Lebo School District Pension Liabilities

At his blog, School Director James Fraasch recently pointed to the coming dramatic increase in the expected employer contribution rates for PSERS, the state Public School Employees' Retirement System. According to his post:

[A] chart of the expected contribution rates that was put out by PSERS . . . outlines the projected rates of contribution all the way out to the year 2038. According to this chart, the employer contribution rate is scheduled to increase from 4.78 percent for 2009 to 16.40 percent beginning in 2013. That would be a 244% increase.Last year the District spent roughly $2.8 million on these contributions, half of which were reimbursed by the state. In the District budget available online on page 68 you can see how much revenue Mt Lebanon received in reimbursement. Forecasting from today's numbers, a 244% increase would mean our contribution for the 2013 year would be close to $6.8 million of which about $3.4 would be reimbursed by the state.

Though you may have missed it in the crush of year-end stories in the Post-Gazette, the P-G ran a good feature on this problem on December 30. If there is no change in the expected employer contribution rate, school districts that are not in good financial shape already may be crushed by the new rates. There are suggestions in the air for what to do about the problem, but all of the suggestions involve serious sacrifices. The state could require school boards to allocate a certain percentage of their budgets to funding the liabilities; bargaining unit contracts might be negotiated so that new hires are put into defined contribution plans rather than defined benefit plans. Someone, either taxpayers or teachers or both, will be paying for this.

Long excerpts from the P-G:

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.
. . .

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.
. . .

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.