Director sounding alarm on state's school pensions

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Jeff Clay has been criss-crossing the state this year with a message.

A big problem is looming in the state pension system that is going to hit taxpayers hard, and officials can't keep pushing it off, said Mr. Clay, executive director of the Pennsylvania School Employees' Retirement System.

The day of reckoning is coming.

Tomorrow the PSERS board will vote to increase the 2010-11 employer contribution rate by as much as 75 percent.

The worst is yet to come, as the rate may grow by as much as 700 percent over today's rate during the next five years.

The state pays about 55 percent of the employer contribution and school districts pay the rest.

Currently, the employer contribution rate is 4.78 percent, including 0.78 percent for retiree health care, and the rest for pension.

The newest estimates will be released at tomorrow's meeting, but they are not expected to be far different from the most recently available estimates.

Those estimates show a dramatic spike from the current rate of 4.78 percent to:

• 8.4 percent in 2010-11

• 10.7 percent in 2011-12

• 29.55 percent in 2012-13

• 32.45 percent in 2013-14

• 33.95 percent in 2014-15

"There is no silver bullet to solve this," Mr. Clay said.

"It's scary," said Thomas Gentzel, executive director of the Pennsylvania School Boards Association and a member of the PSERS board.

"The numbers are really almost unimaginable in terms of the potential impact on taxpayers and school district budgets. It's an urgent problem."

Projections call for the total employer contribution -- state and school district combined -- to grow from $616.5 million this year to more than $5 billion in 2014-15.

PSERS isn't the only group facing the problem. The State Employees' Retirement System -- SERS -- has a similar plight. Its spike is expected to hit 28.3 percent on July 1, 2012, and also stay high. Its employer contribution rate now is 4 percent.

In the case of SERS, the employer is the state. State contributions are expected to grow from $226 million this year to $1.7 billion in 2012-13, said SERS spokesman Robert Gentzel. SERS sets its rates each spring.

Some school districts have started to put extra money aside in preparation for the rate spike, but, Mr. Clay said, "Obviously, they can't reserve enough."

Linda Hippert, executive director of the Allegheny County Intermediate Unit, said, "No district in Allegheny County, and I would think statewide, is able to budget at the 30 percent-plus rate without significant budgetary cuts in other areas or millage increases."

Nor does Mr. Clay think PSERS investments -- which lost 26.54 percent in 2008-09 -- can grow enough to fix the problem, even though investments are up more than 10 percent so far this year. Its estimates call for earning 8 percent a year.

"We're not going to earn our way out of this at this stage," Mr. Clay said.

PSERS has been trying to get the Legislature's attention to tackle the problem for some time. This year, the prolonged budget battle has taken the state's attention for much of the year.

Next Wednesday, the Senate Finance Committee will conduct a hearing focusing both on PSERS and SERS.

The Pennsylvania School Boards Association is expected in the coming weeks to propose legislation to address the issue.

Thomas Gentzel said possible options include stretching the debt out further into the future and changing the retirement system for future employees.

Because of state constitutional issues, there are limits on what can be done with current teachers' pension contributions and benefits.

"Our goal is to get the Legislature to get serious about this early in the new year. We can't keep kicking this can down the road any further," said Thomas Gentzel.

PSERS has three sources of money: investments, employer contributions and employee contributions.

From 2000 to 2009, investment earnings accounted for 59 percent of its funding, employee contributions 26 percent and employer contributions 15 percent. Just one year earlier, before the major losses of 2008-09, the 10-year history showed 77 percent of funding coming from investment earnings.

The employer contribution rate has been lower than the average employee rate for some years. The employer contribution rate also has been lower than the normal cost, which is the amount needed to pay for benefits earned each year.

The employer rate has varied, depending on a formula and projections, but in 2001-02, the employer pension contribution -- not counting the retiree health care payment --fell to zero. In 2004-05, a floor took effect mandating the pension portion of the employer contribution be at least 4 percent.

The employee contribution rate has been higher than that of the employer in recent years. Members contribute 5.25 percent to 7.5 percent, with the average about 7.3 percent.

Wythe Keever, spokesman for the Pennsylvania State Education Association, said, "Funding for PSERS has always been and is supposed to be a partnership."

But when the employer rate fell below the normal cost level, Mr. Keever said, "They basically gave themselves a pension holiday."

In 2003, the Legislature set a formula for computing the employer contribution rate aimed at smoothing out the ups and downs of the market. That was intended as a fix to avoid a rate spike.

That formula took gains before June 30, 2001, and spread them over 10 years. It took the losses after 2001 and spread them over 30 years.

The period of credit for the gains ends in 2012-13, but the payment of the old losses continues another 20 years. In addition, the market slump of the past last two years has added more losses.

Mr. Clay noted several other reasons for the unfunded liabilities, including an increase in the multiplier used to compute benefits; a phased increase in cost of living adjustment; and demographic and salary experience.

PSERS was 86 percent funded as of June last year.

"It's not like you can magically make it disappear," said W. David Hall, director of finance and operations for the North Hills School District. "The only way you're going to get more resources is from the taxpayers."


Education writer Eleanor Chute can be reached at echute@post-gazette.com or 412-263-1955.


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