attack on YOUR retirement security,” and claiming it unfairly targets women, playing off absurd “war on women” demagoguery. The PSEA also sent mail to retirees claiming falsely that proposed reforms take away their pensions.
In contrast to this misinformation campaign, our pension debt is a triple threat to Pennsylvania’s future and could lead to teacher layoffs, fewer government services, and retiree pension benefit cuts.
Increases in school pension costs are equal to the salary of 33,000 teachers, which means one in three teachers could be laid off. That is the equivalent of a family of four facing a tax increase of $900 annually to just to make up the payments for pension debt.
Pension reform is about protecting state employees, taxpayers, and future teachers and state workers. As long as government unions are permitted to campaign against it using taxpayer resources, all Pennsylvanians will suffer.
My latest letter to the editor in the Phoenix Reporter and Item corrects the record, noting that government union leaders have for years denied a pension crisis, supported underfunded pensions for teachers and state workers, and lobbied against any reform.
To the editor:
A recent letter from Jay Galambos (June 3) makes the absurd claim that the Commonwealth Foundation and "right wing lobbyists" created the state pension crisis by supporting reduced payments into pension plans.
Unfortunately, he has his history completely backwards. Public employee union lobbyists — not the Commonwealth Foundation — supported Act 9 of 2001, which increases pension benefits and artificially reduced payments. Those same union lobbyists endorsed Act 40 of 2003 and Act 120 of 2010, which "kicked the can down the road" by continuing to underfund the plans.
In contrast, the Commonwealth Foundation fought all of these proposals and has long touted the need for reform. Yet government union leaders, from both the PSEA and AFSCME, denied there was a crisis coming until it was too late.
That crisis is now here, with tax hikes and teacher layoffs a result of postponing tough decisions. Neither revisionist history nor the continued "do nothing" position of the PSEA will solve that. Rather, lawmakers should look to reform the system with retirement benefits that are affordable for taxpayers and predictable for employees.
Most importantly, such pension reform, similar to a 401(k) plan, couldn’t be deliberately underfunded for short-term political gain, leaving our children to pay the cost.
In 2013, Pennsylvania school districts increased their reserve funds by $445 million—to a total approaching $4 billion as of June 30, 2013—according to the latest data from the Department of Education.
Including charter schools and CTCs, public schools had more than $4.2 billion in total fund balances.
While this increase in reserve funds undermines that narrative that public schools have been "cut to the bone," there are good reasons why school districts have built up massive reserves.
Many school districts have rationally grown their reserve funds to deal with the coming spike in required contributions to teachers' pensions.
However, taxpayers would be better served if public schools invested these funds in the pension system now, got investment returns, and paid off part of our more than $50 billion unfunded pension liability. Unfortunately, there is no incentive for schools to do so—there is no mechanism to reduce their future district pension contributions, and they might not receive the full state match for prepaying.
Legislators should look to develop a formula for schools to "prepay" their pension contributions and get a credit for future costs. This could be done by creating separate accounts within PSERS that are invested, but still owned by public schools in order to pay their pension costs in future years.
Doing this could reduce the unfunded liability by several billion dollars and alleviate the pressure for higher property taxes.
To learn more about additional recommendations to solve Pennsylvania's fiscal crisis, read our policy report, Blueprint for a Prosperous Pennsylvania.
We've mentioned before the big lie of "$1 billion cut from education."
Part of the reason that lie continues is that union executives ignore a big chunk of education spending. For instance, the PSEA doesn't count payments toward teacher pensions as "education spending" when making their allegations.
While it is absurd to suggest payments for teachers' pensions "doesn't go to the classroom," excluding employee benefits from instructional spending means less than half of the $26 billion public schools spend "goes to the classroom." Employee benefits consume 19 percent of public school spending, with construction and debt costs another 13 percent and support services (less employee benefits) 21 percent.
What is more, those categories are among the fastest-growing among school spending.
Here is a shocking statistic: Since 2002-03, school district spending on employees' salaries grew 22 percent, but spending on benefits grew a whopping 108 percent, largely because of pension payments.
It is pretty obvious that employee benefits are consuming more and more of school spending — whether union executives want to count this as "classroom spending" or something else.
So what does the PSEA want to do to fix this runaway growth? Nothing.
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