North Hills School District over the years has built up a healthy $10.2 million fund balance, but officials won't go on a spending spree any time soon.
David Hall, director of finance and operations, said he expects to need at least some of that money to deal with ballooning payments to the state Public School Employees' Retirement System, forecast to begin in 2012-13.
School districts and the state, which share the employer pension costs, haven't contributed enough money to cover PSERS' liabilities, particularly as financial markets have declined.
As a result, PSERS has an unfunded liability of $8.4 billion, its actuaries, Buck Consultants, told the agency's board this month.
That shortfall is forecast to come to a head in 2012-13, when the rate of retirement contributions by school districts and the state are expected to more than triple.
"The chickens come home to roost eventually," Mr. Hall said.
The burden of coming up with the money will fall on taxpayers, both local and state, making the problem a critical one for school boards and state officials who already are struggling with tight budgets.
This month, PSERS approved an employer contribution rate of 4.78 percent of salaries for 2009-10, only slightly above the current rate of 4.76 percent. Of the employer contribution, about half is paid by school districts, charter schools and other public school entities. The state pays the other half.
Employees' contributions are expected to average 7.32 percent of their salaries in 2009-10. The state and PSERS cannot change the employee contribution rate without granting new benefits, so the shortfall ultimately must be made up by schools and the state.
Current estimates call for the employer rate to increase to 16.4 percent of salaries in 2012-13. But by this time next year, based on stock market trends, the estimate for the employer's 2012-13 rate may exceed 20 percent, Jeffrey Clay, PSERS executive director, cautioned the agency's board.
"We are not funding the benefits earned each year, much less paying the unfunded accrued liability of the system," Mr. Clay told the board this month.
"This is the equivalent of having the mortgage and not paying the principal. The principal gets added to the debt and, of course, interest is charged on top of that," he said.
For school officials in the North Hills, which has an annual budget of about $65 million, the increased share translates into millions of dollars. Currently, the district contributes half of its share of $1.5 million for the PSERS cost, or about $750,000. If the contribution increases to 16 percent of employee salary, Mr. Hall figures the district and state combined share will rise to about $5.8 million, meaning the district's share would be about $2.9 million.
How did the fund get to this position?
The state in 2001 and 2002 enhanced retiree benefits. Then it decided to delay larger contributions to the fund until 2012-13, partly because of stock market volatility in the years following the decision to enhance benefits.
The employer contribution rate dipped as low as 1.09 percent of salaries in 2001-02.
"That was, to me, the epitome of penny-wise and pound-foolish," Quaker Valley Superintendent Joseph Clapper said.
PSERS cannot raise the rate now to allow a more gradual increase because it must follow the rate formula -- which includes averaging five years of investment returns -- set by the Legislature.
The procrastination -- with its specter of massive payments beginning in 2012-13 -- has frustrated some school officials and the 40,000-member Pennsylvania Association of School Retirees.
"Even though we know we are coming up to a cliff, nobody's been willing to address that cliff ahead of time," Mr. Hall said.
Some districts -- including Butler Area, North Hills and Quaker Valley -- have nest eggs or forward-looking budgeting that may soften the blow.
But even if districts have set money aside, the high rate is not expected to be a one-year event. The current PSERS forecast put it above 14 percent for at least five years after the spike hits.
Some are calling for the Legislature to make changes to avoid or minimize any rate spike in 2012-13.
"I think the Legislature needs to take a look at the fundamental nature of the retirement system. We really can't afford this system going forward as structured," said Tom Gentzel, executive director of the Pennsylvania School Boards Association.
Richard Rose, a member of both the PSERS and Bethel Park School District boards, said, "I think something has to be done, but it's out of PSERS' hands to do it."
He suggested the Legislature require schools to follow a state Department of Education recommendation that schools budget more than 7 percent each year for retirement contributions so they can build a reserve to be ready for the rate spike.
Mr. Rose said that PSERS had been doing "very well until the market crashed on us like this. We have to ride out the storm. We are still currently investing money, and hopefully there are some reasonable investments out there today that will put PSERS back in good standing."
Over the last decade, about three-fourths of the pension fund came from investment returns.
In the last school year, PSERS investments fell 2.82 percent, its first negative annual return in more than five years and a significant drop from the 22.93 percent earned in 2006-07.
In a report last summer, the governor's budget office painted a troubling picture of PSERS and the State Employees Retirement System, or SERS, which covers non-school retirees.
SERS will not set its new employer contribution rate until spring. Its current rate is 4 percent, and its last projection for 2012-13 was 5.7 percent.
"Unfortunately, this year's investment climate has made old news out of that number," said SERS spokesman Robert Gentzel. SERS reported its investment returns fell 14.4 percent for the first nine months of this year.
The Association of School Retirees has asked the Internal Revenue Service to review the state's management of PSERS and SERS.
"The escalation of our systems' unfunded accrued liabilities poses a very real danger to the taxpayers of Pennsylvania, who will ultimately be required to contribute much more to our systems in later years to make up for the funds that the systems did not receive from the state and school districts and all that the systems were not able to generate from investment of those contributions," Ureneus V. Kirkwood, president of the retiree association, said in a Dec. 2 letter to IRS Commissioner Douglas Shulman.
Tom Gentzel expects that PSBA will make a proposal early next year to create a plan that would apply to employees hired after a certain date in the future.
"One of the ideas that we've been drawn to is the idea of some kind of a hybrid plan, a combination of a defined benefit and defined contribution," he said.
It may be time to think about such a plan, he said, because a high number of teachers who are from the baby boom era will be retiring in the coming years, resulting in new hires that could enter a new kind of retirement plan.